Robin Hood Pricing !!!

Whew! Just stepped out of another meeting with a prospect. I was pitching the world of predictive analytics. The same old question pops up -- "But we do not have data". I am now tired of answering this query everytime people talk of analytics. You may not have demog data ... but you definitely have transaction data. And that is enough to generate a good enough predictive model. Agreed we may not be 100% (pssst: in statistics you never are 100%), we may not even be 95% accurate. But we can atleast be 70%. And that is better than 0%. We can get data updated as we go along business of tomorrow. Maybe in some future post I will highlight how some companies are going about slowly but surely increasing the quality and quantity of customer data.

On the flight to this place, I was scanning one of the business newspaper. I came across a lovely term "Robin Hood Pricing". It implies how we charge a relatively higher premium to serve our good customer and subsidize the net return of our bad customer. This advocates differential pricing.

Today, all service industries (or product industries) charge the same "list" price to all customers. They do not track the cost of delivering the service to the customer. There are two costs involved here. The "Cost of Sales" includes the production, logistics and admin costs incurred for making the sale. The other cost of note is the "Cost of Service" that the customer instigates from the company. A bad customer will keep calling the call center, have complaints and demand more than his share of attention and service. Hence, the cost to serve such a customer will be high. On the other hand, a good customer will not disturb the company too much and will often be understanding towards receiving service from the company.

But in today's world, we charge both the types of customers the same "list" price. Thus, we make the good customer pay a premium of our total cost to serve him whereas the bad customer gets a relatively lesser price compared to the total cost to serve him.

That my dear friends is "Robin Hood Pricing".