Blog » Citibank’s absurd pricing policies

3 Jun 2005

Citibank’s absurd pricing policies

Filed under: Economics — paulcook @ 1:10 pm

I recently opened a Citibank Dividend credit card, which provides 5% cash rewards on groceries, and 1% on all other transactions. It seems great, and has lots of other nice features too. But they use some really dubious pricing policies for an additional feature.

As part of the signup process, they entice you to sign up for a credit protection plan, which suspends payments in the event of injury or income loss. It’s not something I need, and costs 85c/$100 of your balance each month. Nevertheless, I signed up, because the first month is free and they give you a $15 no-obligation voucher.

That was about 20 days ago. Today I cancelled the service. The service person asked my reasons, and I said that I didn’t really need it for the amount that it was costing. He immediately offered to drop the price to 65c/$100. I still refused, since anything above 0c/$100 was more than I wanted to spend. But the point is: just by complaining about the price, they offered to drop it!

Clearly what they are trying to do is market segmentation or differentiation. They’re trying to charge 85c/$100 for the people who are willing to pay that, but only 65c/$100 for those that are willing to pay that. If successful, they’ll have more customers than if they charged 85c/$100 uniformly, but also won’t be losing the 20c/$100 from customers that ARE willing to pay the higher price. Demand vs. price plots are typically assumed to be strictly decreasing functions in classical microeconomics, as higher prices mean fewer customers. For a company to maximise profit, they’d like to charge each customer exactly as much as that customer is willing to pay — then the company captures the entire area under the demand vs. price plot. As it is, Citibank’s two-price structure will (ideally) capture more of the area under the plot than any one-price structure, and so “captures” more value from the customer.

This is a common strategy. It’s why, for example, airline tickets that include a weekend are normally cheaper, as the airlines assume that weekday-only travel is more likely to be for business reasons, and so the passengers will be less price-sensitive. It’s also why gas prices are normally higher in richer neighbourhoods.

The problem is that classical microeconomics doesn’t do a good job of considering the effect of this on the customer. Studies show that if people suspect that someone else is getting a cheaper price for an identical good/service, they become upset — even if they are getting a (smaller) discount themselves. It’s like packed highway traffic — nothing is more annoying than seeing another lane moving faster than the lane one is in. This is also part of the reason for the success of low-cost airlines, with their uniform pricing strategies — people trust those airlines more.

So I really think that Citibank’s policy is not wise, because it doesn’t even try to hide the fact that they’re using differential pricing. I will likely never trust a price they quote me again, as I’ll assume it’s inflated. This means that I’ll (1) look far and wide for another company offering the same service at a reasonable price; and (2) haggle with Citibank, on the assumption that I need to find the “magic words” that will drop the price. Either way, they’ve lost out on good business.

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  1. As you pointed out to me in the “accents” post, not everyone is a Caltech student, and most people don’t have a clue what “microeconomics” is. You’re average Joe, when offered the reduced 65c cost will say something like: “Wow, they really want my business. They up and offered me a lower price without me asking. 65c is less than 85c, I guess I’ll keep that insurance afterall.”

    However, I have similar issues with Sprint. I’ve been a customer since September of either 2001 or 2002. I started out with a one-year contract, which has obviously long since expired. I can drop them at any point without a penalty. And, for my loyalty to them, so long out of contract they send me offers to make my nighttime minutes start 1 hour earlier (they start at 9pm now). However, I could simply go out and buy a new phone, and set up a plan with nighttime minutes starting at 7pm, although I’d have to pay for the new phone and sign a TWO-year contract (at least, last time I checked). If I go with their kind offer of bumping my nighttime minutes to 8pm, I have to sign another TWO-year contract.

    So this kind of annoys me. I’m cool with my phone. It may be big and heavy, but it has good battery life, reasonable reception, it’s durable, and if someone tries to rob me, I can bludgeon them to death with the thing. So, I don’t need a new phone. But, if I want my nights to start earlier I have to either settle for 8pm (which is 11pm on the East Coast, so my parents/brother will already be in bed) and a two-year contract, or I can get 7pm but I have to buy a new phone and sign a two-year contract. They’ve ALREADY gotten a helluva lot more out of me than my original 1-year contract, so it should be obvious that I’m not interested in switching to another company. And yet, to get a feature that a new buyer gets, I have to sign a contract twice the length of my original one. If I’m going to show loyalty to them, they should show loyalty to me by AT LEAST giving me the same options as a new customer, but without the new contract.

    Comment by Adam — 3 Jun 2005 @ 4:00 pm

  2. Ok, I agree — that’s nonsense from Sprint.

    Your point that not everyone would think about the implications of the price drop is a good point. But I still think that Citibank’s approach will at the very least, by a process of stimulus and reward, encourage people to complain and haggle with companies, in the hope of getting price drops. This means that companies will need to spend more on customer service agents, and also rewards the least “polite” members of society — which is in my opinion (and others might disagree) a bad idea.

    Comment by paulcook — 3 Jun 2005 @ 5:45 pm

  3. Okay… yeah… I agree with that aspect of it being bad. I didn’t quite catch the idea as clearly from the original post.

    Comment by Adam — 4 Jun 2005 @ 12:45 am

  4. I’ll tell you what pisses me off. I ordered a sandwich at the Broad Cafe. The chalk-board sign clearly states “$1.00” off for sandwich only, no sides. I ordered the sandwich only. She only took off 75 cents. I called her on it, she said its “75 cents.” I said your board says “$1.00.” She’s like, yeah, but its “75 cents.” Its only a quarter, but thats all it takes to make you feel like you’ve been cheated.

    Comment by suavisimo — 4 Jun 2005 @ 12:26 pm

  5. Let me guess, they probably only gave you half of the things that were supposed to be in the sandwich, in addition to ripping you off by 25c. I’ve been very tempted to write an email whoever is in charge of food at Caltech to invite him to lunch at Broad so that I can point out all of the stupidity going on.

    Comment by Adam — 4 Jun 2005 @ 12:35 pm

  6. On this note of being ripped off I love the British supermarket system of specials. They take a product, push its price up by around 50%, then offer it on a 2for1 deal for a while and then take it off that and have a sign saying new and reduced price… which is in fact just the original price before the whole up down trun around rubbish.

    Comment by Paul F — 5 Jun 2005 @ 2:31 pm

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