Orbitz, Pricing, & Average Initial Margin (Part I)

Several articles were written last month concerning Orbitz’s methods of targeting Mac users.  A post on the HBR Blog Network by Rafi Muhammed (Should Internet Retailers Discriminate Between Customers?, July 10, 2012) stated:

“So if online retailers can identify customers with different price sensitivities, why not charge different prices by customer type? After all, this is commonly done in the brick and mortar world. Retailers often set different prices in different locations. Target has acknowledged using this practice based on the level of competition at each location: If many rivals are close by, prices are lower, but if it’s the only game in town, prices are higher. Gas stations routinely charge different prices at different locations. Similarly, it’s customary to negotiate for certain types of products and services, so the price that anyone pays for, say, a car will vary based on product knowledge and negotiating skill.”

Muhammed goes on to debate the wisdom and ethics of such behavior, and I highly recommend reading his entire post.  (As Muhammed points out, brick and mortar retailers have long done this in the form of zone pricing.)

From a financial standpoint, what we’re really looking at is the impact on average initial margin (average initial markup) of having 1 cost and 2 (or more) retails.  Thinking through this potential pricing scheme, I decided to run a few numbers, and I’ll be posting those numbers in a couple of days.  If you have suggestions for other numbers or ratios to look at – I’d love to hear them.

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