An Important Reminder from Pricing Economist Vin Diesel
Thursday, November 26, 2015
As an aspiring film buff, I've been working through my backlog of films. Last month I took in a real masterpiece - the Mona Lisa of modern cinema. I speak (of course) about the fourth installment of Vin Diesel's The Fast and the Furious franchise. I'm proud to say that I understood the majority of this finely-nuanced film. Nevertheless, there was one small bit that proved beyond my ability to comprehend. At first, I feared this was due to my unfortunate decision to skip the third film in the series, but the more I thought about the well-written characters and witty repartee, the more I realized that my lack of clarity was due to my own prejudices against a common (albeit flawed) pricing strategy.
[Warning: minor spoilers for Fast & Furious ahead]
The movie featured antagonist Arturo Braga, a drug dealer whose actions puzzled me greatly. He was evil. He wasn't your run-of-the-mill criminal who did evil things in order to attain his goals. No. This was a man who was evil for the sake of being evil. He'd even act against his own best interests in order to be evil.
His ongoing business process involved the routine hiring of expert drivers to transport contraband. Upon delivery, his army of minions would execute the drivers. This process was repeated ad infinitum.
Granted, I'm a pricing expert - not a crime expert. Nevertheless, his strategy made little sense. World-class drivers are impossibly difficult to recruit, their murders generate an enormous amount of attention and a standing army of ruthless killers requires plenty of cash to maintain. To make matters worse, the senseless violence that followed each completed job reduced the pool of possible drivers and put the very future of his business in jeopardy.
Why didn't this man simply use the same drivers over and over again?
No businessman in the real would ever act against his own interests so recklessly. Or so I thought.
I recently dealt with a company that could not provide the service that it had promised. Rather than issuing a prompt refund, they demanded additional time - time that they didn't use for any productive purpose. Upon further contact from me, they relented and offered in-store credit.
Why would I want store credit? It's clear why they wanted to keep my payment, but clearly I'd prefer my actual money back. This was clearly a play from Braga's strategy manual - evil for the sake of being evil. Not only did my string of contacts with their customer support cost them money (in terms of labor), but it poisoned my opinion of the firm and caused me to speak poorly of their firm to their pool of potential customers. Well, they still kept my money, right? Not exactly. I issued a chargeback with my credit card company, causing the firm to lose the money that it had seized and forced the firm to pay an additional penalty to boot.
Much like Arturo, they were so focused on taking advantage of the other party, that they lost sight of the long-term consequences of their actions. They had moved from evil to stupid. They had moved from profit maximization to customer-utility minimization.
It often makes little sense to attempt to squeeze every last penny from a transaction. Often such moves will incur significant costs - some monetary and some not.