Five MBA things that #gobeyond in Lagaan

 

When the famous Indian movie Lagaan was released, people were busy praising it for so many different reasons and one of them was that this movie is also being used for training MBA candidates. Well, I was not an MBA then, and hence didn't bother much about this, but I am an MBA now, and so when this movie was telecast on the TV a few days back, I decided to watch it for the MBA concepts this time. And yes, I did browse the web for different lessons that various MBAs have already derived from the movie in all these past years.
Well, I did find a lot of those Lagaan slideshows and lessons-learnt submissions - but, almost all of them were in the areas of People Management, Leadership, Leaders vs Managers, Team Management, and then the rest few were in the areas of Opportunity, Entrepreneurship and Passion.

Personally, my MBA lessons helped me to #gobeyond these concepts of people and talent management, and I found a scope for bringing forth some more MBA concepts that the movie highlights. Hence this post: Five MBA things that #gobeyond in Lagaan

1) Negotiation Skills: The scene where the British officer ends up offering Cricket match as a way to discount additional taxes levied on farmers is an excellent example of how the negotiations should not be done. This officer had an advantage of a favorable B.A.T.N.A. [Best alternative to negotiated agreement], had the required authority to anchor the entire discussion near or beyond the reservation price [beyond which negotiation is not affordable] of the farmers, yet, when he did the actual negotiations, with each round, he kept changing his anchor, in fact he didn't really anchor to any point, and while he kept pushing beyond the reservation price of farmers making them uncomfortable, he also kept pushing his own limits beyond his own reservation price, making offers that expanded the Z.O.P.A. [Zone of Possible agreement] so much that both reservation prices were mandated to become three times of what they originally were. As I mentioned earlier, a classic case of how negotiations should not be done.

2) Principle-Agent Problem: An officer in-charge of a certain region, comparable to regional manager of some multinational firm invests the firm's three year revenue from the region in to a gamble, through a completely personal decision, drenched in risk of losing it all, thanks to his pride and ego. A classic case of an agent forgetting interests of principle, a perfect situation to imbibe some corporate governance, a tale where the very definition of stakeholders and concept of stakeholder's interest goes for a toss. And then, if we wait till the very end of this movie, we see that this officer is in fact penalized, sent to a remote location on transfer and all the taxes missed are recovered from his personal wealth and salary. So, if and when the board decides to take action, our agent manager does see his own earnings tied to the firm's income, and his decisions made accountable for firm's losses - a glimpse of corporate governance to mitigate the principle-agent problem.

3) Change Management: I am not sure if the script writer's of the movie actually read about Kotter's  model for Change Management before making this movie, yet everything that our protagonist Bhuvan does in the movie to create his match-winning cricket team from a bunch of regular village folk conforms so much to the Kotter's model.
a) Create Urgency: Establishing a gamble, a bet, around the cricket match - winning involves opportunity to extreme prosperity, losing involves risk of losing everything that every person of the province possesses, just to be able to pay the three-fold taxes, does create a sense of urgency, ain't it?
b) Form a Powerful Coalition: Bringing on-board a British Lady who knows the ins-and-outs of the game, early on - Can there be a more powerful coalition that Bhuvan could have formed.
c) Create and communicate a vision for change: 'Three years without any taxes. Everyone can keep everything that he earns, Everyone can prosper.' A vision, a common goal that Bhuvan keeps preaching to bring more and more players on-board, to gain support of villagers, to inspire and motivate one-and-all.
d) Remove Obstacles: When you start something with nothing in hand, there will be obstacles. Not having equipment of the game, to finding a suitable ground to play, to keeping an eye of a bunch of hens as they provide livelihood to one of the players, to injuries of players. Our protagonist takes care of them all in one way or another.
e) Create Short-term wins: Whether it is appreciating Tipu before all villagers for his first balling and catching efforts, or whether it is celebrating village festival with a bang, involving the British Lady as well in the celebration, Our protagonist does know how to create short-term wins and also announce them to the world.
f) Build on the change: Well, every little progress that the team makes in the movie is an excellent example of building on the change.
g) Anchor the changes in corporate culture: By the time, the team becomes complete and is ready to play, there is already a crowd of entire village cheering those who are playing. Cricket which was a completely alien game for these villagers has now become an everyday routine.
Interesting, ain't it?

4) Incumbent vs New Entrant Strategy: Well, when you are a new entrant, and you know that you have no choice to give up the game, the best strategy is to burn the ships - Cut off all the ways that can lead you to step back. Invest so much that "not producing" doesn't remain an option anymore. By accepting a gamble, where loss or withdrawal meant paying up triple taxes, which in turn meant ruining the lives of everyone, Bhuvan had burnt the ships as soon as he had landed in the game.

5) Trust: Well, some may call it people management, some may tag it as excellent leadership skills, some may use it to distinguish managers from leaders, and may call it team management, some may describe it as the magic that makes start-ups successful and some others may talk of emotional quotients and stuff. But the bottom-line of it all remains 'Trust'. It is the trust created by our protagonist Bhuvan through his constant endeavor to help others, through his narrative of a better future for every living being of the province, through his actions and through his vision, that makes him successful in the end. Things do work out really well when "trust" is established.

Moment of Truth and CSI : The City Bus Story

Well, today as I was getting late for my lunch, I quickly decided to explore the option of whether I can take a bus to the restaurant - if that bus is going to arrive soon. Yes, I took out my mobile phone, opened an app, and checked the waiting time for next bus arriving at the stop right in front of the school.

And while I did take the bus, once again I could not resist thinking of the recent innovations in service level management that this sector of bus transportation has undergone, at least in the major cities of the world.

So, let us go back around five years - and I am going to refer to the cities in developed countries here in this blog, to establish a commonality in the comparisons that will follow.
Resuming our story, five years ago, while in Tokyo, when I took a bus, I checked what is the timing of next bus. The absolute time like 8:15 AM, 8:30 AM. The bus service though, was top class, always on-time arrival, modern, passenger friendly buses, and a smart card enabled entry and exit system. Life was good.

But then, even during those days, I wondered, will this on-time arrival and other features sustain when the population grows further, when cities of the future will have many more cars and private vehicles on the street, and in times when the bus may break down in middle of the road?

Soon enough though, when I started working in Singapore, I found answer to most of these questions. I came to know of a mobile phone app, which tells me the exact waiting time for every bus that arrives on the stop, of which I know a stop ID. Pretty impressive.
And then, when I arrived in Madrid, the first thing I looked for, was such an app for the city transport here and downloaded the app immediately.

And all this is the story that I would narrate as a passenger of buses in these cities, before I started my MBA.

However, MBA at IE Business School introduced me to some new concepts in service level management. I mean, I knew of the framework and the processes and the functions required and involved in operations management, from an IT organization point of view, but now it was time for taking in to account more fundamental concepts and most generic implementations.

So, I learned about the Moment of the Truth and the Service Triad, and then this whole city bus story changed into an excellent case of service level management for me.

When a customer interacts with your firm, and this can occur in multiple ways, that moment is the moment of truth; and when his perception of quality delivered exceeds [or at least matches] his expectations of quality, that is when your firm can be said to have attained its desired service level.

So, imagine a scenario, when you are the display on a bus stop says, next bus is at 12:30 PM and this bus gets stuck in traffic jam. Yes, we will all know that there would have to be some problem for the bus to be late, but we will all also feel disappointed when the bus arrives at 12:35 PM instead of the announced time of 12:30 PM. This is immediately a service level breach, and it creates disappointed customers.

So, how can this be turned around? Can technology help?

Yes, technology did help. Instead of pre-announcing the timing, how about telling how much more time the bus will take to reach the stop - Add a GPS tracker to the Bus, link it to a portal, publish updates of this portal to mobile apps and web sites and we have a partial solution to the issue.

Remember, we have three parts to the moment of truth, first the contact, second the perception and third the expectation of the service. By tracking the bus location and linking it with waiting time, instead of committing on a definite time, transport company can now manage the customers expectations. Customers now no longer expect the bus to arrive at 12:30 PM, but depending on when they check, they expect it to arrive in 5 minutes and if the bus gets stuck in traffic, these 5 minutes won't change until the bus moves forward. Unless, there is some extreme issue, in which case everyone will suffer and everyone will know of the issue, this new real time monitoring of waiting time has succeeded quite well in customer expectations management.

Next comes the issue of contact. Well, as I said, even five years back in Tokyo, or later in Singapore and now in Madrid, the buses have been modern, they are smart card friendly, they allow occasional ticket purchases, they are suitable for the elderly and the disabled, and so I think as far as the contact between city bus transport as a service goes, there has always been a good stature for at least for the cities I have been to [and I assume its the same for other big cities of the developed countries] and this takes care of the contact aspect.

So, finally we have the issue of perception. How does the customer perceive the service delivered? And this factor can be influenced by the interaction with staff, by the after-service support provided, by the psychology and the mood of the customer. As per me, this is the most grey area, and various firms keep doing multiple things like feedback, surveys, etc to gauge how the customer perception of their service is. In our specific example of City Bus, I found the answer in the way roads and pavements have been planned in either Singapore or Madrid.

Both these cities have dedicated lanes for Buses [and Taxis]. How does this help in managing the customer perception? It is one of the mechanisms that demonstrates the message from administration, that we understand what issues can occur for providing you with the best public transport [bus] service, and we will do everything possible to remove these hurdles. As per me, its also an excellent example of the Continuous Service Improvement.
Understand what stands between a bus reaching exactly as per the waiting time committed, and try to work on removing these hurdles - if traffic is an issue, separate the rest of the traffic flow from buses and let buses have their own lanes.
And as a customer, when I see these efforts, my perception of the service that I get from the City Bus, always meets my expectations.

Add to it, on those few days, when I was on-board a bus in Singapore, and I saw the bus driver getting down, laying out the raft for on-boarding the passengers in wheel-chair and getting back to his/her seat, this perception in-fact exceeded my expectations.

[Haven't taken buses that many times around here in Madrid, so didn't come across such incident here yet, but I do see a space provisioned for wheelchairs in some buses here and can imagine a similar thing]

So that's the moment of truth and the CSI initiative which I came across in the most common thing we see in our life - the city bus :-)

All reactions, comments, stories from readers welcome :-)

Facebook and WhatsApp deal: applying MBA know-how

Prologue:

So, ever since the big deal took place, there are so many posts, tweets and facebook “FB” updates all over the place about the BIG number “the 19 Billion”

When me and my classmate & friend Hitesh Saini first learned about the deal, we knew one thing – as an MBA, we cannot just be “feeling amused” with a weird smiley posted on our FB walls. After finishing our core terms here at IE business School, and after having taken many Finance related classes from Financial Accounting with Garen Markarian to Investment Analysis with Luis Sanz, and from Cost Accounting with Luis Revuelta to Applied Corporate Finance with Conchita Martin, this deal of 19 Billion USD should be something, which we can make sense of. 

Scratching the surface:

During last week, while we were preparing for our Applied Corporate Finance exam, we figured out at least two things. One: this is what can be labelled as  ‘Acquisition of Assets’ kind-of deal, where the target firm is acquired only by taking over the assets of this firm and the name of company is still maintained as a face-off to the customers.

And two: the valuation that team FB [comprising Mark Zuckerberg, FB management, advisors of FB] did for Whatsapp has to be based on the method of ‘Real Options’ – a method to handle any valuation of a project or a firm as the firm will yield returns similar to that of an Option – the financial instrument that we know of. Basically, this valuation assumes that there will be a certain minimum price to be invested, a premium, which is the risk a company takes, to have a possibility of an unlimited upside gain potential.

[I know some of the words in this post may sound too “finance”-like to my regular readers, but I would urge them to get help from google, investopedia, wikipedia and if nothing works, reply to this post with a comment to get clarification on any term they don’t know or can’t understand.]

But this was still too vague for explaining the whole thing, yet there was not much time in last week, as we were busy with all the exams and final presentations and write-ups for term four.
Finally, after relaxing for two days over the weekend, and doing nothing much during the day today, as I lay down in my bed, the chain of thoughts triggered again. The blogger in me now decided to take this thought process in all directions and details possible, to make good sense of the latest FB deal. And finally, when I could not manage to work on numbers all in my mind alone, I just got up and started writing the post to preserve the thought process and check if the numbers match my theory :-)
And after this sort of a long introduction and landing, here it goes – my take on how the 19 Billion USD deal can be broken down in different elements to make a sense of each of this element.
To start with let me divide the post into two parts: Qualitative reasoning for the deal, and Quantitative reasoning for the deal. 

Facebook-Whatsapp deal : Qualitative Reasoning:

Did you all receive this latest notification when you opened FB on your mobile: “Update FB to make it faster” and did you all notice that if you select to run this update, among the various permissions that the update confirms, one is to let FB messenger have a direct access to the SMS in your phone?

Well, I had noticed this and had decided to postpone the FB update until I figure out implications of such an access. A part of why I could write this post is that I had been thinking of this FB update for a while now, and so a lot of things were already laid out for me.

So, the point I am trying to make is: FB realizes or rather realized that FB messenger can be all sorts of things, but it may never replace the mobile SMS mechanism. So, while it tried to provide the messenger as an independent app, and while it tried to add features to the messenger, and synchronize its messenger with the mobile SMS systems [to which have seen many FB posts of people complaining about this SMS access thingy], the FB management also realized that the best thing out there, which has really succeeded in replacing the SMS systems in mobile phones, is Whatsapp.

So, should FB invest a huge capital, trying to come up with an alternative free messaging system, and gather all those members to create a network effect, and take away the market share of Whatsapp in next two to three years, OR should it just buy Whatsapp and add it to the FB portfolio of companies and apps?

The decision made by FB to answer this dilemma, “If you can’t beat it soon enough, buy it”.
What does Whatsapp gain from this, getting bought? Well, for starters, Whatsapp future development now has access to the bigger chunk of capital that FB possesses, so no further round of funding is needed; and when the rivals like Viber are finally catching the vibe and getting back in the game with high velocity, having support of big brother FB will always benefit Whatsapp management. Ultimately, it has to ensure that it maintains it market share advantage.

And now, instead of talking too much in qualitative terms let me throw in some numbers. 

Facebook-Whatsapp deal : Quantitative Reasoning:

Let’s start with first breaking down the USD19 Billion into what the deal is really comprised of [based on details in FT.com article “Facebook buys WhatsApp in $19bn deal”:

1. USD12Billion worth of facebook Shares;

2. USD4 Billion in Cash upfront;

3. USD3 Billion in form of restricted facebook shares vesting over four years

[in other words, stock option].

So, FB paid USD 4 Billion, yes, but the rest of the deal is in form of FB stock and stock options. What does that mean?

It means two things:

1. FB has managed to provide a prompt buy-out benefit to Whatsapp bosses, and at the same time, provided incentive for them and for the employees of whatsapp to keep working hard and keep innovating and keep acquiring market share, to make sense of their stock option in four years time, and to maintain worth of their USD12 Billion payout intact. This is an excellent breakup to ensure that whatsapp remains a market leader in its space even after being acquired by FB. It has found a good way to answer the principal-agent problem that arises post many acquisitions.

2. To extend the thought, if you really think of it, the deal is USD4 Billion in Cash, 183,865,778 shares of FB in stock, and 45,966,444 restricted shares of FB additionally. And if you look at the FB share price between 19^th Feb when the deal was announced and last night, it has changed from 68.06 to 67.41 as of tonight, we can already see that what team Whatsapp has, is a reduction in price they got by approximately USD150 million. I am not saying that the price they got will reduce in future, and depending on when we look at it they may seem to have earned a premium as well. The point I am trying to make is that the major chunk [78.95%] of price that Whatsapp has received makes sense only as long as FB is doing good. The day, FB stock crashes, Whatsapp acquisition may effectively be reduced to just the USD4 Billion of cash they receive. So, FB has managed to transfer the risk associated with this acquisition effectively to the owners and employees of Whatsapp very well.

Facebook-Whatsapp deal : That USD42 per user:

So far, from the write-up above, I believe you have all figured out that with 450 million current users of Whatsapp as of 19^th Feb, which must have already grown to 460 million by today [increase at rate of 1 million new users per day] the USD42 per user that Whatsapp got, is actually, USD8.85 per user in cash up-front, USD26.53 per user in stock and USD6.62 in stock option to be realized after 4 years.

So, it’s time now to construct that cash-flow and take a look at the financial and operational synergies that add up to numbers in the cash flow. I am going to consider the forecast horizon of six years to allow two years further time after stock option is realized in four years.

Considering the rate at which Whatsapp membership is growing, and considering that it now has the FB network effect to build on, it is safe to say that it will reach a billion active users in three years and this number will grow to two billion in around six years.

To talk about various aspects and possibilities for the top line:

• Whatsapp is currently charging one dollar per user. If this membership structure is maintained all along, Whatsapp will generate around USD 450 million at end of this year. To keep things simple, I would like to talk about forecast in terms of revenue or expense per user, moving ahead. So, we have one dollar of subscription revenue per user per year for Whatsapp.

• I am actually surprised that Whatsapp is currently not doing this [at least, I have not read that it is using this one], but eventually, it will resort to ‘Network Streaming’. Imagine the vast number of teenagers, students, housewives and employed people, who buy the network/data plans every month, only so that they can use Whatsapp. In a place like India, where a package of 1 GB per month from any telecom operator costs around USD2, it means every member of Whatsapp is paying a minimum of USD24 per year to the network providers only for using likes of whatsapp and facebook, and now these two major reasons for their data usage are one. So, if Whatsapp management can provide the telecom providers with statistics of network bandwidth that Whatsapp alone consumed per month for each user, and then demand say 1% of revenue that the telecom providers make from data plans, this can add up another minimum 25 cents to the yearly revenue [This revenue streaming was one of my revenue generation suggestions for our Entrepreneurship class project as well and I seriously believe that it is going to get big in days to come]

• So far Whatsapp has not introduced any advertisements. And the biggest strength of FB lies in its success to do non-obtrusive advertisements i.e. advertisements, which don’t disturb or annoy its users and that do not interfere in their usage of FB. If this expert team of FB works and figures out a way to work the same magic for Whatsapp, there can be additional revenue from advertisement for each user. Let’s give this development a two years time to launch and consider that it will provide Whatsapp with a minimum of USD1 per year per each user.

• So, what we have is minimum revenue of USD1 in first year, USD1.25 in second year, and USD2.25 from year three onwards per user of Whatsapp, for Whatsapp.

• So far, we were only looking at revenue generation for Whatsapp. Now let us look at Facebook. For that I am going to throw in a situation. Suppose that being an MBA student, I have some group work in school on a Sunday afternoon. What will be my FB status? “In School on a Sunday” with a checkout at Maria de Molina 31 and a feelings smiley stating “feeling tired”. What will be the FB message that I may have? A message to my Cousin “Talk to you later. Got some work in School today".
• Now, we all know that FB makes money from advertisements. So, if I open my FB during my group meeting, what will be the side-ads that I will see? An Ad of the nearby burger place, based on my location checkout, an ad of a good spa place based on my emoticon, an ad about student discount based on my message with keyword school. Three possibilities to get me clicking, generate a CPC item out of me, and earn some money out of it.
• Now imagine this. What will be the message or rather messages that I will be either putting or receiving on my Whatsapp for the same event? And these are a few samples with no authorship assigned that I would get in my Whatsapp group or individual conversation. “Running late, will be there in 5 minutes”, “Having hangover, cannot make it in time”, “Coming via Starbucks, anyone wants anything”, “Printer not working, we will need to go out”, “Cooking food today. Want to join?”, “We are in Gran Via. What was the Chinese Restaurant you were talking about?”
• Firstly, it is not just one chat per day like FB status update and it is definitely more number of chats than number of posts that any super user of FB puts. It is also not the kind of message that FB messenger is used for. And it is instantaneous messaging. So, if this data is “also” available to FB algorithm, I can additionally have the side-ads and news-feed ads that inform me about Starbucks, that inform me about may be a scooter renting agency [to avoid delay], that inform me about some supermarket for getting groceries and fresh vegetables, that inform me about restaurants in Gran Via, that inform me about nearest PC shops; and all of these double the amount of ads that FB can throw at me, and double my chances of clicking on these ads, thus doubling probability and click-through-rate and FBs current revenue :-)
•  So, at least for the users that have both FB and Whatsapp, FB has a potential to double its revenue, just by having this additional access to Whatsapp data. FB generated USD7 per user in the year 2013, and even if we consider that it generates a minimum of 30% revenue from the whatsapp users, thats USD2 per whatsapp user of additional revenue for FB and at no extra cost for collecting this data.

So, we can take a look at what these most feasible and easily implementable possibilities can do for FB, at a minimum level. At an assumed discount rate of 4% [this discount rate is purely an assumption], we can have the cash flows for Whatsapp revenues and FB increase in revenues for next six years and evaluate if this deal looks good.

And yes, talking about the real options method of valuation, FB will generate additional revenue through advertisements in Whatsapp and through Network streaming sales, only if it invests into the required R&D and develops these revenue streams. If not, the value generated from these options is zero and at the same time, the valuation of revenues from Whatsapp will be lesser than what it will be with these options. However, it cannot make profit out of Whatsapp tomorrow unless it buys it today.

While we can consider all the investments made as exercise price of the option, and the revenues generated as spot price, with time horizon of 6 years as for everything else, and get a option price for these additional investments, and while this will be a more accurate way to do the valuation of this deal, I would present the simplest DCF method valuation here, with cash flow for these options already included.

And I am going to ignore a lot of technical details like depreciation and taxes and stuff.

The point I want to make here is, that even a simple model can help us understand the mechanics of this deal, and those who wish to be more accurate can always resort to more sophisticated and detailed approach.

Having said that I would quickly do a sensitivity analysis of these options by increasing payoffs of these additional revenue options by 20% to showcase the upside potential that these yet-to-be-developed revenue streams can have for FB-Whatsapp combo. Of course, there is a downside risk as well that these revenues will not pick up, but then, FB has already committed the buyout price and locked in its downside to a cash and stock combination of USD19 Billion. For me, it’s already a sunk cost.

Here are some numbers, firstly without any additional revenue from sources yet to be developed; then with additional revenue from these new revenue sources; and lastly with these additional revenues scaled up by 20% of their assumed values to showcase the upside potential for FB:

Conclusion:

The Facebook-Whatsapp deal makes sense when Facebook will make use of additional synergies that this deal has to offer, and if whatsapp continues to maintain its growth rate. That is the current challenge before FB management, and I hope it already had a strategy to address this challenge when making the offer to Whatsapp.

Of course, this is just my thought on the matter and all the feedback, reviews, reactions, comments, queries are welcome as always :-)

The Everyday Monopolies and Price Discrimination

I am an Engineer. I did my Masters in Structural Engineering and then I have been working as an IT Consultant for most part of my professional life.
Speaking of life, it was a little different before I started this MBA.
Then, the discounts offered by stores meant 'discounts', memberships at movie halls and departmental stores meant convenience and special offers, stamps on loyalty cards at restaurants meant some free food as soon as I succeeded in collecting all stamps.

Now, after two terms in this MBA, and after already taking the Managerial Economics class by Prof. Gonzalo Garland - one of my favorite professors here at IE, things are just not the same anymore. By the time you finish reading this post, I am sure you will all know what I mean.

Just last week, I was walking along streets of Madrid, and on one of the traffic lights, a teenager handed over a pamphlet with a bunch of Burger King discount vouchers. As I said, earlier, this would have been just another store offering discounts - that day, even before I could notice, I was already thinking of whether this is a price discrimination implementation by Burger King. This thought led to even further thinking and ultimately I decided to share this entire chain of thoughts through this post.

When most of the people learn about price discrimination, they learn about how the airlines are using this tool or how theme parks play around this concept. When we think of monopolies, we think of Oil companies and telephone operators and some big names and brands.

But, are these savvy MBA concepts applicable to only the big corporations?
No, definitely not - I mean  - the only burger restaurant in an area near International Business School, or the only theater in a Spanish town showing movies in English, or branch of a super market operating in a business district with really no other grocery stores to compete with, or a Japanese/Italian or similar foreign cuisine restaurant - aren't these all examples of monopolies in their own way?
And do we not pay a premium price at these places? The answer is YES.

And now with the changing economies and crisis times, these stores, these shops, restaurants and movie halls need to make the most from their consumers.

In terms of economics, while they are enjoying their monopoly position, if they can also reduce the deadweight/welfare loss and maximize their surplus, they should be able to perform better even in the crisis times.

Here is a supply-demand curve showing monopoly price [M], equilibrium price [E], and the deadweight loss of monopoly.

For those new to concepts, equilibrium price is the price where supply is exactly equal to the demand, monopoly price is the higher price charged by the player with monopoly, and deadweight loss is the loss of surplus [both consumer and producer] as the supply is lesser than demand or the price charged is higher than the equilibrium. Here the supplier/producer benefits because of pure geometrical excellence of the rectangular area he gains by giving up the triangular part in the deadweight loss.

One of the proposed solutions by economics to recover the deadweight loss is Price Discrimination. Charge the customers in proportion to how much they value your product and are willing to pay.

So again, does this price discrimination need complex algorithms like that deployed by the airlines industry? Yes and No.
If the variables are too many, may be we need some algorithms. But for day to day life encounters, there are so many different ways to introduce the price discrimination. The more I thought about it, the more ways I found. Let me list some of them down and you will know how much this concept of price discrimination is now embedded in our life.

1. Loyalty programs: A loyalty card of departmental store, which we can use to avail special offers and discounts is basically a tool which helps those with lower willingness to pay. I am willing to buy a product, but if the store wants me to buy two, it should give me a discount. In other words, charge more to the person who is willing to pay, and make the consumer subscribe to loyalty program to introduce them to discriminated lower price.
A stamp card for restaurants is a similar tool. Charge the customer a premium if he is willing to pay and discriminate with those who are more loyal by offering a meal free for say each 4 meals [effectively offering 25% price reduction per meal].
The discount coupons that shops and restaurant offers, valid for our next purchase is a way to do price discrimination.
If you are still doubting whether these are really the price discrimination cases, think of this. If you are willing to pay the full price even on your second visit to some such place, you would just ignore the discount coupon/loyalty card and end up paying the full price. Nevertheless, you know that you have a discount coupon, and if you use it, you know that you can get the same thing at a lower [discounted] price, which opens a possibility of price discrimination.

 2. Offers: We get so many pamphlets in our mailbox every week. There are so many people distributing pamphlets - on the streets, in the restaurants, in shops, everywhere you go. And then, there are special agencies playing around with pricing schemes and offering consumers with discount deals, even while earning a premium for themselves. May it be paper version like 'Family Check' or an online version like 'Groupon', what these stores and agencies are essentially offering is a chance to pay less, for those who are not willing to pay the current price.

The most evident and also fascinating form of price discrimination that I came across recently is however on the Domino's Pizza website.

Once we select the pizza and get to the billing page, we can either press continue and pay the full price, or we can avail discount from coupon we have or we can also have a generic discount, which is available for all online customers if they click a box on left side of the screen. In effect, this page shouts at all its users - pay the full price if you are willing to, else we can discriminate prices as well, for those who hold discount coupons and also those who are not willing to pay the full price displayed.





Amazing, isn't it?

To conclude this post, all I can say is that the more examples and applications I am seeing of various concepts I am studying as part of my MBA here at IE, the more it is impressing me.