The prices at the hairdresser’s salon down the street start at $25 for men and $35 for women. Entry to the Taj Mahal costs ₹250—if you’re Indian. For foreign visitors, it’s ₹1300. And student discounts are practically an industry, with companies like STA Travel—now, sadly, a victim of Covid-19—leading the way.
These are a few examples of the phenomenon of price discrimination, in which the same product or service is offered at different prices depending on some characteristic of the buyer—in the above examples, gender, nationality, and student status, respectively.1
Whatever you may think of those particular examples, price discrimination sounds like a bad thing. We’re used to thinking of discrimination in terms of prejudice: as discriminating against a marginalised group of people. But in this context, discrimination is used as a neutral term. It describes the fact of differentiated pricing without making any assumptions about the reason for those differences. Like all neutral concepts, it’s the application that matters. We’re here to argue that when done correctly, price discrimination can be a very good thing.
From an economic perspective, one benefit of price discrimination is capturing the consumer surplus—the difference between the price that consumers pay and the price they’re willing to pay. With a fixed price, businesses always leave money on the table: either they set their price so low that everyone is willing to pay, meaning they lose out on the surplus that some consumers can afford; or they set their price high enough to capture that surplus, but in so doing lose customers who aren’t willing to go higher.
The key point here is that the optimal price—the maximum price that a customer is willing to pay—varies from person to person. A business would ideally want to charge each customer the optimal price. Realistically this isn’t possible, but price discrimination allows businesses to more closely approach that ideal.
Few people would bat an eye at a supermarket in rural Maine charging less for the same products than one in, say, the suburbs of Boston. Price discrimination along geographical lines is bog-standard in the retail industry. (So much so that it’s a minor point of interest that one popular chain of grocery stores in the United States—Trader Joe’s—doesn’t do this, a fact that makes it especially popular in large cities.) Different forms of price discrimination are also standard in SaaS business models—think of free trials, introductory discounts, or the last-ditch offer when a customer attempts to cancel their subscription.
What’s perhaps less well-known is the fact that companies like Netflix also practice geographical price discrimination, with prices varying dramatically from country to country. The price of a Netflix subscription (in USD) varies from under $4 (Argentina) to over $13 (Switzerland).2
Taking the American price ($8.99) as a base, this allows Netflix to capture the consumer surplus in countries like Switzerland and Denmark while also expanding into markets like Argentina and Turkey, which wouldn’t be viable at the American price point.3
Using price discrimination to optimise prices is possible for companies like Netflix, but it’s a big ask for smaller companies. The SaaS business model has a lot of moving parts—setting prices is complicated enough when you’re only thinking about conversion rate and MRR, and if you want to expand into a new market, you need to repeat that optimisation process all over again to take into account differences between countries.
But hold on a minute, you might say, plenty of companies have good economic reasons for practicing price discrimination—but does that make it right? Is it fair? To answer this question, let’s consider the examples we mentioned at the beginning of this post: the hairdresser’s salon, the Taj Mahal, and the student discount.
Gendered prices are a good example of price discrimination gone wrong. First, why are prices at hair salons gendered? The common explanation given is that it is due to the difference in work required to cut short and long hair. But Kevin Parker will still pay less than Katy Perry at my local hairdresser (Yes, I had to google “Celebrity with short hair”, and I recommend you do too if you haven’t kept up with Katy in a while!).
The real reason why haircuts prices are gendered is because salons expect the average willingness to pay of women to be higher than that of man. Whether it is true in the absolute (I don’t know), it certainly isn’t true on a case by case basis. I am willing to spend fortunes to look like I have bed-hair, and I have a female friend who just cuts her own hair to save money. But the biggest issue with gendered pricing of haircuts are fairness and exclusion. Non-binary people are excluded by this system, misgender occurrences are common and can be traumatizing. A much better solution is to price-discriminate based on levels of service as opposed to gender. A good example of this includes straight-razor shaves, which despite being roughly equivalent in terms of work required, allows to differentiate prices between customers with a higher willingness-to-pay and a lower one.
If that’s an unfair example of price discrimination, we can argue that student discounts are the opposite. Students, like children and seniors, are at a stage in their lives when they’re less likely to have a regular income. Society recognises this and takes steps to make things easier. Who would deny a family with children cheaper access to the cinema, a student cheaper access to a museum, or an older couple cheaper access to theatre tickets? At the same time, students tend to exhibit higher price sensitivity, which means that offering them discounts is a sound pricing strategy, meaning that there are both economic and ethical reasons to support this category of price discrimination.
That leaves us with perhaps the most illuminating example. On the face of it, the ticket pricing at the Taj Mahal is unfair. After all, tourist attractions in the West don’t charge less for white people!4
Why is it fair that foreign tourists are forced to pay a “white man tax”? The answer requires us to shift our framework of fairness. In terms of equality, yes, this type of pricing is unfair. Different groups are being treated unequally. But this kind of thinking fails to account for underlying global inequalities in the distribution of wealth. Where systemic inequalities exist, surface-level equal treatment—such as offering everyone the same ticket price—only serves to perpetuate the deeper issues. Instead, we should aim for equitable treatment. This means ensuring that everyone has equal access to opportunities. If we think of fairness in terms of equity, then the price discrimination at the Taj Mahal is fair, because it reflects the wealth inequalities between India and the rich western countries which account for most of its foreign tourism.
Still unconvinced? Let’s find an envelope and scribble some sums on the back. To generate the same amount of ticket revenue with a fixed price, we’d need to charge approximately ₹385 per person. That’s a 54% increase for 4.4 million domestic tourists and a 70% discount for a mere 645,000 foreigners!
We can imagine that the number of domestic tourists would drop as a result, but would the number of foreigners increase? Probably not, because this number is already limited by the number of people who travel to India in the first place. What foreign tourist, having made her way to Agra, turns up at the Taj Mahal ticket office only to think, nah, that’s a bit too rich for my blood? Foreigners in Agra will happily pay whatever it takes to visit the Taj Mahal, especially when “whatever it takes'' is still less than a ticket to a comparably iconic monument—say, the top of the Eiffel Tower (starting at €19.90).
In other words, by far the biggest expense for a foreign tourist visiting the Taj Mahal is getting there in the first place. The same isn’t true of domestic tourists—and that’s why price discrimination matters. Here we must ask ourselves: is it fair to prevent Indians from visiting one of the most famous sites in their own country in order to maximise profit from foreign tourists? Of course it isn’t. Price discrimination offers a solution where everyone wins: domestic and foreign tourists alike are able to visit for a price that reflects what each group is willing to pay, all while ensuring that ticket revenue is high enough to maintain the Taj Mahal for subsequent generations.
A version of this question applies to software companies choosing whether to practice price discrimination. Is it fair to ask the rest of the world to pay prices that are calibrated for rich countries like the United States? Not if you consider the question through the lens of equity. By adopting US software prices globally, we are denying a vast majority of the world’s population access to any number of useful products for no good reason. After all, the prices of goods and services already vary from country to country—that’s a basic economic fact, encapsulated by the concept of purchasing power parity. Why shouldn’t SaaS prices also vary?
The only difference is that we’re not used to it. Unlike physical goods, where the complexity of global distribution creates a smokescreen—“of course a cup of coffee costs twice as much in the UK as in Slovenia, that’s just how it works,” we might say—SaaS is more immediate. We are accessing the exact same website, signing up for the exact same service. This feels different, but it isn’t. All it is is more transparent.
Maybe that’s a good thing. Maybe we should all start being more honest about how much things cost, wherever we live. Maybe we’ll learn something about the way the world works, the way that people in other countries lead different yet similar lives.
At the very least, we’ll make the world more equitable. That’s a noble goal in its own right—and we’ll help start you on the path to realising it.
- When you start looking for it, price discrimination pops out at you everywhere—for example, did you know that the Isabella Stewart Gardner Museum in Boston offers free admission to people named Isabella?↩
- The content available on Netflix also varies from country to country, but not in a way that correlates with the price of the subscription. For our purposes we’ll treat a Netflix subscription as more or less equivalent around the world.↩
- This second point demonstrates another benefit of price discrimination for SaaS companies: capturing consumer surplus. Server capacity aside, there is essentially no limit to the supply of software, meaning that SaaS companies can expand into new markets without having to contend with logistics on the ground.↩
- Tourist attractions in remote areas do occasionally charge less (or waive the entry fee entirely) for locals, which is an example of the same phenomenon playing out at a regional rather than a global scale.↩