Over the last decade or so, more and more goods and services seem to be adopting a two-part pricing strategy as a way to maximize their profits. Two-part pricing (also sometimes known as a two-part tariff) is a strategy used by firms with market power in which the price of a good or service is composed of a lump-sum fee, as well as a per unit cost. The benefit of this technique is that firms are able to capture more of the consumer surplus (the monetary gain that consumers get when they are able to purchase a product for less than the highest price they are willing to pay) than they might otherwise. In some cases, the firms can even make more than they would selling at the monopoly price.
Once you start looking for it, this strategy is absolutely everywhere. From Costco memberships, to cover charges at bars, to razors and blades that are sold separately, two-part pricing is a common facet of the day-to-day life of many consumers. This is the strategy behind cheap printers, but expensive ink, and why wine has a higher mark-up than entrees in many restaurants. The firms in question are increasing their profits by breaking up their good or service into discrete parts that necessitate extra spending on the part of the consumer. However, the “entrance” fee paid by consumers in these examples can in some cases be more beneficial for the consumer than than the firm. A low cover charge for a bar with expensive beer may be a great deal to someone who values the venue more highly than the drinks, for example.
But what happens when the firm produces a product that is sold under a two-part pricing strategy, but one of the parts is discovered to be unnecessary? For Silicon Valley firm Juicero, the answer is public ridicule and angry investors. The success of this pricing strategy rests on the two parts being inexorably intertwined, and Juicero apparently discovered this the hard way. In 2016, Juicero was one of the “most lavishly funded startups”, attracting approximately $120 million investors (including Google’s venture capital arm). Their product? A $400 wifi-enabled juicer that would make cold-pressed juice from packets of raw fruit and vegetables provided by Juicero on a subscription basis. However, the juicer was quickly discovered to be irrelevant as consumers found that the packets could be squeezed by hand, rendering the juicer completely extraneous.
The fate of Juicero still remains to be seen, of course, but it certainly looks like they will serve as a cautionary tale about the dangers of cavalier two-part pricing. It can be a tremendously profitable (if arguably exploitative) strategy, but careful planning and a solid understanding of the consumer market are mandatory if the firm is to be met with success. And, of course, it helps to make sure that consumers actually need both parts of your product.