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Monthly Archives: December 2010

A Pygmalion approach to pricing a service

Pricing is always a tricky problem where a service like training or teaching is concerned, because marginal price (i.e. the price to serve one additional customer) is almost zero (as with most informational goods). How much more does it cost you to teach 51 students when you’re already teaching 50? Economics teaches us that in the long run, the price of a product goes to its marginal price. But surely, a service with a marginal price near zero cannot be given away for free!?George Bernard Shaw had an interesting take on pricing in his play, Pygmalion. See this video: (if you have difficulty understanding the accent, a (more elaborate) transcript of the relevant portion from the play is below the player).Here’s a videoclip from the 1938 movie Pygmalion (whole movie available on YouTube)[kaltura-widget wid="7rm50xm8tw" width="400" height="365" /]The section from the play is more clear:

HIGGINS. Come back to business. How much do you propose to pay me for the lessons?LIZA. Oh, I know what’s right. A lady friend of mine gets French lessons for eighteen pence an hour from a real French gentleman. Well, you wouldn’t have the face to ask me the same for teaching me my own language as you would for French; so I won’t give more than a shilling. Take it or leave it.HIGGINS [walking up and down the room, rattling his keys and his cash in his pockets]You know, Pickering, if you consider a shilling, not as a simple shilling, but as a percentage of this girl’s income, it works out as fully equivalent to sixty or seventy guineas from a millionaire.PICKERING. How so?HIGGINS. Figure it out. A millionaire has about 150 pounds a day.She earns about half-a-crown.LIZA [haughtily] Who told you I only–HIGGINS [continuing] She offers me two-fifths of her day’s income for a lesson. Two-fifths of a millionaire’s income for a day would be somewhere about 60 pounds. It’s handsome. By George, it’s enormous! it’s the biggest offer I ever had.

What would you call this pricing strategy? An equal-share-of-wallet strategy?