Joel Spolsky whips out a copy of Visicalc to demonstrate the economics of pricing, its effect on demand, and price discrimination as the road to profit — or to Hell, as the case may be.
Price discrimination involves altering the price of a good for each customer according to their willingness to pay. Bob is willing to pay $50 for the good, but Alice is willing to pay $25. Our costs are under $25, so we’d prefer to sell to both Bab and Alice, thus maximizing our profit. The classic means of price discrimination are bargaining and auctions. More modern means include different media formats, coupons, rebates, brand cachet, and distinguishing between buiness and residential customers. The problem with price discrimination is that customers feel bilked.
Another means is changing the price over time. Early adopters, the least price sensitive, will pay handsomely, while the more price sensitive customers will purchase the good later, after the price drops.