Confusion pricing

by Rob Horning

24 April 2006


One of my main excuses for not having a cell phone is the byzantine way the service is priced—it seems designed to generate maximum confusion and get people to pay different amounts for exactly the same thing, depending on how gullible they are. I don’t want to be gullible, and I am somewhat risk averse, so I steer clear of this market. I’m not adequately compensated for the price of feeling stupid by having the privilege to chitchat with people when I’m walking to the subway.

But don’t cell phone companies eventually want to sign people like me up? Why the opaque pricing?

Tim Harford theory is that confusion pricing is a simply another way companies shop for customers and categorize them in terms of how careful they are about their money. Some customers—let’s call them the stupid ones, the ones who need branded luxury goods to feel significant—allow companies to operate with high margins, others squeeze companies by being better informed, forcing companies to earn their money. By throwing out a bunch of confusing plans, cell-phone companies are filling the waters with chum, luring the idiot customers who’ll eagerly pay more without thinking or understanding what they are really paying for. The rest of us, if we choose to have a cell phone, are forced to look past the illusion of customer service presented in these plans and log some unpaid time on a customer-service hotline waiting to be told the real facts. Of course the burden is always on the consumer to make sure he’s not getting ripped off, but any industry that makes its business practices purposely opaque seems a good one to avoid. The perpetuation of confusion pricing suggests to me that there hasn’t really been enough competition yet in that particular sector, which suggests that whatever is being sold isn’t truly necessary. (Cell phones are luxury items for people with the time to burn figuring out what they cost.)

Harford seems all too trusting, it seems to me, that these reps will give you the straight deal and won’t try to bamboozle you more—he assumes that they’ll conclude you’re too smart for that just by virtue of having called demanding an explanation. I prefer not to do business with companies that force me to jump through hoops before they will treat me with respect. So I may be without a cell phone for a very long time.

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