This past weekend I was at an event where everyday people drove their cars on the Watkins Glen racetrack under the guidance of Porsche Club instructors. Any kind of car is allowed, as long as it passes the safety and mechanical inspection. The list of cars included Porsches from the late 1970s to 2013, a Subaru station wagon, several Mazda Miatas, some BMWs, Corvettes, Mini Coopers, Nissans, VWs, a couple Lotus Elises and a Ferrari. The event has drivers in groups based on experience, so the most experienced drivers are on track with other experienced drivers, and beginners are on the track with beginners. The result is there is downtime for every driver during which conversations typically revolve around the cars, how they perform, and what it takes to maintain them. To me, the most interesting conversation was about the cost of Ferrari brakes.
I happened to talk with the owner of a beautiful 2004 Ferrari, during which I learned that it cost nearly $5,000 to replace the brakes on his car. I and everyone around who heard it were shocked. “How can it possibly cost that much?” another driver asked. Well, they are carbon ceramic, but that does not explain the difference in price compared to all the other cars. To me, the cost of the materials is irrelevant and the price of that brake job is completely based on buyer willingness to pay.
All good pricing organizations segment their customers based on characteristics that indicate potential differences in value to the customers or potential differences in buying behavior. When we can determine which customers are more price sensitive and which ones are less sensitive, we can tailor our prices to each group. Well there are not many groups of people that are less price sensitive than Ferrari owners, other than perhaps owners of helicopters, jets, and yachts. So Ferrari did what good pricing organizations do and they tailored their prices to the customer segment.
I explained my hypothesis to the Ferrari owner and he agreed. He said he thought the price was very high, but he knew it was simply because he was in a group who could afford a very expensive car. “I bought the car to drive it fast, which means I need to stop it fast. When I need brakes, I am going to get them.” He would love to have the brakes changed for less money, but since he loves the car, wants to keep it, and has few repair options he is willing to pay. Ferrari pricing is an admittedly extreme example of differentiated pricing, but it is one we should all remember.
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