Even If Customers Don’t Bother About Costs, Regulators Do

My recent post The Tug-of-War Between Different Pricing Models sparked a lively debate and attracted several comments and 1-on-1 feedback about whether customers care about costs or not.

Some people believe that buyers are only interested in the value they receive from a product and are least bothered about how much it costs a manufacturer to produce it. It’s thanks to such buyers that five star hotels – and many other industries – can get away with their prices. For example, a typical London 5* hotel charges £25 for a full English breakfast although its cost is less than 50p (Source: Hotel Babylon).

On the other hand, others – including me – believe that customers do care about costs. Take, for example, the author of this article who argues that Indian Railways is not justified in charging a higher price for return trips on trains. To give a bit of background, train tickets are always issued for one-way journeys. This is unlike air tickets where round trip booking is common and one-way trips are sometimes not even permitted. By issuing a return ticket, Indian Railways is certainly delivering convenience. Despite that, the consumer activist writer of the article complains about the premium solely on the grounds that Indian Railways is incurring no extra cost to issue a return ticket.

I concede that whether or not customers worry about costs is a cultural thing and could vary from one country to another. That said, the way the governments and regulators approach this topic seems uniform in many parts of the world. In a true laissez-faire economy, governments shouldn’t be involved in the business of business, let alone get into prices charged by private players. However, in the real world, they do.

Even in a Mecca of free market like the USA, there has been a spate of legislation in recent times around fees and charges that can be levied by banks. For example, according to Dodd-Frank-Durbin act, banks can charge a maximum of 24 cents per debit card transaction. While enacting this law, the legislators specifically linked price to cost and noted that fees for debit card transactions should be “reasonable” in comparison to the cost of processing them. Other examples where prices are set on the basis of costs are credit card APR limits (US CARD Act), overdraft charges on checking / current accounts (USA, UK) and insurance premiums (Germany, India).

So, whether customers care about costs or not, regulators do.

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