On Wednesday I had to send a package to Mumbai by courier. I walked over to the nearby DTDC office and was told that I had two options – i could pay Rs. 85 for “standard courier” or Rs. 180 for “next day guaranteed delivery”. I asked the guy at the counter when the courier would be “cleared” (i.e. leave the booking office) and he said “this evening”. Assuming that courier gets sent by flight, it would reach Mumbai the next day, so it made me wonder what would take a courier longer to reach.
I’m reminded of this famous story of HP (or was it Xerox? Or Epson?) adding an additional component to their printer to slow it down so that they could sell it as an “economy model”. The problem with offering differential levels of service in what is essentially the same product is that you know that the service provider has an incentive to willfully offer mediocre service when you go for the cheaper option.
Let us get back to courier, and assume that it is theoretically possible for DTDC to deliver my courier to Mumbai in a day. Suppose they start delivering most “standard” (Rs. 85) packages the following day, then people will have no incentive to go for the “premium” (Rs. 180) service! Because a “premium” service exists, they actually have an incentive to provide poor service for the “standard” package.
It is a similar case with Indigo’s “fast check in” counter at airports. For Rs. 200 you can skip the lines in the airport and go to a special “fast check in” counter. There is the same conflict of interest there – if the regular check in counters were efficient and there were no long lines, there would be no incentive for anyone to go to the “fast check in” counter. So if Indigo has revenue targets for the fast check in counter, it makes sense for them to make the regular check in more inefficient and create longer lines.
Coming back to DTDC, how is the market likely to react to their premium service? Let’s say that I’m someone who regularly sends couriers (but not regularly enough for me to have a deal with DTDC). I’ve been using the “standard” package so far. Most of my letters arrive in Mumbai the next day but a small number (let’s say 10%) take two days to arrive. Now, DTDC introduces the premium package, but I continue using the standard package. What do I see now? Rather than 90% of the letters arriving the next day, only 10% do, and 90% take longer (in line with DTDC’s revised incentives). It is likely that I’ll either start using the premium service or I’ll move to another operator.
The ostensible reason for DTDC introducing an “overnight guaranteed” courier service is easy to see – earlier, 90% of the packages were arriving in a day, and now they guarantee that it is 100%. The problem, however, is that the company will soon want to target increased sales of this “premium” service, and so will start taking steps to prevent the “standard” service from “cannibalizing” the premium sales.