In my previous post discussing how prices are determined, I talked about companies searching for the right price point. Sometimes lower prices lead to higher sales which can lead to higher total profits even though the margin is slimmer. Inversely raising prices can drive your customers to choose a cheaper substitute. Higher margins, but fewer sales leads to less profit. Reminds me of a Calvin and Hobbes comic in which he’s trying to sell lemonade at $15 a cup. Since he wasn’t selling any he decided to raise his price, so that he wouldn’t have to sell as many to get the money he wanted.
I suppose while I’m going tangentially I should mention (as someone pointed out to me) that not follow the all products follow the normal rules of supply and demand. Luxury goods in particular behave perversly. The value of a $500,000 watch is largely the status you get from spending half a million dollars on a watch. It’s not like you’d sell more than twice as many if you cut the price in half.
So when someone decides to sell a product, they naturally want to get as much money as they can from it. They don’t actually care about what’s a “fair” price, nor do they worry about the justice that not everyone can afford to pay the price they’re asking. However some profit is far better than no profit. This conflict is at the heart of selective pricing. Once upon a time when every shop counter was run by the owner, and prices weren’t as easliy compared nor were they even tagged on the products, every transaction involved bargaining. The seller would gauge the amount of money he guessed you had available, and how bad you wanted that particular product, and name a price. It was up to the buyer to vote with his feet if he wasn’t willing to pay the asking price.
When I hear a phrase like “variable pricing” my gut goes “that’s not fair!” But that’s the way every transaction was made in every market square for a thousand years. If you leave America you’ll find that our fixed pricing scheme is actually the odball in the world. So how did we end up with our system? Department stores. When stores began to get so large they had to hire sales staff who didn’t have the business’ interest at heart they had to stop bargaining on every sale and set the prices firmly for the clerks to follow.
Thier tendency is to set the prices a little on the high side, because after all someone will be willing to pay it. But they know that there are more profits to be made by selling the product for less to people that aren’t willing to pay the higher price. The way this is done is by putting obstacles between the consumer and the lower prices.
The most common of these is time. Keep the price high when a DVD is first released. Then after a couple of months all the impatient money is spent and the price is lowered. More people are willing to buy at the lower price. I hear you trying to argue that this isn’t a nefarious plan, this is just supply and demand… Demand drops so the price drops. But I don’t think the number of people interested in buying the movie really changes, just the number of people willing to pay $24.95.
Many items have a seasonal price cycle that tracks the opposite of demand. Swim suits are most expensive in the spring and get cheaper throughout the summer. At the end of the summer the prices are knocked down to cost because they don’t want to store them all winter.
Another discount hurdle is “the sale.” They will create a narrow window of a few days in which the price sensative consumers can get the products they want at prices they’re willing to pay, and the stores can get the money they can from them without giving up the money they normally get from the more affluent (or lazy, or impatient) consumers. The store’s are simultaneously using this as a bait and switch advertising ploy, hoping you’ll buy some full price items while you’re there.
A third method is the coupon. You have to find and save this scrap of paper to earn your cheaper price. Coupons also overlap neatly with advertising.