What Price Truth? What Truth Price?
	found on Fast Company written by Saige, edited by John (Plastic) [ read unedited ] posted Thu 6 Mar 5:32am
		"How do the prices of products and services get determined? We all know that one. They figure out the cost of creating the product/providing the service, plus a small amount added on for profit, whatever the market will bear. Right?" Saige asks. "Wrong. 'You have to know the cost so that you can understand the profitability implications of price,' says Kent Monroe, a college professor, 'but not for the purpose of setting price.' So how do companies set prices? They guess. They pray. They look at their competitors. But for the most part, they're completely clueless. What happened to the 'what the market will bear' thing? Well, nobody knows what that amount is to make use of it. They're so clueless, that businesses don't even want to talk about it, lest people find out how clueless they are. I sensed trouble when the first person I called to interview said after a few minutes, "Wait. I hear typing. I always get nervous when I hear typing." Next came a woman from American Airlines. She kept repeating the official position: "Absolutely not. We just don't discuss prices." Finally, she pleaded, "If I talk about prices, I could go to jail." The spokeswoman for a telecom company said, "We're not going to talk about prices, and the fact that we're not going to talk about it is off the record. You can't use the fact that we won't talk about prices in a story."

	"But that's all starting to change. A few companies have started making efforts to collect real, empirical data, and creating software to help predict the effects of various prices. One of the first discoveries? Sales can be increased in the fashion industry by discounting products less - but making the discounts sooner. Also, just by having a firm research and test price changes in a scientific manner, the shipping company DHL has managed to increase both revenue and profits during a depression - a remarkable feat."

[ more plastic... ]    

show almost all: 49 commentsbest: 12 comments by oldest first (ignore threads) newest first highest scores first oldest first newest first (ignore threads)

1.  The Invisible Hand becoming more visible?   by Philosawyer       at Thu 6 Mar 6:51am score of 1     One reason for the failure of most attempts to control prices and production by centralized authority is precisely the lack of this kind of accurate information. The communist approach is closer to the initial model described by the submitter of this piece. Needless to say the world is an extremely complicated place, and past efforts to apply logic and reason to build markets based on rationality and purposely designed have been doomed to pale in comparison to markets for the most part permitted to be shaped by the "invisible hand." Could increased ability to model such extremely complex systems serve to make a communist or socialist approach more viable? Alternatively, will such approaches tend to defeat themselves since once more and more market players have access to the same information there will be tendency to try to beat out other competitors to the punch (e.g. have those discounts come out just before the competetors and just a slight bit larger in the amount of discount). In any case, knowledge is power, up to now the workings of the economy has been closer to stumbling in the dark than to mapping out precise plans and strategies. However this knowledge is not free, it remains to be see whether aqcuiring it is really worth the trouble. The marketing division of the Sirius Cybernetics Corporation defines a robot as "Your plastic pal who's fun to be with."   [ ...reply just to this | comment on the story... | next new ]

3.  Re: The Invisible Hand becoming more visible?   by lopati       at Thu 6 Mar 7:14am score of 2 helpful   in reply to comment 1     theoretically linear programming employed by a centralized planning authority (and for war planning and economic warfare) can be functionally equivalent (or dual :) to an efficent market frontier. what's interesting i think, and the article points out, is that it's increasingly being used by corporations!   [ ...reply just to this | comment on the story... | next new ]

2.  perfect information   by lopati       at Thu 6 Mar 6:55am score of 3 astute     fixed pricing is pretty entrenched in our sense of "fairness" but there's been a movement toward flexible or differential pricing -- like market segmentation, name your price or auction models. it allows companies (or universities :) to capture greater profits, while serving a larger market -- from each according to their abilities, to each according to their needs! The classic prescription for economically efficient pricing---set price at marginal cost---is not relevant for technologies that exhibit the kinds of increasing returns to scale, large fixed costs, or economies of scope found in the telecommunications and information industries. The appropriate guiding principle in these contexts should be that the marginal willingness to pay should be equal to marginal cost. This condition for efficiency can be approximated using differential pricing, and will in fact, be a natural outcome of profit-seeking behavior. it's actually a characteristic of "public goods" beyond the usual definition of non-excludable and non- rival (fireworks displays, national defense, etc.) which generally make them the purview of the government... i guess the point is that education can be considered a public good! or maybe it's a case for universal access to all human knowledge :)   [ ...reply just to this | comment on the story... | next new ]

4.  Wal-Mart Anecdote   by goofyroo       at Thu 6 Mar 7:19am score of 3 interesting     I met a plastics manufacturer who spoke frankly with me about his dealings with Wal-Mart. Think what you will about that company, but their record indicates they know something about pricing. He said he went to their buyers with a prototype tool box that would retail for about $16. They said, Thanks, but we need a $9 tool box. He said he could only make the tool box for that price if he took out one of the trays and eliminated the cord winder, plus a few other mods he had put a lot of thought and engineering into. They said, Great, we'll take it if you do that. He sold them thousands, and they sold them to the public so fast he had to run extra shifts to keep up. Point is, they know their customer. They know a $16 tool box, even if it is superior, will collect dust. A $9 tool box will fly off the shelf. Go figure -- that's how WM makes the big bucks. Goofy Roo Calling someone judgmental makes you judgmental.   [ ...reply just to this | comment on the story... | next new ]

14.  Economics 101   by jgbustos       at Thu 6 Mar 10:08am score of 1   in reply to comment 4     In a perfect competition scenario, the prices are not fixed by the manufacturer, but by the market itself. My crack dealers are angels   [ ...reply just to this | comment on the story... | next new ]

5.  There was a story in one of the Dilbert books   by chatsubo       at Thu 6 Mar 8:05am score of 1     (it was a Christmas Present, I swear) about a record owner who couldn't shift a particular CD, so he kept marking most of them up at a dollar over the price, while keeping one at the real price. Customers thought that he had made a mistake, so kept buying the 'cheap' copy of the album. So I guess you need to cheat your customers into thinking that they are cheating you. Every man is guilty of all the good he did not do   [ ...reply just to this | comment on the story... | next new ]

9.  Re: There was a story in one of the Dilbert books   by lopati       at Thu 6 Mar 9:47am score of 1   in reply to comment 5     reminds me of a story my HS econ teacher told us about consumer behaviour (or gullibility :) -- a drugstore received some free samples of toothpaste to give away, but at checkout noone was taking any, so the manager put a sign up that read, "1/2 OFF SALE, $1^H^H 50¢," or something to that effect, and they flew off the counter!   [ ...reply just to this | comment on the story... | next new ]

6.  It's worse...   by mrwarmth       at Thu 6 Mar 9:09am score of 1     I'm not surprised that companies are clueless about how to set prices. That's because, believe it or not, most companies are clueless as to why customers buy their products in the first place. If you don't know why customers buy your products, then you have no idea how pricing affects that choice. I have worked for companies that were making money hand over fist on a product, yet if you asked them why sales were growing 30% a quarter, quarter after quarter, they would say, "We have no idea." Most companies just focus on the processes and methods and cost model of creating their product. When it comes to pricing, very few people have a lot of expertise in that. So what companies tend to do is spend lots of money on "VP"s of marketing who know nothing, but spend years pulling cockamamie schemes out of their asses that lead nowhere. That's why the most successful companies are those that (a) know why customers like their products and (b) are masters of marketing. This is why Wal-Mart is so successful. -Niall Where is Ratko Mladic?   [ ...reply just to this | comment on the story... | next new ]

8.  In the case of Walmart,   by bokeh       at Thu 6 Mar 9:32am score of 2 irrelevant   in reply to comment 6     That's why the most successful companies are those that (a) know why customers like their products and (b) are masters of marketing. This is why Wal-Mart is so successful. it also helps to underpay and overwork your employees, utilize rabid and likely illegal union-busting techniques, and to generally be as nasty a "corporate citizen" as possible. If there is a Universal Mind, must it be sane? --Charles Fort   [ ...reply just to this | comment on the story... | next new ]   10.  Re: In the case of Walmart,   by mrwarmth       at Thu 6 Mar 9:48am score of 2 astute   in reply to comment 8     SOrry, but they could be doing all of those things and still fail if they didn't understand their customers. The sad thing about the practices you mention is that Wal-Mart would still be immensely profitable if it didn't resort to them. They have nothing to do with Wal-Mart's financial success. -Niall Where is Ratko Mladic?   [ ...reply just to this | comment on the story... | next new ]   11.  Re: In the case of Walmart,   by Subtle Trouble       at Thu 6 Mar 9:49am score of 2 compelling   in reply to comment 8     What, exactly, does your frothing-at-the-mouth response have to do with the economic basis of pricing? Your off-topic response is why so many people associate the phrase "knee-jerk" with "liberal". Yes, yes, we all know how poorly WalMart treats its workers, ravages Mom-and-Pop retailers, and despoils neighborhood landscapes. But we were actually discussing some of the interesting things WalMart has done, such as use information technology to make their operations as efficient as possible and give their consumers what they actually want at prices they want to pay. de asini umbra disceptare   [ ...reply just to this | comment on the story... | next new ]   13.  Re: In the case of Walmart,   by bokeh       at Thu 6 Mar 10:04am score of 1.5 succinct   in reply to comment 11     What, exactly, does your frothing-at-the-mouth response have to do with the economic basis of pricing? It has to do with how companies decide to set prices. In the case of Walmart, they decided that the best business strategy was to set the very lowest price, and in order to do that, they must also act in ways that, attributed to an individual, would be considered pathological. How is it "knee-jerk" to point out some real-world implications of how a company does the very thing that is being discussed? I wasn't frothing at the mouth. If I were I would've used the word "fucking" quite a bit more. If there is a Universal Mind, must it be sane? --Charles Fort   [ ...reply just to this | comment on the story... | next new ]   15.  Re: In the case of Walmart,   by eyebrow606       at Thu 6 Mar 10:18am score of 2.5 astute   in reply to comment 11     Completely OT at this point = Are "liberals" associated with "knee jerk" perhaps because "liberals" seem to point out social injustices a lot more than "conservatives" do? I rarely notice "conservatives" sticking up for the common man, but maybe I'm just not very observant. Quit cogitating, Steinmetz!   [ ...reply just to this | comment on the story... | next new ]   19.  Re: In the case of Walmart,   by Subtle Trouble       at Thu 6 Mar 11:51am score of 1.5 brilliant   in reply to comment 15     Just like freeing Mumia has nothing to do with our war on Iraq, Walmart's labor practices have nothing to do with the way they manage their inventory and pricing. But, we digress here. de asini umbra disceptare   [ ...reply just to this | comment on the story... | next new ]   22.  Re: In the case of Walmart,   by rdww       at Thu 6 Mar 12:18pm score of 2 scholarly   in reply to comment 11     The hatred felt by bobos and "progressives" toward Wal-Mart is nothing new in America. Do some research, and you'll find that a century ago, the big mail order houses (especially Sears) were heavily attacked for the same sins of "bankrupting small local merchants." Then as now, most of these sob stories concerned mom-and-pop stores with higher prices, poorer selections, and inconvenient hours.   [ ...reply just to this | comment on the story... | next new ]   23.  Re: In the case of Walmart,   by bokeh       at Thu 6 Mar 12:35pm score of 2 astute   in reply to comment 19     Walmart's labor practices have nothing to do with the way they manage their inventory and pricing To the contrary, keeping labor costs down is how Walmart "always sells for less". Their whole identity is in their pricing structure, and their labor cost is a major determinant of the prices they charge. Again: Noting that the first question of the write up is How do the prices of products and services get determined? , I'd say this is no digression at all. If there is a Universal Mind, must it be sane? --Charles Fort   [ ...reply just to this | comment on the story... | next new ]   43.  Re: In the case of Walmart,   by Victor Lazlo       at Fri 7 Mar 8:45pm score of 1.5   in reply to comment 23     The problem is that people who get paid WalMart salaries can only afford to buy stuff at WalMart. Unionized wages created the American middle class.   [ ...reply just to this | comment on the story... | next new ]   45.  Re: In the case of Walmart,   by Disgruntled Engineer       at Sat 8 Mar 1:37am score of 1   in reply to comment 10     I don't believe it takes any great leap of intellect to determine that any customer would rather pay less than more for a product. There's no rocket science involved here and no divining either. If I could sell you a PS2 for $100 instead of $200, its not like it's hard to figure out that you may be more interested at the $100 price. Now what is more relevant is not what price people are willing to pay... people are always ALWAYS willing to pay less. The genius of Wal-Mart if there really is any, is that they were able to determine that a customer would be willing to accept a lower quality product, ie the toolbox without the reel or try etc. This is of course why when one creates a marketing survey you pretty much never ask a multiple choice question, which of the following prices would you be willing to pay. Its alway the lowest. Furthermore to the comment, the fact that Wal-mart does underpay staff, union bust etc does indeed help lower the marginal cost of the product and as long as people are more concerned about spending less than where they are buying from and the tactics of said company. Let me give you an example. Say a bottle of shampoo. The reason Wal-mart can sell that shampoo for $0.10 or $0.50 cheaper than a drug store or similar other chain store is not only economy of scale, since at one point there were companies larger than Wal-mart who had the economy of scale thing working in their favour, it very much has to do with some of their wage practices. They simply have lower overhead cost to be factored into each product since both companies would be buying the same product from the manufacturer for the same price.   [ ...reply just to this | comment on the story... | next new ]   48.  Re: In the case of Walmart,   by garymilner       at Sun 9 Mar 12:16am score of 1.5 astute   in reply to comment 45     They simply have lower overhead cost to be factored into each product since both companies would be buying the same product from the manufacturer for the same price. In a majority of cases Walmart does not pay the same price for the same product from the same manufacturer. While underpaying staff obviously makes a difference, Walmart is such high power over it's suppliers (one of Michael Porter's 5 forces) that they can basically dictate what price they want, and what time of day that the product has to be in the loading dock. If you won't give them the price they want or you get your stuff there late, they don't accept delivery. As a manufacturer what are you going to do... Just not sell to one of the worlds biggest retail outlets? That only works if you have a prestigious product. Find out more at Gary Milner's Weblog   [ ...reply just to this | comment on the story... | next new ]   49.  Re: In the case of Walmart,   by Lemmy Caution       at Sun 9 Mar 12:44am score of 1   in reply to comment 45     That's true for some products. For others, the price is part of the information, and a low price can be negative information. Services, for example. Many consultants will tell you that they tried to discourage getting new clients, when already overengaged, by raising prices - and find that raising prices increased demand. When looking for a restaurant in a new town, the prices on the menu are going to be used as information, and prices that are too low will suggest poor quality. Same thing shopping for furniture, jewelry, art, and the like. Or even a consumer product for an unknown brand: if I'm shopping for a certain brand of shampoo that I already know about, of course I'll choose the cheapest. If it's a matter of choosing between 4 or 5 than I don't know about, maybe I won't.   [ ...reply just to this | comment on the story... | next new ]   50.  Re: In the case of Walmart,   by miriamsong       at Sun 9 Mar 4:39am score of 1   in reply to comment 43     Yes, exactly. WalMart is the present exemplar of "price-point as the only strategy". If all companies followed suit, and no workers stopped them, then everyone's job would be as soul-destroying and ill-paid as a WalMart job. Have any "professionals" on Plastic seen their domains de-skilled and routinized to the detriment of their quality of job life? I'll bet we all have. When social systems have only one set of values (in this case, market fundamentalism), things can get seriously wacky. The organizational systems we use (HMOs, educational testing, etc.) are so incredibly efficient that they quickly expose and tend to eliminate any "extraneous" inputs and outputs. The problem is, a lot of those targeted inefficiencies are the sole sources of challenge and joy at work. Now, I'm not saying that unions are all about quality and fulfillment. But when practitioners of any kind are excluded from worklife decisions, there is a price to pay for low prices.   [ ...reply just to this | comment on the story... | next new ]   51.  Re: In the case of Walmart,   by Disgruntled Engineer       at Sun 9 Mar 8:40am score of 1   in reply to comment 48     Well I agree that at its current behemoth size yes it can basically dictate prices to manufacturers, however Wal-Mart hasn't always been the biggest kid on the block, there were many other retailers at one time larger yet on similar or even the same products Wal-mart was able to undercut their prices. In those days since Wal-mart didnt have the economies of scale it does today, it was able to price lower because of its employment practices for one.   [ ...reply just to this | comment on the story... | next new ]

7.  The initial price is not the end of the story   by ksu93       at Thu 6 Mar 9:13am score of 1.5 astute     In theory at least, prices are not actually set by sellers, but rather by consumers. That's because the sellers are the ones who will ultimately decide how much they're willing to pay for something. Now obviously this assumes that supply will be plentiful and that consumers will have alternate choices if they don't like the price, so it doesn't apply to commodities. But the basic principle is sound. The seller of a product can initially assign any price he wants, but he won't sell enough to make a profit if that price is too high and he'll run out of them without making enough of a profit if that price is too low. Eventually the idea is that an equilibrium will be met after sellers and consumers finally "agree" on an appropriate price for the product. Besides, just criticizing sellers for being clueless about this stuff is kind of unfair, because consumers are often even more clueless. If you ask someone how much he or she would be willing to pay for something, the number you get is unlikely to be accurate because, unless they really want or need it at that moment, they don't have any idea how much they'd pay for it. "War is God's way of teaching Americans geography." -Ambrose Bierce   [ ...reply just to this | comment on the story... | next new ]

26.  Re: The initial price is not the end of the story   by deanc       at Thu 6 Mar 1:09pm score of 1.5 helpful   in reply to comment 7     The seller of a product can initially assign any price he wants, but he won't sell enough to make a profit if that price is too high and he'll run out of them without making enough of a profit if that price is too low. But this is only true in the aggregate. A company will go out of business if it doesn't make a profit and move enough goods. However, that does not mean that a company has an efficient consumer-driven pricing structure that maximizes revenues. More likely, the average companies are using haphazard pricing structures that don't reflect their true costs. It just so happens that enough consumers buy their products that these companies are barely able to stay in business (or, not, in some cases). That doesn't mean "prices are determined by the consumer." It means that a company just happened to be lucky enough to sell enough products, in the aggregate, keep themselves in business. That doesn't mean that the consumers demanded that the company adjust prices on all their products at all times to respond to consumer demand. You're also incorrectly assuming that consumers care enough to "determine" prices, something which also doesn't seem to be true, either.   [ ...reply just to this | comment on the story... | next new ]

12.  customer training   by garymilner       at Thu 6 Mar 9:55am score of 3.5 intriguing     One thing that bugs me about walmart is all the stuff they have in the aisles. I know a Wal-Mart HR guy and so I asked him why they block the aisles. He said, "It's because you can sell anything if you put it in the aisle. You could have tv's in the electronics department for 3 years, put them in the aisle and double the price and sell out in 2 days." People have been trained to know that they are getting a good deal if they buy something that is not on the regular shelf. There is a chain of sporting goods stores that sells clothes and various pieces of equipment and nothing in the entire store is being sold at the regular price. Everything is at least 10% off. People are conditioned to know that when there is a yellow price tag that they are getting a good deal. My sister-in-law worked for the chain and she told me that they would put out new price tags that had the same sale price but actually raise the original price. for example a $80 pair of shoes with a regular price of $100 one week would suddenly have a new tag that said $80 with a regular price of $120! Imagine that by buying the shoes a week later you are saving $40 instead of $20. Another pricing trick is the infamous .9 of a cent at gas stations. People are so price sensative when it comes to gasoline that if they see 69.9 cents/litre and 70.0 cents/liter they 99% of people will go out of their way to go to the cheaper station. The most my car will take is 40 liters, so that means I would be saving 4 cents. However, how many of these people would pick up a penny as they are walking down the street? The gas station example really illustrates the problems that companies have. They don't exactly know what price they can get away with. Most don't know how much people are willing to spend. You can say if it sells out in an hour it's too cheap. If it doesn't sell at all it's too expensive. The problem is that you need to sell now and make money. If you price to high, you will have the added cost of having the inventory in stock. If you price too low, you lose the money that you would have earned by pricing a little higher, and you loose the goodwill of the people by not having the item in stock. Not to mention the fact that some shoppers (my mom) ask for rainchecks if the deal is particularly good. Find out more at Gary Milner's Weblog   [ ...reply just to this | comment on the story... | next new ]

16.  Ah, the gasoline market...   by emperorpenguin       at Thu 6 Mar 10:35am score of 1   in reply to comment 12     Another pricing trick is the infamous .9 of a cent at gas stations. People are so price sensative when it comes to gasoline that if they see 69.9 cents/litre and 70.0 cents/liter they 99% of people will go out of their way to go to the cheaper station. It gets even more complicated than that in my city. I think it started when Safeway opened a few gas bars, and you could get 3.5 cents off with your club card. Then the gas stations in the surrounding area dropped prices to compete, and we had a wonderful price war going on for a few weeks. When things finally settled down, the competing gas stations realised that they couldn't post a price 3.5 cents below Safeway -- but they could post prominent signs saying "3.5 cents off posted price!" Now, just about every gas station in the city has a sign like that. The funny part is, on every single one of these mass-produced signs the small print says "this location only". Occasionally there'll be a station that doesn't offer the discount, so you have to look closely before you pull in for a fill-up. everything moves real slow when it's forty below   [ ...reply just to this | comment on the story... | next new ]   30.  Re: Ah, the gasoline market...   by garymilner       at Thu 6 Mar 6:19pm score of 1   in reply to comment 16     People's sensitivity to gasoline prices is irrational. A $0.01 price difference (per liter) will be at most a $0.40 price difference on the total bill. In the USA a $0.01 difference would probably be about a $0.10 difference (I'm not sure how many gallons a car will hold). The place will make that up on a Big Gulp. That's the brilliance (from Safeway's point of view) about having a gas station. Give the people $1.20 off on gas and they will spend $100.00 on groceries. Think about it, you can get cupons worth more than $1.20 right in the store! This is where the software from the article comes in give a smaller discount sooner and you will sell the items at a higher price. Best of all you won't have to gouge your prices when the clothes (or whatever) are out of season. Find out more at Gary Milner's Weblog   [ ...reply just to this | comment on the story... | next new ]   39.  Re: Ah, the gasoline market...   by elchang       at Fri 7 Mar 11:26am score of 1   in reply to comment 30     actually, some of us are sensitive for a reason. here in the SF bay area, i can save $0.30 on gas by driving 5 miles (currently premium ranges from $2.09 to $2.39). that's about $4.50 a a tank, for my dinky little coupe...and much more for all those fancy luxury SUVs.   [ ...reply just to this | comment on the story... | next new ]   17.  Re: customer training   by irrahe       at Thu 6 Mar 10:46am score of 1   in reply to comment 12     Excellent points, and it reminds me of my problem with "sales". There's the variety of sales that you get with the coupons in the Sunday paper from department and electronics stores; those you expect are only valid for a week because next Sunday there's a new flier. But are you sure? Have you ever tried to find the fine print that states when the sale expires? Then there's other sales, with the big posters, the seasonal discounts and special offers. Ask the clerk of the manager when the sale ends. They won't or can't say. Some admit that even they don't know, that word comes from coporate to take it down one day. I'm not an impulse shopper and I'm especially loath to buy something I don't necessarily need/want now just because the price is right. I may want to shop around or budget/save for it. But between the hype and pressure to get it now - offers won't last long, I'll walk away. I find this especially with cars. A commercial announces that a car is on sale. Who impulse buys a car? Who doesn't expect to have to negotiate the cost? A sale is meaningless as it's usually something you prepare for, sales schedules be damned. Or is it just me? Intergalactic Planetary   [ ...reply just to this | comment on the story... | next new ]   27.  Re: customer training   by TheMCP       at Thu 6 Mar 1:41pm score of 1   in reply to comment 12     There is a chain of sporting goods stores that sells clothes and various pieces of equipment and nothing in the entire store is being sold at the regular price. Everything is at least 10% off. Wow, really? I believe that's illegal in Massachusetts. End of line.   [ ...reply just to this | comment on the story... | next new ]

18.  Pricing 101   by dylanr       at Thu 6 Mar 11:13am score of 3 interesting     Pricing your products is the hardest part of running a business, no question. Smirking about clueless businesses shows a deep unawareness of how difficult this really is. Price is more than cost plus markup - it plays a key role in the consumer's experience of their purchase. Put three identical items with different brands side-by-side and price them as follows: Item A: $9.99 Item B: $12.50 Item C: $29.95 More often than not, items A and C will sell, but probably not B. Just about any old crap can be made into a purchase experience just by raising the price 2-300% and raising the quality of the packaging a little. Think about that next time you see someone buy a Tommy Hilfiger t-shirt instead of a plain old t-shirt. Similarly, just about any item (no matter how unnecessary) can be made to look like a bargain by having the lowest price. Wal-Mart has thrived by catering to this phenomenon. But low prices are hardly a sure thing. If your product is something like consulting, you may be unable to sell it at a low price... after all, who wants a $10/hr consultant setting up a major system? Better go for the $150/hr one... it'll be worth it in the long run. In the end, nothing determines what something is worth besides consumers. A thing is worth what people will pay for it... no more and (frequently) no less. What people will pay for something is constantly changing. Even what a thing is changes constantly... when t-shirts were largely used as underwear, the criteria by which they were valued was vastly different than it is now. There are really only two ways to guess price: by seeing what someone will pay for a competitor's item and by going with your intuition. To some extent, they're both wrong. About the only way to figure out the right price for something is to constantly fiddle with it. It's not that hard to show why certain things sell or don't sell... but predicting prices is a bit like predicting the weather. You can get pretty close pretty often, but you'll never have as much information as you need to be as accurate as you want to be. There are just too many variables and too much flux. In theory there should be no difference between theory and practice. In practice, there usually is.   [ ...reply just to this | comment on the story... | next new ]

31.  Re: Pricing 101   by garymilner       at Thu 6 Mar 6:36pm score of 1   in reply to comment 18     I don't know if I am convinced that A and C will sell better than B. What about the people who think the cheapest thing is crap and the most expensive thing is probably over priced? I'm not saying your wrong, I'm saying that there is no doubt that deciding on a price is very hard. who wants a $10/hr consultant setting up a major system? The only people who want the $10/hr consultant are the type of people you don't want to work for anyway. They are the type of people that will cause problems and try to get out of paying you. Obviously they if they pick you, their decision is based purely on price. Even if you are the best consultant in the world, what do they tell everyone? "Hey I got a $10 consultant!" Not that they guy they got did the best job in the world. Better go for the $150/hr one... it'll be worth it in the long run. Here here! When someone pays for high perceived quality and gets it that's what they will tell everyone. Find out more at Gary Milner's Weblog   [ ...reply just to this | comment on the story... | next new ]   33.  Re: Pricing 101   by dylanr       at Thu 6 Mar 10:41pm score of 1   in reply to comment 31     I don't know if I am convinced that A and C will sell better than B. Don't take my word for it. Here's what marketing guru Harry Beckwith has to say on the matter: Beware the deadly middle. If you price in the middle, what you are saying is "We're not the best, and neither is our price, but both our service and price are pretty good." Not a very compelling message. Obviously, in any sufficiently complex marketplace, there is lots of middle. Most people want to buy cars that are more expensive than a Yugo and less expensive than a Ferari. But among relatively undifferentiated goods and services, the middle is a tougher sell. The only people who want the $10/hr consultant are the type of people you don't want to work for anyway. No doubt. When I was just getting started in contracting, I grossly underpriced myself... and got a string of loser clients as a result. When someone pays for high perceived quality and gets it that's what they will tell everyone. Yeah... if you're going to go out with a large price, you'd better be prepared to deliver the goods. On the other hand, I've seen $200/hr consultants get away with spending weeks doing nothing. I'd try to be on the cheap end of expensive and have my clients feel they're getting the best of both worlds... but that's not an easy mark to hit. In theory there should be no difference between theory and practice. In practice, there usually is.   [ ...reply just to this | comment on the story... | next new ]   36.  Cognitive dissonance   by nicky       at Fri 7 Mar 1:24am score of 1   in reply to comment 31     and if people spend a lot on something that sucks, they convince themselves it doesn't, rather than admit to themsleves they were screwed there aint no future...in england's dreaming   [ ...reply just to this | comment on the story... | next new ]   32.  Re: Pricing 101   by esmoon       at Thu 6 Mar 10:37pm score of 1   in reply to comment 18     Item A: $9.99 Item B: $12.50 Item C: $29.95 More often than not, items A and C will sell, but probably not B. Just about any old crap can be made into a purchase experience just by raising the price 2-300% and raising the quality of the packaging a little. Think about that next time you see someone buy a Tommy Hilfiger t-shirt instead of a plain old t-shirt. From my reading of the article, it appears that item B would sell better. You may see more people buy the Tommy Hilfiger t-shirt instead of the generic, but that's because they don't want to pay what a Calvin Klein t-shirt costs. Here's the relevent section: Monroe tells a pricing story that shows how even the simplest situation can confound accepted wisdom about prices. "A company is making two versions of the same product," says Monroe. "One has a little more gold and foil on it, but they're essentially the same. One is $14.95; the other is $18.95." Not surprisingly, the $14.95 item is selling better. It's also the lower-profit product. "Then a competitor comes in with a third product. Again, it's essentially the same thing, but a fancier version. And it's much higher priced: $34.95." For our original company, asks Monroe, "what becomes the best-seller? Why, the $18.95 version, of course."   [ ...reply just to this | comment on the story... | next new ]   34.  Re: Pricing 101   by dylanr       at Thu 6 Mar 11:02pm score of 1   in reply to comment 32     From my reading of the article, it appears that item B would sell better. ...even the simplest situation can confound accepted wisdom about prices. Well, there you go confounding my accepted wisdom. Darn you! Pricing is a deep, difficult art. It's almost silly to propose as simple an example as I proposed since there are probably any number of cases where you could show it isn't true or is only true for certain situations, etc, etc. Perhaps the introduction of the Lexus is what made Acura start selling so well. Maybe consumers triangulate off extremes to find safety in the middle. It works in politics... why not commerce? Frankly, all I can say in the face of this is that it hasn't been my experience. But maybe my sense of my experience is colored by my received wisdom. Who knows? In any event, pricing is very difficult... and you won't hit the right price without being willing to take your best guess and be wrong 98% of the time. That's the most important point I was trying to make... that getting pricing wrong is pretty much a given, and not some evidence of pointy-hair boss ineptitude. In theory there should be no difference between theory and practice. In practice, there usually is.   [ ...reply just to this | comment on the story... | next new ]

20.  Economic realities   by Nameless Cynic       at Thu 6 Mar 12:05pm score of 1     Prices are set to make a profit. Whether this profit is due to higher prices or higher sales volume depends entirely on the retailer. The retailer just wants his profit. He isn't out to intentionally screw Joe Citizen. He just doesn't even factor Joe in, except for "How will Joe act in the store?" Take blue jeans, for example. Some years back (yep, I'm showing my age), designer jeans turned into big business. Retailers could sell them for basically any price. The higher, the better, in a lot of cases. People allowed themselves to believe that "More expensive = better." But they were just blue jeans. And often badly-made blue jeans, at that. Now, everybody has a new strategy on selling their jeans. One of the better ones, Old Navy makes solid, relatively long-lasting clothes, and sells them at a decent price. As long as you're willing to be a walking billboard for Old Navy. They plaster their logo on everything. Cuts down on their ad budget. At least, I'm assuming that they're skimping on the money they pay for ads. The last few years, I've had to leave the room whenever one of their especially putrid commercials came on. Sentio aliquos togatos contra me conspirare   [ ...reply just to this | comment on the story... | next new ]

42.  Re: Economic realities   by MC Nally       at Fri 7 Mar 4:47pm score of 1.5 astute   in reply to comment 20     At least, I'm assuming that they're skimping on the money they pay for ads. The last few years, I've had to leave the room whenever one of their especially putrid commercials came on. If you see and remember the ads then they're not skimping on ads..   [ ...reply just to this | comment on the story... | next new ]

21.  $19.95   by bitter_engineer       at Thu 6 Mar 12:07pm score of 2.5 novel     During the time I was taking Discrete Mathematics at college, my professor was also busy trying to sell his math education book and the associated cassette-learning program via infomercial. At the time, the whole package could be bought for $12.95, but he told our class that the business guys were thinking of trying to sell it for $19.95. When a student asked why they didn't want to try for any price between $12.95 and $19.95, the prof explained that the infomercial people had done their research, and it simply wasn't worth selling anything, infomercial style, at any price between those numbers--if you could sell your product at a profit for $15, you would always make more of a profit selling for $19.95--the decrease in demand would not offset the increase in price. Just my 1 and 9/10ths of a cent. Non estat prandium gratuitum   [ ...reply just to this | comment on the story... | next new ]

35.  Whole units versus partial units   by DensityDuck!       at Fri 7 Mar 12:07am score of 1.5 interesting   in reply to comment 21     if you could sell your product at a profit for $15, you would always make more of a profit selling for $19.95--the decrease in demand would not offset the increase in price. I believe that this is because people usually think of money in units of ten dollars. i.e. $10, $20, $30. This is because you typically don't have integer numbers of dollars less than that, or at least you don't if you've been to the ATM recently. If you're selling something for $15, most people are going to pay with a twenty-dollar bill, so you might as well sell it for $19.95 because that will cost the same number of "money units". Eagles may suck, but weasels don't fly jet planes into...uh...how did that go, again?   [ ...reply just to this | comment on the story... | next new ]

25.  you can't afford it   by ignoblus       at Thu 6 Mar 12:43pm score of 1     Has anyone seen those commercials for a weight loss pill where they repeatedly point out how expensive it is? Apparently some people will presume anything expensive enough is worth the money. Things like this are completely unaccounted for in the free market model (which always assumes that only one variable at a time ever changes). It never was that simple, and it still isn't.   [ ...reply just to this | comment on the story... | next new ]

28.  Re: you can't afford it   by dylanr       at Thu 6 Mar 1:59pm score of 1.5 astute   in reply to comment 25     Apparently some people will presume anything expensive enough is worth the money. The thing is, they often are. The real problem here is most people are unqualified to hold an informed opinion on what constitutes quality for most kinds of goods and services. Who can possibly know what makes for a good car, a good pharmaceutical, a good telephone service and a good yoga instructor? In most such cases, people tend to use price as a proxy for the quality they are otherwise unable to judge. They reason that a $20/hr yoga instructor must be better than a $15/hr instructor... after all, if other (hopefully better-informed) people are paying a higher price for X than Y, isn't it rational to suppose that Y is in some way better than X? Conversely, for goods that people perceive as undifferentiated (like long-distance service) there is no reason to pay anything other than the lowest price offered by an established vendor. Why would you? It's just telephone service. Better decide based on what goodies and gimmicks they throw into the mix... how else could you have an opinion? That perfectly rational process produces some perfectly irrational results. We turn up our noses at some reasonably-priced offerings and act as though bare-minimum price is all we need to pay for other things. Complexity is a bitch. Things like this are completely unaccounted for in the free market model (which always assumes that only one variable at a time ever changes). I'm not sure which free market model you mean... the one they teach in high school econ, maybe? Few economists of any persuasion would say that economic activity is best measured or predicted one variable at a time. It's ludicrous. The free market model I'm familiar with supposes that consumers make choices based on a wide range of criteria. Just about all it predicts is that consumers do make choices. Indeed, one of the whole points of believing in the free market is that you're willing to believe that the choices people make are fundamentally unpredictable... if they weren't, central planning would work a whole lot better than it does. In theory there should be no difference between theory and practice. In practice, there usually is.   [ ...reply just to this | comment on the story... | next new ]   29.  Re: you can't afford it   by dylanr       at Thu 6 Mar 2:02pm score of 1   in reply to comment 28     paying a higher price for X than Y... Y is in some way better than X? Er... make that: X is in some way better than Y In theory there should be no difference between theory and practice. In practice, there usually is.   [ ...reply just to this | comment on the story... | next new ]   37.  Re: you can't afford it   by ignoblus       at Fri 7 Mar 10:34am score of 1   in reply to comment 28     You're right. The theory doesn't assume only one variable changes at a time. My mistake. I should have said the models, which are always simplifications. As you include additional independent variables and especially variables with complex interactions, the problem quickly becomes complex to the point where it cannot be "solved." Actually solving the problem is rarely important. (I'm a mathematician by training. It is usually enough for us to know that a solution exists. By putting solved in quotes I hope to indicate understanding rather than calculation.) But determining the properties of the system becomes very difficult as well. For example, you note that little more can be said than that consumers do make choices. An example outside economics would be gravitational systems. Last I heard, noone had yet "solved" a system of nine (moonless) planets orbiting one star. However, and this was my point, the most basic assumptions of free market capitalism are predicated upon very simple models. The ones I've seen (in college, btw) refused to account for multiple independent variables or complexly (for example, reciprocally) interacting variables. It occurs to me that there may be much more sophisticated models out there, but every argument for a free market I've seen is based on those same simple models. And, knowing how quickly those models become difficult or even impossible to analyze, I'm skeptical that those complex models can be used to justify a totalizing theory. Those models might become completely pathological (in a mathematical sense) given certain consumer choice patterns. Can anyone even describe what patterns would lead to a stable system, let alone the maximized system that free market theorists claim for themselves? It never was that simple, and it still isn't.   [ ...reply just to this | comment on the story... | next new ]   38.  Re: you can't afford it   by dylanr       at Fri 7 Mar 11:18am score of 1   in reply to comment 37     Your larger point is obviously right. Economic models are inherently simplifications... over-simplifications, at that. But conflating models with economic activity is like that old joke about the economist who lays awake in bed wondering if what works in practice can be made to work in theory. Many efforts have been made to understand and predict economic phenomena. Most of them suck, to a greater or lesser degree. Some are still useful. But there's a more fundamental point here. Economic activity can be observed, much like gravity can be observed. We don't know for sure yet if gravitation and electrical charge are related, but we've got a pretty good idea where all the planets are going to be this time next year. Similarly, economic activity simply is. We don't know for sure how recessions start nor how to get out of one, but we've got a pretty good idea how people behave during a recession and how that behavior deepens recessionary effects. We may have pet theories about how to prevent or cure recessions... but surely our experience is proof that we have no real idea. Being both an academic subject and the focus of much governmental policy, economics frequently red-lines my bullshit meter. It is fraught with both unnecessary complexity and ludicrous simplicity. Ideological trench-digging is virtually unavoidable. The free market perspective fares best, IMO, when it embraces that quagmire as a principal reason to make as little economic policy as possible. It is far more difficult to prove that we know what measure to take than it is to prove that we have no idea what we're talking about. Market pricing can be observed to work pretty well in practice. Whether or not it works in theory remains to be seen. :-) In theory there should be no difference between theory and practice. In practice, there usually is.   [ ...reply just to this | comment on the story... | next new ]   41.  Re: you can't afford it   by ignoblus       at Fri 7 Mar 2:09pm score of 1   in reply to comment 38     Market pricing can be observed to work pretty well in practice. Whether or not it works in theory remains to be seen. :-) Depends on what your idea of working well is. Is working well setting prices so that a maximum number of people can get the item (requiring the company stay in business obviously being imperative to that goal)? Is it that the company make the greatest profit? Is it stability or growth of the overall market? If we have different values for society, we set different priorities. For example, I think health care should work to minimize statistics like infant mortality (to pick one statistic that is often used as a good measure of the quality of health care). We do have good evidence that a free market is not the best way to accomplish that goal, but free marketers don't accept that as a goal with the primacy that I give it. Many will say that the greatest way to ensure this goal over the very long term is a free market, even if evidence so far indicates otherwise. But in that case, they are arguing that their model can accurately predict that, which we already know is false. (Single-payer health plans are not socialist, but clearly regulated.) My biggest problem with most, though not all, free marketers is that they reify the assumptions upon which their model is based. So, in the end, the free market works best only because it is measured by how free it is. If you can clearly state the goals to which you believe the free market is best suited, then we can discuss how well it works. By my values, it doesn't work when applied uniformly to the whole of the economy. It never was that simple, and it still isn't.   [ ...reply just to this | comment on the story... | next new ]   44.  Re: you can't afford it   by dylanr       at Fri 7 Mar 11:58pm score of 1   in reply to comment 41     Depends on what your idea of working well is. Indeed. All the logic and reasoning often boils down to a simple deontological assumption. If we have different values for society, we set different priorities. Perhaps. I think it's a fair question to what degree it is possible to determine "our" priorities any better than allowing each person the ability to seek their own preferred outcomes. I realize that approach has limits, but as a general rubric, it's not terrible. I think health care should work to minimize statistics like infant mortality And largely it has, with geographical and temporal exceptions. We do have good evidence that a free market is not the best way to accomplish that goal Indeed. A free market is just about the worst way to accomplish any particular goal you have in mind. That's because it doesn't support the degree of fine-grained control planners desire. By way of contrast, it is an excellent way to find out what people will actually pay for. Hidden in our national insurance crisis is the stark reality that a large block of people who can afford health insurance simply don't think it's worth the money. There is a legitimate problem here, one that is a proper matter for public policy. But it's tough sometimes to figure out how much of a market phenomenon is a problem and how much of that problem is actually information about people's actual preferences. Many will say that the greatest way to ensure this goal over the very long term is a free market, even if evidence so far indicates otherwise. I'd phrase that a bit differently. I'd say the most likely way to see an increase in therapeutic options and efficacy lies in the free market. I'd also say the most likely path for seeing costs decrease with time lies with the free market. Continuing to look into my crystal ball, it's also likely that this path holds the greatest probability of large short-term inequality in access but the largest long-term equality in access. And I don't think the evidence indicates otherwise. The development of drugs and therapies have exploded in western nations in rough proportion to how open their markets are. It's no accident that France and Germany have virtually no pharma business but Switzerland has created three of the largest pharma companies in the world. Oh, and the US has done pretty well in this area too... far better than Canada. Obviously, you can't measure success just on the basis of the strength of your pharma industry... but then again, perhaps the big advantage that planned economies have is that there's not enough stuff to bother distributing it unequally. But in that case, they are arguing that their model can accurately predict that, which we already know is false. Which false proposition is that? The free market philosophy I'm familiar with specifically avoids making predictions about outcomes in detail. It remains generally true that options will (on the whole) expand and prices will (in the long run) fall... but predicting much else is showing too much confidence. reify the assumptions upon which their model is based Agreed. We could use a lot less religion in our economic philosophy... even the supposedly rational philosophies. By my values, it doesn't work when applied uniformly to the whole of the economy True enough. Regulation plays an important role. Public sector services play an important role. There are some things that are simply too important to leave to chance: national defense, for one. Important health and safety regulations are another. In principle, government has an important role to play in maintaining a healthy market. In practice, this power is often abused, over-used, or mis-applied. One of the great ironies of regulation is that established players have a greater role in shaping it than emerging ones. It is almost inevitably the case that laws are implemented in a way that favors the maintenance of the economic status quo. This is neither an accident nor an unfortunate side effect. It is the very essence of how politics actually operates. Which reminds me of my second-favorite Ambrose Bierce quote (my sig being the first). It's his definition of a conservative: A statesman who is enamoured of existing evils, as distinguished from the Liberal, who wishes to replace them with others. Sometimes it's difficult to know what form of evil to choose. In most cases, I'm inclined to prefer the option that leaves open the greatest possibility for non-evil choices to prevail: deciding that no central policy is necessary or prudent. Leaving choices to the marketplace won't work for everything, but it's something we should consider a lot more often than we do. In theory there should be no difference between theory and practice. In practice, there usually is.   [ ...reply just to this | comment on the story... | next new ]   46.  Re: you can't afford it   by ignoblus       at Sat 8 Mar 1:50am score of 1   in reply to comment 44     Perhaps. I think it's a fair question to what degree it is possible to determine "our" priorities any better than allowing each person the ability to seek their own preferred outcomes. I realize that approach has limits, but as a general rubric, it's not terrible. Actually, continuing with the example of health care, both doctors and patients in Canada are more satisfied with thier health care than their counterparts in the US. Furthermore, in polls of US citizens, when they describe the American and Canadian system without naming them as such, about 2 of 3 prefer a Canadian-style system. I don't think the American economic model has come close to describing what "the people" want. Rather it has accurately determined what those with power in the health-care system want. And largely it has [minimized mortality rates], with geographical and temporal exceptions. I think you underestimate those variations and overestimate the more general quality of health care. In a study of Harlem in 1980, mortality rates were comparable to Bangladesh. Except for the fabulously wealthy, American health care ranks below other Western nations in all major categories. There are over 40 million uninsured in the US. Over 40 million again are underinsured. The vast majority of the rest have simply bad insurance. Hidden in our national insurance crisis is the stark reality that a large block of people who can afford health insurance simply don't think it's worth the money. Actually, hidden in our health insurance crisis is the fact that the insurance industry has more capital than any other sector and is one of the most profitable. When the stock market goes down, and their investments with it, they manufacture the appearance of a crisis. The real crisis, which is more chronic, is the lack of coverage. Meanwhile, the insurance industry does not actually provide anyone with any medical service; other nations have successfully ended private health insurance with resultant lower costs. I'd say the most likely way to see an increase in therapeutic options and efficacy lies in the free market. I'd also say the most likely path for seeing costs decrease with time lies with the free market. Continuing to look into my crystal ball, it's also likely that this path holds the greatest probability of large short-term inequality in access but the largest long-term equality in access. I think the evidence shows otherwise. Costs have been rising and coverage has been reduced in the US faster than in other Western countries. This is while the US spends over 14%, Canada spends 9%, and Britain spends 6% of GDP on health care. The way I see it, your argument can be unpacked as follows: the free market system is more efficient than other systems, therefore this result must be true in the long run. However, the model upon which that is based is, in turn, based on radical over-simplifications. Here you turn to "evidence" of superior performance to justify these simplifications, but that evidence seems to be the only the belief that the free market works better in the long run. The free market philosophy I'm familiar with specifically avoids making predictions about outcomes in detail. It remains generally true that options will (on the whole) expand and prices will (in the long run) fall... but predicting much else is showing too much confidence. But, there is little if any evidence. The evidence that is often presented uses a bias that is familiar to the research I work on. In Borderline Personality Disorder, the therapy viewed as state of the art is Dialectical Behavioral Therapy. A large number of people drop from the therapy regime because it is too strict. They are never counted in the final results, then. Similarly, free market research focuses on a single section of the economy, ignoring the impoverished (or, frequently, attributing their fate to qualities inherent in them rather than in the economy). In the case of health care, our claim to have the best in the world is only true for the fabulously wealthy. The fact is that the majority of Canadians have more options, all at less cost, than Americans. Canadians can go to any doctor (excepting the very few who operate completely outside the system). And the treatment options available to them are greater. How many Americans do you know with that level of freedom? It doesn't matter to me that limits are placed by insurance companies rather than the government. The development of drugs and therapies have exploded in western nations in rough proportion to how open their markets are. It's no accident that France and Germany have virtually no pharma business but Switzerland has created three of the largest pharma companies in the world. Oh, and the US has done pretty well in this area too... far better than Canada. Actually, Canada, especially at the University of Toronto, has produced a lot of great advances. France's Roussel-Uclaf is no chump either. Meanwhile, the US produces tons of drugs that are less effective than oth read the entire comment...   [ ...reply just to this | comment on the story... | next new ]

47.  An old lost art...   by Patrik       at Sat 8 Mar 10:11am score of 1.5     One way to determine the price of your product is indeed to survey your customers, do extensive market research and scientifically test any price changes. Hopefully, you will reach a good balance. One that will maximize your profits while reaching the largest group of potential buyers. Or... Everytime a customer walks buy and asks how much your item costs, you simply state an outrageously high price. He in turn will laugh you in the face. He will then lecture you on the fact that your item can only be worth an outrageously lower amount of money then you originally stated. It is now your turn to laugh him in the face. Once the outer price ranges have been set, you can finally start haggling over the price. In the end, you should both reach a price that will satisfy both parties. The way things are now, you simply have no idea how much an individual customer is willing to pay for an item. Even with research to back you up, all you can do is make an educated guess. In the end, you will be paying more for research, but you still won't be able to maximise your profits to what is theoretically possible. Another problem is, how do you test that your research is actually effective? The only thing you can really measure is the actual profits being made, but not the potential profits. How do you balance any other factors out of the equation? Maybe the real question is, how do you combine hagling with mass consumer products?   [ ...reply just to this | comment on the story... | next new ]