The Price is Right?

Thanks to Larry Engemann of Phil’s Sewing Machines in Washington, MO for pointing out this article from Forbes.com on one of MYOB’s favorite topics; pricing.  If you’ve been following the news recently, you know that after only two months on the market, Apple dropped the price of its iPhone by 33% creating a firestorm among the first adopters who had stood in long lines to buy the device at full price when it first came out.  The criticism was so bad that Steve Jobs issued an apology and offered customers a partial rebate.

As we’ve pointed out here many times before, pricing is a complicated issue.  The days of marking up everything in the store by the same percentage are over.  Besides, cost-plus pricing is seldom the best way to maximize your profit. (See our earlier post on Variable Pricing.)

The Forbes article goes into some detail on "Temporal Price Discrimination", a terrible name for a business practice if ever I heard one.  It means pricing a product or service based on the customer’s ability or desire to pay.  I prefer "variable pricing".  For example, those first iPhone buyers knew that there would be price reductions sooner or later.  Apple’s mistake was taking too big a cut, too soon. 

Variable pricing can also be applied across seasons, geography, or by adding or taking away features.  After-Christmas sales are an example of seasonal pricing.  A Christmas tree is certainly worth less to the consumer on December 26 than it is on November 26.  A dealer would be leaving money on the table discounting seasonal items too early.

A good example of geographical pricing might be a hot dog at the ball game.   That 99 cent hot dog at 7-Eleven probably sells for $3.50 or more at the ball park.   Gasoline will usually be more expensive at tourist destinations than it is at home.

Variable pricing according to features can be an interesting one.  I had breakfast at Denny’s while I was out of town last week.  They offer a special "Senior’s Menu" for those 55 and over.  Their "Senior Omelet" costs quite a bit less than their "Ultimate Omelet".  But if you read the menu descriptions, the old follks version uses one less egg, and the accessories aren’t the same.  Either omelet is a good value. They’re just different and priced accordingly.  The same is true of their other "Senior" items.  (BTW, I’m over 55 but I bought the regular omelet.)

The author makes several other good points, but I’ll leave it to you to check them out. BI will mention that he (or she) talks about products that carry an emotional attachment or that become a symbol of the owner’s sense of self.  Kobe beef anyone?

If pricing is a problem for you, click on the "Pricing" Category link in the right column of this blog to see some of our earlier posts on the subject.  If pricing isn’t a problem, please use the comment link below to tell us how you do it.

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2 Responses

  1. I hate it when people price things really high only to drop them later. It doesn’t seem fair but I have learned to wait later for things. If that is what it takes. 🙂

  2. The iPhone fiasco proves that you’re not the only one. We all know that electronics prices are likely to fall, especially around the holidays and that we pay a premium to be one of the first to own new technology. But a third of the price in just over sixty days was just too much.

    That’s why it’s important for us to get it right the first time.

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