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- [Instructor] Hello, welcome to part two

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of the video lecture on pricing.

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We're gonna spend some time in class,

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but think about and come
with a number of reasons

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why is it important for a
business to know its costs?

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And be ready to discuss this in class.

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So, another thing that
you should think about

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is how much someone is willing to pay.

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So here is a demand curve.

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So you can see price is on the Y axis

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and quantity is on the X.

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And it basically tells
how much will you sell

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if you offer at this price?

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Or what is the demand?

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So you can see, at a very high price,

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hardly anybody will be
willing to pay this.

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And then at a low price, a lot are.

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The slope of this line is
determined by the elasticity.

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And we will talk in class
about what elasticity means

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and some examples of this,

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but it might be good to
bone up on this concept

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if you haven't heard it in class

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or maybe haven't heard it in a while.

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But what determines elasticity?

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So here are a number of factors

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that determine what is a good price.

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And this is from the suppliers
or the seller's standpoint.

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Hopefully these all make sense.

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Have a look, bring a list of any questions

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that you might have to class.

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But in each case, these are
from the seller's standpoint,

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what you can expect from the price.

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The final set is competition-based.

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So it looks at what are
similar products being sold for

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in the marketplace?

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What is the going rate?

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So you can think about
the going rate is sort of

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that if you will want to
charge the same amount,

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and then if you want to
charge slightly above that,

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where you're positioning it
as a higher quality good,

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this is called skimming.

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And if you sell` at slightly
below that positioning

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as a bargain, then this
is called penetration.

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And I will discuss each one.

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So, a skimming strategy.

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So you can think of it as sort of skimming

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a little bit of profit off the top.

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So you're charging a slightly higher price

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so you can skim a little bit of profit.

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So you're positioning your
good as a premium good,

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high quality, that there
will be a strong desire,

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high value, high perceived benefit.

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They're gonna tend to tell this to folks

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that are not quite as price-sensitive.

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So in a more inelastic market maybe.

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At times when you have
fewer direct competitors.

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And this is often used in the beginning,

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that if you wish to recoup
your development costs.

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So you position it as a
new, unique, premium product

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and sell slightly above what you think

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would be the going rate.

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On the other side,

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if you sell it slightly
below this going rate,

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so you can position it as a bargain.

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Here you will sell to more
price-sensitive customers.

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You may discourage competitors

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that this is good for elastic demand

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and things that have a low entry cost.

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Here's an approach that
I think is interesting

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and has some merit.

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So there is a nonprofit
fresh produce broker

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in the Northeast here called Red Tomato.

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And their job is to sell
farmers' produce to local buyers.

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In many cases to supermarket chains.

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And they have a conversation
with farmers each year

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and they ask for three things:

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first, what is their aspirational price?

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What's a really good price

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that they hope that they can get?

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Realistic, but optimistic.

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What would be a really good price?

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What would they really
realistically hope to get?

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Two, what was last year's average price?

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What did you get last year for it?

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And three, and this is kind
of the interesting part,

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what is their dignity price?

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So they define this as the lowest price

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that a farmer can accept

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without feeling like they're
losing both money and dignity.

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So what is the lowest price
that the farmer will accept

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and feel like they're not being had?

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That they're not being taken advantaged.

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And of course, when Red Tomato goes out

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and negotiates prices, they
want to get as close to one

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and as far away,

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and always be preferably above
or at very worst at three.

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Here's another heads up

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for a discussion we will have in class.

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So here are two approaches

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where each time you go out to sell,

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you bargain with multiple buyers

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and find the highest price

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that you can get for that batch of goods,

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or two, working with a
single buyer to get a fair,

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but maybe slightly lower price,

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but a more consistent price each time.

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Both of these may work.

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I'm not saying one is
better than the other,

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but there are some clear
pros and cons here.

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And I would like you to
think about what they are

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and be ready to discuss them in class.

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I want to talk to you now
about two more concepts.

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That of a loss leader
and that of bundling.

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The first concept is loss leader.

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So this is a time where you
sell a good at a very low price.

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Maybe even less than what you paid for it,

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but the idea is it brings
the customers into the store.

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And once they're there,

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they will buy a whole
bunch of other things.

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So the classic example of
this is Thanksgiving turkeys.

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So right before Thanksgiving,

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you'll often see grocery stores

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offering a really, really
low price on turkeys

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with the hope that that bargain

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will draw people into the store.

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And while they're there,

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that they will buy all
the other ingredients

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for their Thanksgiving dinner,

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like cranberry sauce and
sweet potatoes and stuffing

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and all the other things.

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What they hope that they do not do

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is what is called cherry picking,

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which is walk into the
store, buy the cheap turkey,

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don't buy anything else,

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leave and buy the other
items at another store.

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So that's the danger there.

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Another strategy is bundling

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where you offer a bundle
of goods or services

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at a price that is less than
the sum of the individual ones.

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So Burlington Telecom who I
get my wifi from offers this.

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And so do a lot of
other telecom providers.

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That if you get all three,
if you get cable, landline,

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phone, and internet all through them,

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that they will give you a lower price

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than you would get than if you just

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then the sum of them individually.

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Insurance is another one.

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So if you bundle your
home and car insurance,

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they will offer you premiums

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that are less than what you would pay

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if you just got each one individually.

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The final concept that I
want to introduce to you

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is the idea of price discrimination.

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So this is simply
charging different prices

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for the same item to different people.

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So there are three degrees of this.

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So the first one is so-called perfect

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or first degree price discrimination.

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This is really only a theoretical thing.

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That it wouldn't be
realistic to actually do it,

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but this is to charge
everybody's reservation price.

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So whenever you encounter a buyer,

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you can read their mind

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and know what the most that
they would ever pay was

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and charge of that.

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Next is second degree.

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This is where you charge a different price

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based on quantity bought.

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So this is an example of a bulk discount.

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So the more that you buy,
the lower the per unit cost.

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And we see this very often.

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Say in dog food,

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the per pound price for a
five pound bag of dog food

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is greater than the per
pound price for a 50 pound.

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And finally, there's third degree,

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which is different prices
to different people.

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And it's sort of offering different prices

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to different segments.

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So there's geographic.

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So a farmer might charge a bit more

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if they sell at the
Shelburne Farmer's Market,

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thinking that there are more
affluent buyers in Shelburne.

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Charge a bit less in the Old North End,

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where there are fewer well-off buyers.

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There's also demographic.

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So many places will offer
a senior citizens discount,

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others will offer a student discount.

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So here it's based on
age or by occupation,

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where you say like where
they will offer you a bargain

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if you're a student.

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You may have to like show your student ID.

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And last is behavioral.

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And I'm gonna talk about the
hurdle model in the next one.

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(speaks faintly) idea is the early bird.

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So if you go into a restaurant
and order your meal,

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let's say four o'clock or five o'clock

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when it's not really very busy,

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they may offer you a
better price on the meal

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knowing that they have
capacity there, they're open.

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They already have the
cooks and wait staff there,

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and to sort of use that excess capacity,

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they might offer an early
bird special on dinner.

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So the hurdle model looks at,
again, it's different prices

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for different behavioral segments.

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And this is an example of third degree.

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And it's basically offering a lower price

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for someone who will jump over a hurdle.

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Now it isn't a real hurdle.

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It's a conceptual hurdle.

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So things like people
really don't like to fly

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on a Saturday or especially
fly on like Christmas day.

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So if you'll fly on that,

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if you'll jump over that
hurdle of inconvenience,

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they'll give you a lower price.

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Scratches and dents sales.

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So appliances that might
have a slight scratch or dent

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or a second sale at a clothing store,

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it has a slight defect

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or slightly like oddly-shaped chocolates,

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they'll offer for a lower price.

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Or mailing in a rebate.

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So in each case,

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the consumer has to endure
some sort of inconvenience

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or slightly lower quality
to get the discount.

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And the idea is that the
hurdle should be such that

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only those who wouldn't
pay the higher price

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will go to the bother,

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and those that are willing
to pay the higher price

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won't bother to jump over it.

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So it has to be such that the hurdle

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makes those who require a discount

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sort of reveal themselves.

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So you should be able to rank these.

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And maybe we'll do it in class.

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So here's a recap.

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This is what we did.

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And this is the end of this section.

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And thank you.

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Make sure you do the assessment.

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And we will discuss it in class.

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Thank you.