- [Instructor] Hello, welcome to part two
of the video lecture on pricing.
We're gonna spend some time in class,
but think about and come with a number of reasons
why is it important for a business to know its costs?
And be ready to discuss this in class.
So, another thing that you should think about
is how much someone is willing to pay.
So here is a demand curve.
So you can see price is on the Y axis
and quantity is on the X.
And it basically tells how much will you sell
if you offer at this price?
Or what is the demand?
So you can see, at a very high price,
hardly anybody will be willing to pay this.
And then at a low price, a lot are.
The slope of this line is determined by the elasticity.
And we will talk in class about what elasticity means
and some examples of this,
but it might be good to bone up on this concept
if you haven't heard it in class
or maybe haven't heard it in a while.
But what determines elasticity?
So here are a number of factors
that determine what is a good price.
And this is from the suppliers or the seller's standpoint.
Hopefully these all make sense.
Have a look, bring a list of any questions
that you might have to class.
But in each case, these are from the seller's standpoint,
what you can expect from the price.
The final set is competition-based.
So it looks at what are similar products being sold for
in the marketplace?
What is the going rate?
So you can think about the going rate is sort of
that if you will want to charge the same amount,
and then if you want to charge slightly above that,
where you're positioning it as a higher quality good,
this is called skimming.
And if you sell` at slightly below that positioning
as a bargain, then this is called penetration.
And I will discuss each one.
So, a skimming strategy.
So you can think of it as sort of skimming
a little bit of profit off the top.
So you're charging a slightly higher price
so you can skim a little bit of profit.
So you're positioning your good as a premium good,
high quality, that there will be a strong desire,
high value, high perceived benefit.
They're gonna tend to tell this to folks
that are not quite as price-sensitive.
So in a more inelastic market maybe.
At times when you have fewer direct competitors.
And this is often used in the beginning,
that if you wish to recoup your development costs.
So you position it as a new, unique, premium product
and sell slightly above what you think
would be the going rate.
On the other side,
if you sell it slightly below this going rate,
so you can position it as a bargain.
Here you will sell to more price-sensitive customers.
You may discourage competitors
that this is good for elastic demand
and things that have a low entry cost.
Here's an approach that I think is interesting
and has some merit.
So there is a nonprofit fresh produce broker
in the Northeast here called Red Tomato.
And their job is to sell farmers' produce to local buyers.
In many cases to supermarket chains.
And they have a conversation with farmers each year
and they ask for three things:
first, what is their aspirational price?
What's a really good price
that they hope that they can get?
Realistic, but optimistic.
What would be a really good price?
What would they really realistically hope to get?
Two, what was last year's average price?
What did you get last year for it?
And three, and this is kind of the interesting part,
what is their dignity price?
So they define this as the lowest price
that a farmer can accept
without feeling like they're losing both money and dignity.
So what is the lowest price that the farmer will accept
and feel like they're not being had?
That they're not being taken advantaged.
And of course, when Red Tomato goes out
and negotiates prices, they want to get as close to one
and as far away,
and always be preferably above or at very worst at three.
Here's another heads up
for a discussion we will have in class.
So here are two approaches
where each time you go out to sell,
you bargain with multiple buyers
and find the highest price
that you can get for that batch of goods,
or two, working with a single buyer to get a fair,
but maybe slightly lower price,
but a more consistent price each time.
Both of these may work.
I'm not saying one is better than the other,
but there are some clear pros and cons here.
And I would like you to think about what they are
and be ready to discuss them in class.
I want to talk to you now about two more concepts.
That of a loss leader and that of bundling.
The first concept is loss leader.
So this is a time where you sell a good at a very low price.
Maybe even less than what you paid for it,
but the idea is it brings the customers into the store.
And once they're there,
they will buy a whole bunch of other things.
So the classic example of this is Thanksgiving turkeys.
So right before Thanksgiving,
you'll often see grocery stores
offering a really, really low price on turkeys
with the hope that that bargain
will draw people into the store.
And while they're there,
that they will buy all the other ingredients
for their Thanksgiving dinner,
like cranberry sauce and sweet potatoes and stuffing
and all the other things.
What they hope that they do not do
is what is called cherry picking,
which is walk into the store, buy the cheap turkey,
don't buy anything else,
leave and buy the other items at another store.
So that's the danger there.
Another strategy is bundling
where you offer a bundle of goods or services
at a price that is less than the sum of the individual ones.
So Burlington Telecom who I get my wifi from offers this.
And so do a lot of other telecom providers.
That if you get all three, if you get cable, landline,
phone, and internet all through them,
that they will give you a lower price
than you would get than if you just
then the sum of them individually.
Insurance is another one.
So if you bundle your home and car insurance,
they will offer you premiums
that are less than what you would pay
if you just got each one individually.
The final concept that I want to introduce to you
is the idea of price discrimination.
So this is simply charging different prices
for the same item to different people.
So there are three degrees of this.
So the first one is so-called perfect
or first degree price discrimination.
This is really only a theoretical thing.
That it wouldn't be realistic to actually do it,
but this is to charge everybody's reservation price.
So whenever you encounter a buyer,
you can read their mind
and know what the most that they would ever pay was
and charge of that.
Next is second degree.
This is where you charge a different price
based on quantity bought.
So this is an example of a bulk discount.
So the more that you buy, the lower the per unit cost.
And we see this very often.
Say in dog food,
the per pound price for a five pound bag of dog food
is greater than the per pound price for a 50 pound.
And finally, there's third degree,
which is different prices to different people.
And it's sort of offering different prices
to different segments.
So there's geographic.
So a farmer might charge a bit more
if they sell at the Shelburne Farmer's Market,
thinking that there are more affluent buyers in Shelburne.
Charge a bit less in the Old North End,
where there are fewer well-off buyers.
There's also demographic.
So many places will offer a senior citizens discount,
others will offer a student discount.
So here it's based on age or by occupation,
where you say like where they will offer you a bargain
if you're a student.
You may have to like show your student ID.
And last is behavioral.
And I'm gonna talk about the hurdle model in the next one.
(speaks faintly) idea is the early bird.
So if you go into a restaurant and order your meal,
let's say four o'clock or five o'clock
when it's not really very busy,
they may offer you a better price on the meal
knowing that they have capacity there, they're open.
They already have the cooks and wait staff there,
and to sort of use that excess capacity,
they might offer an early bird special on dinner.
So the hurdle model looks at, again, it's different prices
for different behavioral segments.
And this is an example of third degree.
And it's basically offering a lower price
for someone who will jump over a hurdle.
Now it isn't a real hurdle.
It's a conceptual hurdle.
So things like people really don't like to fly
on a Saturday or especially fly on like Christmas day.
So if you'll fly on that,
if you'll jump over that hurdle of inconvenience,
they'll give you a lower price.
Scratches and dents sales.
So appliances that might have a slight scratch or dent
or a second sale at a clothing store,
it has a slight defect
or slightly like oddly-shaped chocolates,
they'll offer for a lower price.
Or mailing in a rebate.
So in each case,
the consumer has to endure some sort of inconvenience
or slightly lower quality to get the discount.
And the idea is that the hurdle should be such that
only those who wouldn't pay the higher price
will go to the bother,
and those that are willing to pay the higher price
won't bother to jump over it.
So it has to be such that the hurdle
makes those who require a discount
sort of reveal themselves.
So you should be able to rank these.
And maybe we'll do it in class.
So here's a recap.
This is what we did.
And this is the end of this section.
And thank you.
Make sure you do the assessment.
And we will discuss it in class.
Thank you.