WEBVTT 1 00:00:01.500 --> 00:00:05.283 Welcome to the video lecture on pricing part two. 2 00:00:08.280 --> 00:00:11.433 There are many reasons why a firm should know its costs. 3 00:00:13.650 --> 00:00:18.060 First, we talked about the breakeven price 4 00:00:18.060 --> 00:00:22.623 and how that can inform what you charge. 5 00:00:23.640 --> 00:00:26.610 It's important to know something that you do, 6 00:00:26.610 --> 00:00:27.930 does it make you money? 7 00:00:27.930 --> 00:00:29.370 Is it worth doing? 8 00:00:29.370 --> 00:00:32.040 Is it something that you should be making? 9 00:00:32.040 --> 00:00:33.690 Is it maybe something 10 00:00:33.690 --> 00:00:37.740 that you could buy from someone else and resell? 11 00:00:37.740 --> 00:00:40.800 And last, that knowing your cost 12 00:00:40.800 --> 00:00:42.720 and doing a deep dive on that, 13 00:00:42.720 --> 00:00:47.720 you can gain insight into your operations 14 00:00:47.760 --> 00:00:50.670 and know what do you do efficiently, what do you not? 15 00:00:50.670 --> 00:00:53.103 And there are other reasons as well. 16 00:00:55.410 --> 00:00:57.870 So the next thing is to think 17 00:00:57.870 --> 00:01:02.870 about how much will consumers pay. 18 00:01:02.880 --> 00:01:06.030 And you can think of this as a demand curve, 19 00:01:06.030 --> 00:01:10.290 and it's driven by what's called elasticity. 20 00:01:10.290 --> 00:01:13.860 So a good that is highly elastic 21 00:01:13.860 --> 00:01:17.040 has a lot of direct substitutes. 22 00:01:17.040 --> 00:01:21.630 The demand curve is fairly horizontal. 23 00:01:21.630 --> 00:01:26.630 And a small change in price 24 00:01:27.450 --> 00:01:32.450 will drive a very large change in quantity, sold or bought. 25 00:01:34.890 --> 00:01:36.480 On the other hand, 26 00:01:36.480 --> 00:01:41.040 a good that is inelastic has very few substitutes, 27 00:01:41.040 --> 00:01:43.530 the curve tends to be more vertical, 28 00:01:43.530 --> 00:01:47.130 and the quantity sold or consumed 29 00:01:47.130 --> 00:01:52.130 does not change based on a change in price. 30 00:01:54.145 --> 00:01:57.633 So necessities tend to be very inelastic. 31 00:02:00.900 --> 00:02:05.460 So here are just some things from the seller's standpoint, 32 00:02:05.460 --> 00:02:08.880 factors that you can put into it, 33 00:02:08.880 --> 00:02:13.770 thinking about the quantity and quality and attributes 34 00:02:13.770 --> 00:02:15.510 and all kinds of stuff like this. 35 00:02:15.510 --> 00:02:20.510 And again, there may be other factors in play too, 36 00:02:22.140 --> 00:02:24.900 but all these drive sort of what, 37 00:02:24.900 --> 00:02:29.900 based on your attributes on the left side, 38 00:02:31.710 --> 00:02:33.480 how does that help you think 39 00:02:33.480 --> 00:02:38.313 about what kind of a price that you can charge? 40 00:02:41.610 --> 00:02:42.900 So the rest of this, 41 00:02:42.900 --> 00:02:45.540 we'll talk about that sort of middle ground. 42 00:02:45.540 --> 00:02:48.213 What are your competitors doing? 43 00:02:49.470 --> 00:02:51.420 First is the going rate. 44 00:02:51.420 --> 00:02:54.750 So you see, you can just charge exactly what they are. 45 00:02:54.750 --> 00:02:59.610 And there's two strategies, skim and penetrate, 46 00:02:59.610 --> 00:03:03.030 where you can charge slightly above what they're doing 47 00:03:03.030 --> 00:03:05.343 or slightly below what they are. 48 00:03:08.130 --> 00:03:11.070 So if you skim, 49 00:03:11.070 --> 00:03:14.820 you're sort of skimming profits off the top 50 00:03:14.820 --> 00:03:19.820 that you charge slightly above what your competitors are, 51 00:03:20.220 --> 00:03:25.220 that you position it as having higher value, higher benefit. 52 00:03:26.700 --> 00:03:29.520 You may have fewer direct customers, 53 00:03:29.520 --> 00:03:34.520 that there may be a more inelastic demand curve. 54 00:03:35.580 --> 00:03:38.850 And this can be a way to recoup your development costs, 55 00:03:38.850 --> 00:03:42.294 but you're positioning it as a premium. 56 00:03:42.294 --> 00:03:44.640 It's better than theirs. 57 00:03:44.640 --> 00:03:48.000 I charge slightly more because mine is better. 58 00:03:48.000 --> 00:03:50.850 There's something about mine that's better than theirs 59 00:03:50.850 --> 00:03:53.253 and it's worth paying a bit more for. 60 00:03:57.600 --> 00:04:01.440 The opposite of that is going slightly below the going rate, 61 00:04:01.440 --> 00:04:03.150 the penetration. 62 00:04:03.150 --> 00:04:06.600 Here you're positioning it as a bargain. 63 00:04:06.600 --> 00:04:09.900 You're saying same good, same quality, 64 00:04:09.900 --> 00:04:11.970 but mine costs a bit less. 65 00:04:11.970 --> 00:04:15.177 This is good for price sensitive customers. 66 00:04:17.400 --> 00:04:21.543 It can discouraged direct competition, 67 00:04:22.800 --> 00:04:26.473 better when you're facing an demand curve 68 00:04:29.970 --> 00:04:32.340 and when you have low entry costs. 69 00:04:32.340 --> 00:04:34.293 So if there's, 70 00:04:37.521 --> 00:04:39.997 if it's easy to enter 71 00:04:41.040 --> 00:04:44.100 and you're at a lower price, again, 72 00:04:44.100 --> 00:04:48.273 that's gonna sort of discourage the competition. 73 00:04:51.090 --> 00:04:56.090 One model that I like a lot and I worked with in the past, 74 00:04:56.940 --> 00:05:00.870 an organization, a food hub called Fair Trade, 75 00:05:00.870 --> 00:05:03.480 which is a nonprofit broker. 76 00:05:03.480 --> 00:05:08.480 And their mission is to work with small, independent farmers 77 00:05:11.250 --> 00:05:15.960 and help them get onto, mostly onto the shelves of retailers 78 00:05:15.960 --> 00:05:20.490 to sort of do all that brokering work to get them there. 79 00:05:20.490 --> 00:05:24.270 So they work very closely with farmers 80 00:05:24.270 --> 00:05:25.770 and when they meet, 81 00:05:25.770 --> 00:05:27.900 they ask them three things. 82 00:05:27.900 --> 00:05:31.410 One, what is their aspirational price? 83 00:05:31.410 --> 00:05:34.950 What is a really good price that's realistic, 84 00:05:34.950 --> 00:05:36.030 but that you hope for? 85 00:05:36.030 --> 00:05:40.440 What would you, what would you aspire to? 86 00:05:40.440 --> 00:05:43.530 Next is what did you get last year? 87 00:05:43.530 --> 00:05:46.560 What was the price last year? 88 00:05:46.560 --> 00:05:49.350 And then three is what is your dignity price? 89 00:05:49.350 --> 00:05:53.463 And this is sort of what I think is the most interesting. 90 00:05:54.330 --> 00:05:55.320 And they say, 91 00:05:55.320 --> 00:05:58.770 what is the lowest price that you can accept 92 00:05:58.770 --> 00:06:01.830 without losing money and without losing dignity? 93 00:06:01.830 --> 00:06:04.170 That feeling like you got robbed. 94 00:06:04.170 --> 00:06:07.743 You were taken, I was exploited here. 95 00:06:08.610 --> 00:06:10.470 And then they will, 96 00:06:10.470 --> 00:06:15.060 what Red Tomato does is uses this information 97 00:06:15.060 --> 00:06:19.110 with negotiating with the retailers and buyers 98 00:06:19.110 --> 00:06:24.110 try to get as close to one as they can, 99 00:06:24.360 --> 00:06:25.500 maybe even reach it 100 00:06:25.500 --> 00:06:28.020 or go above it if they can. 101 00:06:28.020 --> 00:06:30.210 But make sure they're always above three. 102 00:06:30.210 --> 00:06:33.900 Always makes sure that the farmer gets their dignity price 103 00:06:33.900 --> 00:06:35.730 and doesn't sort of lose money 104 00:06:35.730 --> 00:06:38.703 and dignity in the transaction. 105 00:06:42.630 --> 00:06:47.277 So think about what are the pros and cons of bargaining 106 00:06:48.420 --> 00:06:51.090 with multiple buyers each time, 107 00:06:51.090 --> 00:06:56.090 buy and sell to get the best price that you can 108 00:06:56.340 --> 00:06:59.940 versus maybe not getting the best price each time, 109 00:06:59.940 --> 00:07:01.770 but working with a single buyer. 110 00:07:01.770 --> 00:07:04.233 And there's a lot of advantages to both. 111 00:07:07.620 --> 00:07:10.680 So I wanna bring in two concepts, 112 00:07:10.680 --> 00:07:13.170 the loss leader and bundling. 113 00:07:13.170 --> 00:07:14.913 And I will discuss each one. 114 00:07:16.860 --> 00:07:21.860 So a loss leader is and this is often done by retailers 115 00:07:22.230 --> 00:07:25.050 where they'll charge a low price, 116 00:07:25.050 --> 00:07:27.120 where they make little or no money 117 00:07:27.120 --> 00:07:29.490 for a single good with the idea 118 00:07:29.490 --> 00:07:33.840 that it brings people into the store 119 00:07:33.840 --> 00:07:38.130 and then they will, while there, buy a lot of other stuff. 120 00:07:38.130 --> 00:07:42.300 So the classic case of this is Thanksgiving turkeys. 121 00:07:42.300 --> 00:07:45.090 So a store will charge a really low price, 122 00:07:45.090 --> 00:07:47.880 say 20 cents a pound, 123 00:07:47.880 --> 00:07:52.880 and their hope is that once someone comes to buy that 124 00:07:53.010 --> 00:07:55.140 for their Thanksgiving meal, 125 00:07:55.140 --> 00:07:58.260 that they will also buy things like potatoes 126 00:07:58.260 --> 00:08:03.260 and stuffing and cranberry sauce and many other things. 127 00:08:05.160 --> 00:08:07.350 So while they're at that store, 128 00:08:07.350 --> 00:08:09.870 they come there for the bargain, 129 00:08:09.870 --> 00:08:12.330 but then they buy a whole lot of other stuff 130 00:08:12.330 --> 00:08:15.843 and then the store still ends up making money. 131 00:08:18.360 --> 00:08:22.500 Bundling, and this is often done with insurance 132 00:08:22.500 --> 00:08:24.640 as well as telecom, 133 00:08:27.960 --> 00:08:32.960 where you sell a number of goods, sell them together, 134 00:08:33.300 --> 00:08:35.670 and they're sort of related goods 135 00:08:35.670 --> 00:08:37.620 like home and auto insurance 136 00:08:37.620 --> 00:08:42.620 or a telecom will bundle cable, phone, and internet. 137 00:08:44.730 --> 00:08:48.210 And where the price of the bundle 138 00:08:48.210 --> 00:08:51.120 is less than the sum of the prices 139 00:08:51.120 --> 00:08:55.920 that you would get for each individual thing 140 00:08:55.920 --> 00:09:00.150 to sort of encourage them, to encourage consumers 141 00:09:00.150 --> 00:09:02.340 to buy them in bulk in a certain sense 142 00:09:02.340 --> 00:09:06.270 or buy them together so that they save a little bit of money 143 00:09:06.270 --> 00:09:08.913 and you get to sell more stuff. 144 00:09:12.450 --> 00:09:14.310 The last thing I wanted to talk about 145 00:09:14.310 --> 00:09:16.440 is price discrimination. 146 00:09:16.440 --> 00:09:18.060 Now that might seem bad 147 00:09:18.060 --> 00:09:20.280 if you're someone who discriminates 148 00:09:20.280 --> 00:09:25.280 that maybe it's many cases that is a bad thing. 149 00:09:25.650 --> 00:09:27.810 But here what it means 150 00:09:27.810 --> 00:09:32.670 is to charge different prices for the same item. 151 00:09:32.670 --> 00:09:36.600 And there's three degrees and I'll talk about each one. 152 00:09:36.600 --> 00:09:41.430 So first is where if you could read someone's mind 153 00:09:41.430 --> 00:09:45.240 and know what is the most that they will possibly pay 154 00:09:45.240 --> 00:09:48.660 so you have a mind reading device, 155 00:09:48.660 --> 00:09:50.370 they walk into your door 156 00:09:50.370 --> 00:09:52.800 and you know exactly what they will pay 157 00:09:52.800 --> 00:09:54.090 and you charge 'em that. 158 00:09:54.090 --> 00:09:57.210 Now again, this is not realistic, 159 00:09:57.210 --> 00:09:59.853 it's more of a theory radical thing, 160 00:10:03.270 --> 00:10:06.480 but it's just sort of something that that would be 161 00:10:06.480 --> 00:10:09.183 the most that you could get each time. 162 00:10:10.920 --> 00:10:14.820 Next is second, which is you buy, 163 00:10:14.820 --> 00:10:18.120 you charge a different price based on quantity. 164 00:10:18.120 --> 00:10:23.120 So the more they buy, the lower the per unit price. 165 00:10:24.690 --> 00:10:27.240 So you charge more per pound 166 00:10:27.240 --> 00:10:29.940 for a five pound bag of dog food 167 00:10:29.940 --> 00:10:34.773 than for a 25 pound bag of dog food. 168 00:10:36.060 --> 00:10:41.040 Third degree is where different segments 169 00:10:41.040 --> 00:10:44.130 are charged different prices. 170 00:10:44.130 --> 00:10:49.050 So geographics segment that you may charge more 171 00:10:49.050 --> 00:10:52.740 in a high income area 172 00:10:52.740 --> 00:10:54.843 than in a low income area. 173 00:10:55.680 --> 00:10:59.237 Demographic are things like they often, 174 00:10:59.237 --> 00:11:03.153 stores will offer you a student discount. 175 00:11:05.310 --> 00:11:09.540 So that demographic segment earns you a lower price, 176 00:11:09.540 --> 00:11:14.393 many offer senior discounts or based on occupation, 177 00:11:17.460 --> 00:11:20.880 like those in the armed forces 178 00:11:20.880 --> 00:11:25.170 can sometimes get a lower price. 179 00:11:25.170 --> 00:11:28.020 And last is behavioral where, 180 00:11:28.020 --> 00:11:31.260 and one example of this is the hurdle model 181 00:11:31.260 --> 00:11:34.937 where based on sort of how you buy, 182 00:11:34.937 --> 00:11:38.613 they will charge you the different prices. 183 00:11:41.310 --> 00:11:43.350 So the hurdle model, again, 184 00:11:43.350 --> 00:11:47.280 this is example of third degree price discrimination. 185 00:11:47.280 --> 00:11:51.060 And this is where they make you jump 186 00:11:51.060 --> 00:11:53.460 over a hurdle of some sort. 187 00:11:53.460 --> 00:11:56.910 You know, it isn't actually a real physical hurdle, 188 00:11:56.910 --> 00:11:58.500 but it makes you do something 189 00:11:58.500 --> 00:12:00.690 that you wouldn't otherwise do. 190 00:12:00.690 --> 00:12:04.680 So it might be that you just have to ask for it. 191 00:12:04.680 --> 00:12:06.810 It might be that you have to mail in 192 00:12:06.810 --> 00:12:10.263 and get a rebate or bring in a coupon, 193 00:12:11.126 --> 00:12:16.126 certain times of flights or certain times of the year 194 00:12:16.260 --> 00:12:20.703 that they made, that an airline, 195 00:12:22.920 --> 00:12:25.410 based on that you have to do something 196 00:12:25.410 --> 00:12:29.700 that inconveniences you like a red-eye flight 197 00:12:29.700 --> 00:12:33.180 or a Saturday flight, which charge more, 198 00:12:33.180 --> 00:12:38.033 a restaurant might offer lower food prices 199 00:12:39.385 --> 00:12:42.663 before they get super busy. 200 00:12:43.620 --> 00:12:48.620 The idea is that this hurdle should break folks 201 00:12:49.650 --> 00:12:54.650 into those who wouldn't buy unless they get a good deal 202 00:12:56.370 --> 00:12:57.570 versus those who would, 203 00:12:57.570 --> 00:13:00.900 that those who it's not worth their while 204 00:13:00.900 --> 00:13:04.650 to jump over this hurdle will get the full price, 205 00:13:04.650 --> 00:13:07.860 and those that will go to the bother 206 00:13:07.860 --> 00:13:11.253 of jumping over the hurdle will get a low price. 207 00:13:13.440 --> 00:13:17.673 So you should be able to rank these high to low. 208 00:13:19.290 --> 00:13:21.690 Well which of these is the highest price, 209 00:13:21.690 --> 00:13:24.033 which of these is the lowest price? 210 00:13:25.830 --> 00:13:27.513 So this is what we did. 211 00:13:28.740 --> 00:13:33.303 We talked about costs, competition, and competitors, 212 00:13:34.159 --> 00:13:39.159 or the cost, competition, and customers. 213 00:13:40.110 --> 00:13:44.130 We talked about penetration and skimming, 214 00:13:44.130 --> 00:13:46.680 loss leader and bundling, and price discrimination. 215 00:13:47.550 --> 00:13:48.383 Thank you.