-: Welcome to the video lecture on pricing part two.
There are many reasons why a firm should know its costs.
First, we talked about the breakeven price
and how that can inform what you charge.
It's important to know something that you do,
does it make you money?
Is it worth doing?
Is it something that you should be making?
Is it maybe something
that you could buy from someone else and resell?
And last, that knowing your cost
and doing a deep dive on that,
you can gain insight into your operations
and know what do you do efficiently, what do you not?
And there are other reasons as well.
So the next thing is to think
about how much will consumers pay.
And you can think of this as a demand curve,
and it's driven by what's called elasticity.
So a good that is highly elastic
has a lot of direct substitutes.
The demand curve is fairly horizontal.
And a small change in price
will drive a very large change in quantity, sold or bought.
On the other hand,
a good that is inelastic has very few substitutes,
the curve tends to be more vertical,
and the quantity sold or consumed
does not change based on a change in price.
So necessities tend to be very inelastic.
So here are just some things from the seller's standpoint,
factors that you can put into it,
thinking about the quantity and quality and attributes
and all kinds of stuff like this.
And again, there may be other factors in play too,
but all these drive sort of what,
based on your attributes on the left side,
how does that help you think
about what kind of a price that you can charge?
So the rest of this,
we'll talk about that sort of middle ground.
What are your competitors doing?
First is the going rate.
So you see, you can just charge exactly what they are.
And there's two strategies, skim and penetrate,
where you can charge slightly above what they're doing
or slightly below what they are.
So if you skim,
you're sort of skimming profits off the top
that you charge slightly above what your competitors are,
that you position it as having higher value, higher benefit.
You may have fewer direct customers,
that there may be a more inelastic demand curve.
And this can be a way to recoup your development costs,
but you're positioning it as a premium.
It's better than theirs.
I charge slightly more because mine is better.
There's something about mine that's better than theirs
and it's worth paying a bit more for.
The opposite of that is going slightly below the going rate,
the penetration.
Here you're positioning it as a bargain.
You're saying same good, same quality,
but mine costs a bit less.
This is good for price sensitive customers.
It can discouraged direct competition,
better when you're facing an demand curve
and when you have low entry costs.
So if there's,
if it's easy to enter
and you're at a lower price, again,
that's gonna sort of discourage the competition.
One model that I like a lot and I worked with in the past,
an organization, a food hub called Fair Trade,
which is a nonprofit broker.
And their mission is to work with small, independent farmers
and help them get onto, mostly onto the shelves of retailers
to sort of do all that brokering work to get them there.
So they work very closely with farmers
and when they meet,
they ask them three things.
One, what is their aspirational price?
What is a really good price that's realistic,
but that you hope for?
What would you, what would you aspire to?
Next is what did you get last year?
What was the price last year?
And then three is what is your dignity price?
And this is sort of what I think is the most interesting.
And they say,
what is the lowest price that you can accept
without losing money and without losing dignity?
That feeling like you got robbed.
You were taken, I was exploited here.
And then they will,
what Red Tomato does is uses this information
with negotiating with the retailers and buyers
try to get as close to one as they can,
maybe even reach it
or go above it if they can.
But make sure they're always above three.
Always makes sure that the farmer gets their dignity price
and doesn't sort of lose money
and dignity in the transaction.
So think about what are the pros and cons of bargaining
with multiple buyers each time,
buy and sell to get the best price that you can
versus maybe not getting the best price each time,
but working with a single buyer.
And there's a lot of advantages to both.
So I wanna bring in two concepts,
the loss leader and bundling.
And I will discuss each one.
So a loss leader is and this is often done by retailers
where they'll charge a low price,
where they make little or no money
for a single good with the idea
that it brings people into the store
and then they will, while there, buy a lot of other stuff.
So the classic case of this is Thanksgiving turkeys.
So a store will charge a really low price,
say 20 cents a pound,
and their hope is that once someone comes to buy that
for their Thanksgiving meal,
that they will also buy things like potatoes
and stuffing and cranberry sauce and many other things.
So while they're at that store,
they come there for the bargain,
but then they buy a whole lot of other stuff
and then the store still ends up making money.
Bundling, and this is often done with insurance
as well as telecom,
where you sell a number of goods, sell them together,
and they're sort of related goods
like home and auto insurance
or a telecom will bundle cable, phone, and internet.
And where the price of the bundle
is less than the sum of the prices
that you would get for each individual thing
to sort of encourage them, to encourage consumers
to buy them in bulk in a certain sense
or buy them together so that they save a little bit of money
and you get to sell more stuff.
The last thing I wanted to talk about
is price discrimination.
Now that might seem bad
if you're someone who discriminates
that maybe it's many cases that is a bad thing.
But here what it means
is to charge different prices for the same item.
And there's three degrees and I'll talk about each one.
So first is where if you could read someone's mind
and know what is the most that they will possibly pay
so you have a mind reading device,
they walk into your door
and you know exactly what they will pay
and you charge 'em that.
Now again, this is not realistic,
it's more of a theory radical thing,
but it's just sort of something that that would be
the most that you could get each time.
Next is second, which is you buy,
you charge a different price based on quantity.
So the more they buy, the lower the per unit price.
So you charge more per pound
for a five pound bag of dog food
than for a 25 pound bag of dog food.
Third degree is where different segments
are charged different prices.
So geographics segment that you may charge more
in a high income area
than in a low income area.
Demographic are things like they often,
stores will offer you a student discount.
So that demographic segment earns you a lower price,
many offer senior discounts or based on occupation,
like those in the armed forces
can sometimes get a lower price.
And last is behavioral where,
and one example of this is the hurdle model
where based on sort of how you buy,
they will charge you the different prices.
So the hurdle model, again,
this is example of third degree price discrimination.
And this is where they make you jump
over a hurdle of some sort.
You know, it isn't actually a real physical hurdle,
but it makes you do something
that you wouldn't otherwise do.
So it might be that you just have to ask for it.
It might be that you have to mail in
and get a rebate or bring in a coupon,
certain times of flights or certain times of the year
that they made, that an airline,
based on that you have to do something
that inconveniences you like a red-eye flight
or a Saturday flight, which charge more,
a restaurant might offer lower food prices
before they get super busy.
The idea is that this hurdle should break folks
into those who wouldn't buy unless they get a good deal
versus those who would,
that those who it's not worth their while
to jump over this hurdle will get the full price,
and those that will go to the bother
of jumping over the hurdle will get a low price.
So you should be able to rank these high to low.
Well which of these is the highest price,
which of these is the lowest price?
So this is what we did.
We talked about costs, competition, and competitors,
or the cost, competition, and customers.
We talked about penetration and skimming,
loss leader and bundling, and price discrimination.
Thank you.