Reality Check

Been reading – “The Undercover Economist”, by Tim Hartford.  It’s got a lot of interesting stuff and the stuff below made me think once again and get back to the basics.

1. Do you really have scarcity power?

In the perfect economy sense, no company has power unless you got scarcity.  Nothing stops us from walking down the street or driving from one store to another – it’s just that there is a limit to the laziness everyone has.

For instance take popcorn in theaters or wine in restaurants.  Is it – “Because once they get you in the door they can charge whatever they want”?  Not true – Moviegoers who are sensitive to price will bring their own snacks from home, or go without. People who are not sensitive to price—perhaps because they’re on a date and don’t want to look stingy—will simply pay for the overpriced popcorn”

Remember most of the theaters have a rest room Etc – they do not charge for this kind of stuff directly.  Because they know that this scarcity is not something which pays off positively.

So, it’s how to understand and utilize the scarcity factor while pricing thing out.

2. Can the company plug leaks?

Your Price-targeting systems has two potentially catastrophic leaks

a. The first “leak” in a price-targeting strategy, then, is that rich customers may buy cheap products, unless the products are deliberately sabotaged.  For example –

For instance, IBM’s “LaserWriter E,” a low-end laser printer, turned out to be exactly the same piece of equipment as their high-end “LaserWriter”—except that there was an additional chip in the cheaper version to slow it down. The most effective way for IBM to price-target their printers was to design and mass-produce a single printer, then sell it at two prices. But of course to get anyone to buy the expensive printer they had to slow down the cheap one. It seems wasteful, but presumably it
was cheaper for IBM to do this than design and manufacture two completely different printers.

Price-insensitive customers may not play the self-targeting game. It’s not hard to persuade price-sensitive customers to steer clear of an expensive product.

b. The second “leak” is a particularly difficult one for companies using a group-target strategy to plug: their products may leak from one group to another. The risk is that the customers who are being offered a discount buy the product and then resell it at a profit to the customers who are being charged a higher price.

Posted by Digvijay “VJ” Singh Rathore

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