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Pricing Myths 5 and 6

The book “Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services” has been available for twelve months now.

To celebrate the first anniversary of publication, over the coming weeks, Chapter 2 of the book will be serialized, revealing nine myths that surround pricing. In this blog post, you can read about Pricing Myth Number 5 and Number 6…

Myth #5: Other problems with traditional economics

The misuse of economics in pricing goes well beyond the realm of “systems,” “mechanisms” and “invisible hands.”

How often do we hear about “rising inflationary pressure in the economy,” which always seems to be explained away with references to the money supply or the bond market? Just like purchasing managers, who are regularly asked about upstream and downstream manufacturing activity (via Purchasing Manager Indices), wouldn’t the right people to ask about inflationary pressures be pricing managers? They are the ones setting the prices of products and services.

And then there are the microeconomic tools of demand and supply analysis and price elasticity. The former is a tool that is so simple that it could be dangerous.

Demand and supply analysis assumes that transactions take place between a buyer and a seller. It tends to ignore the role of intermediaries and the behavior they drive in terms of commercial transactions and demand, never mind being unhelpful in explaining modern business platforms like Uber and Airbnb.

It assumes a company sells a single product, when in fact most companies today sell hundreds, sometimes thousands of products. In 2008, Starbuck took out full page advertisements in US newspapers stating that it offered 80,000 possible drinks.

Finally, demand and supply curves often assume a linear relationship between price and demand. But companies that flex their pricing muscle know that different customers at different times in different markets don’t always exhibit linear responses to price changes. And then there are “Veblen” or “Giffen” goods – luxury or non-luxury goods (respectively) that experience an increase in demand in response to an increase in price.

As for price elasticity, this is a bit like the abominable snowman: everyone has heard about it, but no one is really sure if they have seen it or not. What they often do see are elasticity calculations aggregated across multiple products and customers segments, based on historical data, which don’t necessarily take into account advertising or competitive activity, or have relevancy for sales into the future.

 

Myth #6: Pricing models are for life, not just for Christmas

Most (marketing) students are taught about the product life cycle, where a product goes through four distinct phases: infancy, growth, maturity and decline. It is a myth to assume your pricing model does not go through a similar transformation, or that it doesn’t warrant similar life cycle management.

For years, airlines purchased very expensive engines from companies like Rolls Royce, General Electric and Pratt & Whitney. These days, engines are leased to airlines on “power by the hour” contracts. This is effectively a subscription model, the pros and cons of which are discussed in Chapter 24.

 

Overcoming Floccinaucinihilipilification: Valuing and Monetizing Products and Services”  is available from the following retailers:

Amazon Australia and Amazon Worldwide

Barnes and Noble

BookDepository

Booktopia

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