Innovative Pricing Strategies to Increase Profits, Second Edition

Daniel Marburger

• Publisher: Business Expert Press
• Year: 2015
• Print ISBN: 9781631573699
• eBook ISBN: 9781631573705
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Perhaps the most confounding characteristic of the competitive marketplace is that everyone wants a piece of the action. If a firm successfully enters a new market, creates a new product, or designs new innovations for an existing product, it's just a matter of time before competitors follow suit. And the influx of competition inevitably places downward pressure on both price and profitability. Whether you're an economics student or a manager with absolutely no background in economics, this book will help you make better decisions and learn more about the Five Forces Model, (first published in 1979 by Harvard economist Michael Porter) which identifies the characteristics that can help insulate a firm from competitive forces. This book brings microeconomic theory into the world of the business manager rather than the other way around. The author expounds on microeconomic theory, enabling economists to take the knowledge back to the office and apply it.

PART I

If You Could Choose Any Price, What Would It Be? Fundamentals for the Single Price Firm

CHAPTER 1

Economics and the Business Manager

What Is Economics All About?

Mention the word economist and one conjures up a vision of an academic who scours over macroeconomic data and utilizes sophisticated statistical techniques to make forecasts. Indeed, many economists do just that. But some people may be surprised to learn that economics is a social science, not a business science. Like psychology, sociology, anthropology, and the other social sciences, economics studies human behavior. That includes consumer behavior, firm behavior, and the behavior of markets.

In its simplest form, economics is a study of how human beings behave when they cannot be in two places at the same time. If you take a job that requires extensive travel, the income and opportunities for advancement come at the expense of spending time at home with spouse and children. No matter how badly you may want the career opportunity and to still spend quality time at home with the family, you cannot have both. You’re going to have to choose. The idea that we cannot have all the things we want is called scarcity , and it plays a role in every decision we make; not just financial decisions, but nonfinancial ones as well. Do you want to stay up late to watch the ballgame on TV if it means you won’t get a full night’s sleep? Do you want to read the financial pages on the Internet or watch your son pitch in the Little League game? Scarcity forces us to lay out our opportunities, prioritize our activities, and choose accordingly.

Consumers do the same with their incomes. They cannot spend the same money twice, so scarcity (in the form of a finite income) forces them to determine what they can afford, prioritize the possibilities, and decide what to purchase and what to do without. The latter point, what to do without, is relevant to both spending decisions and the uses of one’s time. As long as you cannot be in two places at once, whatever you choose implies the alternatives you must forego. Likewise, because you cannot spend the same money twice, each purchase decision you make implies those you cannot make. Economists refer to this as opportunity cost . In understanding human behavior, most economists will acknowledge that opportunity cost is the most critical concept in decision making.

Let’s begin with a simple example of the role of opportunity cost in business: Negotiating the price of a new car. Most consumers dread negotiating with the salesperson. They assume the salesperson has superior information and will take advantage of them. In fact, the salesperson and customer are negotiating to find a mutually beneficial price; the final act of negotiating is more an act of cooperation than confrontation.

When a consumer decides to buy a new car, he recognizes that monthly car payments supplant the purchase of other goods and services he values. Moreover, the better the car the higher the price, and the greater the opportunity cost. Opportunity cost helps him determine how much he is willing to spend on a car and what types of vehicles fall within that price range. Once he decides on a vehicle, it’s time to sit down with the salesperson and negotiate. The critical element of negotiating is recognizing that both the buyer and seller have alternatives. The seller doesn’t have to sell to you. But if the salesperson sells the car to you, he cannot sell it to someone else. The opportunity cost of selling the car to you is the foregone profit he would earn by selling the car to someone else. This represents the lowest price he will accept in a deal. As a prospective buyer, you can go elsewhere. If you buy from this dealer, you will not buy the car from another dealer. Thus, your opportunity cost of buying from this dealer is the price you could likely obtain from a competing dealer. This represents the maximum price you would ever pay to this dealer.

Assume you’ve staked out the inventories at competing dealerships, determined your willingness to trade away options for a lower price, and researched dealer cost and average regional sales prices through the Internet. You have a good idea of the opportunity cost of buying from this dealer. This represents the maximum you would be willing to pay this dealer for the car. The dealer’s costs and the price he expects to get from other prospective buyers represent his opportunity cost of selling to you, and it serves as his minimum price. The price that drives the deal necessarily lies between the opportunity costs of the buyer and seller and will be mutually beneficial.

Let’s review that last point again, as it will prove to be the crucial point in understanding the marketplace. All transactions between a buyer and a seller are mutually beneficial. If either party believed it would be worse off by making the transaction, no transaction would take place. Thus, to make a profit, your firm must make an offer that’s at least as attractive to the consumer as the available alternatives. In essence, then, the only way to maximize profits is to attract the consumers’ money; to offer a product and price that’s at least as desirable as those he would forego if he buys from your firm.

What Does Economics Have to Offer to the Business Manager?

Economics studies how individuals deal with scarcity. The theory of the firm is based on the notion that firms seek to maximize profits but must deal with constraints that inhibit their profitability. The constraints incorporate the opportunity costs...

Table of contents

• Frontcover
• Halftitle
• Title
• Copyright
• Abstract
• Content
• List of Cases/Firms/Products
• Part I If You Could Choose Any Price, What Would It Be? Fundamentals for the Single Price Firm
• Part II Different Strokes for Different Folks: Charging More Than One Price for the Same Good
• Part III How Does My E-Tailer Know that I Read Comic Books and Cook with a Wok? Pricing in the Digital Age
• Table of Strategies
• Appendix: Relevant Published Case Studies
• Notes
• References
• Index
• Ad page
• Backcover