Tuesday, June 28, 2011

How Do Companies Set A Price For Their Products?

On vacation a few years back, I traveled with a group of friends and family to a foreign country.

While my family and I seemed somewhat local, the people we traveled with were clearly tourists. One day, all of us went out to dinner, and each of us were handed menus. Later, when I caught a glimpse of our friends’ menu who were sitting at another table, I was shocked to see that we were being charged two different prices for the same foods. The manager intentionally charged for the food according to how much he believed would make him the most money. Analyzing the situation now
with a much different perspective than I had viewed it with many years ago, I realize the restaurant manager must have found an effective price-point for the classifications he grouped us in. Clearly, he acknowledged charging everybody lots of money simply did not work, and, though unethical, his actions made me wonder about the practice.

This brought me to an interesting question: how do companies set the price of an item? In order to maximize profits, they must find an exact price at which the worth of the product or service becomes valuable enough for a consumer to buy. So what determines the price at which profits are highest, especially considering each individual has their own opinion as to the “ideal price”?

As any economics course would teach on day one, the intersection between the supply and demand curve determines equilibrium quantity and price, but what are some of the tools a company can use to determine where this intersection may be?

The answer obviously is different for different industries. In the case of Boeing, factors like fuel prices and growth of emerging markets and currency exchange rates factor heavily in pricing their products (planes and plane parts). However, in the case of the local pizza shop the pricing may be much less scientific but just as relevant to the long term success of the business.

Some of the tools that industries use to price their products are:
- Market Research / surveys (opinion)
- Market Research - Conjoint Analysis (examines the direct trade-ofs
among competing products)
- Market Research - perceptual mapping - assesses the benefits of
various products that may not be direct substitutes for one another,
and seeks to identify the benefit of one product that no other product
- Competitive Analysis (what is the other guy doing, price-wise ?)
- Historical Trend analysis (where is the price of this product most
likely to go)
- Purely quantitative materials costing (what does it cost me, and
what kind of premium should I be getting? AKA Floor pricing)
- Use a Life Cycle Strategy - Price a product for early adopters to
take advantage of its extra value early, then plan to reduce the price
later on for increased market share.

The science behind some of these techniques is astoundingly sophisticated, and I know for a fact that some industries spend millions on pricing their inventory, including Television Companies (price of Advertising), Pharmaceutical Companies (price of medications in line with Insurance Company expectations), and even Chocolate Manufacturers

Other factors also affect the ultimate price of a product:
- Speculation (Oil prices are affected by the perceived lack of
inventory in the future)
- Coolness Factor (Apple products are sold at a solid premium because
they are cool)
- Political Climate (fluctuations in the currency of a country that
produces a certain product will affect the price)
- Fluctuating Weather (especially for produce, etc)
- Artificial control of world supply (diamonds)

©2011. All rights reserved.

Tuesday, June 21, 2011

Is the nostalgia associated with print books powerful enough to stifle the uprising of e-books?

Recently, I read a very interesting article which stated that “E-books now outsell print books” (http://www.computerworld.com/s/article/9216869/Amazon_E_books_now_outsell_print_books?taxonomyId=77) . This fascinating transition from print books to e-books marks a huge movement away from the traditional method of reading that’s been used for so much time in history. This big of a shift away from an established method must be due to a significant technological advance, especially considering print books have been conventional entity— and the process of printing books is hardly one that has been modified over the years. Let’s take a look at the pros and cons of E-books vs. Print Books, and consider the reasons which e-books have been popularized.

In conclusion, many of the positives of print books are a result of the “nostalgia” which many feel in turning pages and holding a binded book. While print books are certainly still prominent in society, will society eventually turn to e-books? Please comment with your thoughts below.

©2011. All rights reserved.

Monday, June 20, 2011

How Large portion-sizes and Bringing Home Left-overs can potentially serve as a means of accelerating revenue for a Restaurant

Who doesn’t look forward to eating leftovers from last night’s big portion meal? In my opinion, while serving large portion-sizes and bringing home left-overs may seem like a benefit to only to the customer, I propose it can serve as a huge asset to the company too. In restaurants such as Cheesecake Factory, Maggianos, and T.G.I Fridays, customers can expect to come home with a bag full of delicious left-overs. When eating the leftovers the morning (or afternoon) after the dining experience, the customer relives the delicious food again the morning after. This forces a customer to not only enjoy the meal once, but to experience it twice, in two different atmospheres, at two different times. It makes economic sense for the restaurants to serve huge quantities and charge a few extra couple dollars for numerous reasons. While charging a customer an extra three dollars for a dish, and serving a three dollar out of restaurant pocket cost may seem somewhat ineffective , it is not. These large portion sizes add value of the meal in the minds of the customers, and also creates a more lasting impression. There is no denying that the food these aforementioned restaurants sell may be delicious, but no customer walks in these casual restaurants expecting a feeling of “gourmet”. Rather, customers expect an enjoyable atmosphere, friendly service, and their bellies to be filled. “Doggy-bags” serve as a way for middle-class restaurants to stand out from each other, because of their abilities to self-advertise and send some of the restaurant experience with the customer to enjoy a second time.