When you start business it helps to know a little bit of economics and the way the world operates. Its interesting to know the different models of pricing which will give you hint to come up with more innovative ideas yourself.
We have already discussed ways to price a software product which mainly dealt with the cost in building and the way you sell your product. But this article will be all about the theories of economics which have helped many big businesses to achieve high revenues and to extract every ounce of profit from the product.
What does pricing means in economics?
No its not the amount of money you charge for your product.
What price means in economics is the amount people are prepared to pay for a product, price is also a measure of value.
Prices and supply & Demand are inter related and hence the market forces the prices to converge towards equilibrium. What this means is if a price for a good goes up, then the demand quantity of that good goes down, Consumers who believe that an item is priced high can Purchase a substitute product which is lower-priced or Decrease their consumption for the good, or Buy the product from another place. The key point here is what your customer believes, nobody imagined that Starbucks would be successful considering the huge amount they were charging for a cup of coffee. Now you may think charging more is possible if you build a brand, which needs quiet an amount of money. But we are talking about Startups! Economic theories provides us with a amazing pricing strategy called as Price discrimination.
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What is Price Discrimination?
Now discrimination may sound little too harsh, but it has proved to be more socially viable and successful model. To explain it more clearly take an example of you selling 10 products for a price of 100. now to increase sales if you decrease the price to 80, you will be able to sell 12, so extra revenue is 80 x 2=160, but you also made a loss of 20 from your previous 10 customers, who were paying 100. loss = 20 x 10 = 200. What if you were able to identifies the customers who are willing to pay 100 and who are not willing to pay, and then what if you charged your 10 customers 100 and your another few customers 80, your revenue would be maximum. This method of charging in called as Price Discrimination. You can work out the numbers for the graph above. (At price $30 you will be able to sell 500 units, so on)
Types of Price Discrimination with examples
The difficult part in this model is to identify the customers willingness to pay, how will you differentiate? How will you know how much a person is ready to shell out for your product? There are many tools available to know your customers better, specially if you are online, CRM tools can be of great help, collect data from your customers and make sense of it There are many which we would have not noticed in our day to day life check them out below-
If you get the mantra to do this.. then nothing like it. Best example of this category is Prices charged by Airplanes, they form a groups of the customers and labels them as business traveler and tourists, and will charge huge amount from the business traveler and give good discounts to the tourist who travel once in a while. Deciding factors are something like is the customer willing to stay over weekend in the destination location, or is the time constraint, previous transaction helps.
Based on time
Say you are not able to clear cut identify the high paying customer, then based on time you can differentiate the customers, and get maximum returns.
Ex: Retail store, Big Bazaar gives good discount bargains on Wednesdays when people coming to the store is at bottom low. Or take the example of Mac Donald’s Happy hours, this encourages the people to come to store on odd day and odd timings.
Based on Age
If your product can be used by all age groups, and some may not be able to afford it, usually senior citizens and students, then you can give special discounts to only this age groups.
Ex: Movie tickets for students and senior citizens, discount on software products for students. Amusement park, Wonder-la gives good discount for students.
Based on Sex
For a simple hair cut men pay way to less than ladies, and ladies are allowed to enter free of charge in some night clubs and are offered free drinks.
Sell a version of your product at high cost, when you have sold to enough, reduce the price to get the next level of customers who are willing to buy the product for cheaper price. This is also called as Price Skimming.
Ex: iPhone reduced the prices after few days of its first iPhone release. Movie tickets are the highest on first day, first show.
If you work out a strategy and set a price for a group which will give you maximum returns, then by all means you should give group discounts.
Ex: Group medical Policy offered to corporate firms. Or whole sale price for buying more of the same product.
You have a better selling product and a not so better selling product, you bundle them together and sell it at one price, customers have to buy both.
Ex: Digital TV channels is a big mix of strategies, any channel you choose you will have to shell out more than you wish to. Bundling of software packages too comes in this category.
Most effective will be personalized pricing model by using dynamic pricing for software and eCommerce goods, i.e., if you can crack it All the Best!