Sunday, November 1, 2009
╠ What is Expensive? ╣
Throughout Uni I've always heard about how things add value to a product, make people willing to pay more for it. Basically working as if people have an exact dollar value they're willing to pay for an item that fits into a product category and then additional for extra components and branding.
However in practice it isn't like this. On my most recent large purchase I was negotiating a price down for an outdated display item and I realized I don't have an exact price that I won't pay a cent more. Instead what the situation is in most cases is as the price rises, your percentage chance of purchase goes down.
What this is known as in economics is price elasticity, how much demand changes with an increase in price. The greater the change,the more elastic a product is. The elements that reduce the elasticity of a product are elements such as brand and reduced alternatives. Basically it is shaped by the opportunity cost of not purchasing it. Is today your only opportunity? Do you need it right away? Someone saying yes to these will be more price inelastic and therefore will be a higher chance of purchasing the same product for a higher cost.
So pricing isn't about hitting a magic number that everyone will buy at, it's about picking a value that will create the highest percentage chance of purchase in the average situation without sacrificing too much profitability.
To finish I'd just like to share what was one of my favourite thoughts on this issue. The definition of expensive is wrong, instead of just being a high cost item it is instead an item that is priced above your expected expenditure. Or in relation to my explanation priced at an area with low purchase intention.