Pricing and Demand

Lets say I am selling shoes. These shoes are not meant for the entire world, but for a select few. Lets say shoes for computer gamers. Something that all gamers would want for sure.

Once I have a product to sell, I have a few options of creating a pseudo demand (and inflate prices). Let me call them models.

Model 1
I create 500 pairs and sell each at say Rs. 100. Like a typical sales process happen.

Model 2
I create 500 pairs. Sell them in lots of 50 at Rs. 50 each. Once each lot gets over, I jack up the price by Rs. 25. I create that “rush” where everyone would want to buy the shoe when its still 50. If lot 1, gets over, everyone knows that if they dint buy it for 75 (and miss this lot), the price would go up at 100. So on and so forth. Also, since these shoes are limited in number, by raising the “price”, I raise the “value” of the shoes that have been earlier purchased. I theoretically sell faster and make more money.

Model 3
Reverse of Model 2. Lets say I want at least Rs. 100 per pair. I create lots. I sell the first lot for Rs. 200. Every incremental lot, I reduce the price. I think this is the worst of all. This is infact the winners curse. The price for other users falls as a result of actions of the winners. But there is something interesting. Moment I slash the prices from Rs. 200 to Rs. 100, I think a lot of people would compare the two prices and use models like contrast and grounding to buy in herds.

Is there a merit in thinking about pricing and economics before you create a business? Which of the three is advisable in the long run if your product is not a commodity? Is there a fourth, fifth, sixth .. way to think about pricing and generate demand.

Thoughts?

11 comments ↓

#1 kidakaka on 04.13.09 at 9:33 PM

There is merit in pricing before you create a business, but in real life you do not put that much thought into this. For eg. If I make shoes which cost me Rs. 100, I will sell them at Rs. 150 and make a contribution of Rs. 50. The faster you are out in the market, the better. Any changes in your strategy can also be done on the fly.

#2 Kapil on 04.13.09 at 9:48 PM

I don’t know if you have factored in acceptability and love factor for your product. Model 2 is valid if people just can’t do without your product and the first lot starts giving out some great feedback. But if the reverse happens and there isn’t a strong feedback initially then Model 3 gets activated to attract consumers at lower prices.

And I think due to a dynamically changing market environment a producer would not be able to stick to ONE model, you will need to keep adapting them based on market reactions.

#3 Anaggh Desai on 04.13.09 at 10:08 PM

Nowhere have you mentioned the cost price & what is the profit you intend to make.

Also what is the strategy, long/short/price/distribution/brand et all.

Ideally, I would say try & go with CP+/- 40% then based on your brand strategy do a fixed pricing, with value adds thrown in – something like shoe shine kit free, 15% off on another pair bought in 1 year etc.; post the initial rush, evaluate & correct your strategy.

But remember, Pricing alone cannot be a Strategy.

This is just a generic off the cuff comment & does not construe actual consulting etc. etc.:)

#4 Saurabh on 04.13.09 at 10:18 PM

Hi Guys,

Thanks for your comments.

Few clarifications
1. I am assuming that I ideally want to sell these shoes at Rs. 100. This means that my cost is Rs. 50. I was taking a 100% margin on the product.

2. I am assuming that everyone loves these shoes. There is consistent demand.

3. I am selling in an “economically efficient” environment. Price at one store is exactly same as the price at other stores.

Thanks for your comments. Would update the post.

Regards,
SG

#5 Munish Gupta on 04.13.09 at 10:20 PM

I think model 2 is the best since the users will know that the price will increase with time. In model 3 the uses will understand after a while that the prices tend to decrease and they will prefer waiting for the price to reduce and then buy and also there will be a factor of items not being sold at a higher price. So it will ultimately result in increase of supply relative to demand.

#6 kidakaka on 04.13.09 at 10:30 PM

the product life cycle can also be important in deciding whether you want to slash prices (sales promo) or increase awareness (adverts). So if gamers do not know that gaming shoes are good for increasing their skills, then even though you have put the price at Rs. 50, they may not purchase them … (who needs shoes, i love playing games).

#7 Juhi Munjal on 04.13.09 at 10:37 PM

Ideally, Model 2 and 3 should work when you know that the market for your product or service is Oligopolistic. In such a case, you can merrily take the risk/advantage of price leadership and go about starting a price war.

But in the case of a product like shoes, where you know you are operating in a monopolistic market structure, One has to be sure enough of the “USP” of his product to ensure consistency of demand and revenue under erratic pricing schemes.

If this works (of which one cannot be totally sure), then it’s viable to go for Model 2. Else, I would say sticking with Model 1 should prove optimum.

#8 Kaustubh on 04.13.09 at 11:16 PM

When you are talking about a populace thats increasingly becoming conservative about the products/services it chooses, you do have to take a certain amount of risk. Its true that you might be venturing into a market segment with very few players in it, but to establish yourself you need time.
Now, considering the worst case scenario, Model-2 in this case does contain a certain risk, since, if your product does not do well, you are left with no other options (I dont think you would be willing to reduce your price beyond the manufacturing/cost price).
My personal opinion is that Model-3 works better if you are venturing into the market with a new product offering. Also, a research on the competitors pricing would be helpful in pricing your product.
If your product does take off, you can always drop prices and see things fly of the shelves.

#9 Akshay Surve on 04.14.09 at 1:12 AM

Model 1 – Conservative

Model 2 – Good when one wants to test the market, acceptability and reward early adopters.

Model 3 – I don’t think this is a viable strategy but more of a fallback when you gauge reducing the pricing could be beneficial.

Makes sense?

#10 Jaidev on 08.21.09 at 9:52 PM

Hi Saurabh,
I feel that pricing of the product is very important.
Infact pricing affects other marketing mix elements such as product features, channel decisions, and promotion.

1.

Develop marketing strategy – perform marketing analysis, segmentation, targeting, and positioning.
2.

Make marketing mix decisions – define the product, distribution, and promotional tactics.
3.

Estimate the demand curve – understand how quantity demanded varies with price.
4.

Calculate cost – include fixed and variable costs associated with the product.
5.

Understand environmental factors – evaluate likely competitor actions, understand legal constraints, etc.
6.

Set pricing objectives – for example, profit maximization, revenue maximization, or price stabilization (status quo).
7.

Determine pricing – using information collected in the above steps, select a pricing method, develop the pricing structure, and define discounts.

All the best !!

#11 Saurabh on 08.22.09 at 6:54 AM

Thanks Jaidev for your comments. Appreciate it.

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