If figuring out how to maximize your revenues by charging the right price is hard when people actually need your product, imagine how much harder it is when they don’t need your product or don’t necessarily even need to pay to enjoy your product. The lessons learned from how to maximize revenue in this regard, which is a much more formidable challenge, can profoundly impact your ability to maximize earnings in the less difficult situation where people have no alternate choice but to pay for your product. In a stroll down a busy street, we will once in a great while receive a good that can stir our soul yet require no payment. We receive this good from the ubiquitous street musician who earns his income as a mendicant who lets you set the price (which is often nil), rather than setting his own price for “services tendered.”
And then there are those rare occasions where we encounter a street musician whose music soars so high that we are forced to refer to him simply as a “musician,” for using the adjective “street” would be nothing short of a criticism. About 2 years ago, this is what I encountered at one of Washington D.C.’s busiest Metro (subway) stations during the morning rush hour. It wasn’t until much later in the day that I discovered the musician in whose masterly hands the violin “sobbed and laughed and sang” was the great virtuoso Josh Bell. In the middle of the morning rush hour, 1,097 commuters passed by and all heard soul-stirring music at a price of their own choosing that just a few days earlier fetched more than $100 a seat at Boston’s Symphony Hall. Josh Bell played to a rush hour herd, and demanded no price for priceless music.
His income depended not on the value he provided to those 1,097 passersby, but the overwhelming value he provided – for, if he failed to stir, we listless commuters would feel no compunction to pause and forfeit even a meager fraction of our purse. And stir he did, with a masterly performance of Bach’s Chaconne from Partita No.2 in D Minor. Of the almost 2,000 pedestrians that filed by, only 27 gave money for a total of $32. In other words, for a performance that was described by the Washington Post as “pearls before breakfast,” less than 3% of us offered any payment (for “a man whose talents can command $1,000 a minute”). Did the service deserve such scant payment, or was there more to the revenue than just the greatness of the service itself. This is a question that goes right to the root of just how complex the endeavor of pricing can be.
Beyond Josh Bell’s performance and the payment it merited, there is a litany of other factors that affected his earnings power (or pricing power if he were to charge a price). First and foremost, there were 3 possible locations at which Bell could have positioned himself (see figure below):
- At a location of high transient pedestrian traffic (between the entrance door to the subway station and the escalator bank that leads to the underground train platform).
- At a location of stationary traffic waiting for a subway train to arrive (i.e., on the underground platform).
- At a location where the acoustics of the Metro arcade would create the most perfect sound possible within the subway station.
Of the 3 possible locations, Bell perhaps chose the worst location to generate earnings. No matter how good his music, rush hour traffic has no time to stop. It wasn’t their purse that the commuters failed to contribute, but their precious time.
The attributes that govern your power to generate revenue transcend the product itself. Bell’s performance at the L’Enfant Plaza Metro stop highlights several fundamental truths of pricing science:
- Could being situated at one of the locations where stationary traffic was high have yielded more revenue?
- Or, perhaps could being situated at a location where the sound would be even more magnificent have yielded more revenue?
- What if the perfect acoustic spot had only scant stationary traffic? Then, sadly, we can surmise his income would be lower even though the quality of the product would be it’s highest.
- To complicate matters even further, what if Bell chose a different day for his performance?
- What if he played on a sunny, spring day where spirits are higher instead of a dreary winter morning?
- What if he played on payday (in the Federal government, payday typically lands on the 2nd and 4th Friday of the month) instead of an arbitrary day?
- What if Bell advertised with a sign around his neck that he was indeed Josh Bell?
- What if underneath the sign, Bell posted a requested donation of $5 for his performance?
By not focusing on these questions, and concentrating solely on his music (i.e., the tangible product itself), Bell failed to create a high market price for his product, and earned only $32 dollars from a 43 minute performance that in a proper venue would have earned 6 figures. All of these factors would have dramatically affected the revenues Bell earned that morning. But, identifying the 12 square inch box out of the 15,000 square feet of space in which Bell would have obtained maximum revenue (i.e., gotten an “optimal price” for his public performance) is an optimization problem of mind-boggling complexity, and simply cannot be solved without data and quantitative analysis. After all, the analysis is not just about where Bell should stand to optimally balance sound quality with foot traffic, but also about how this optimal location varies with changes in any of the above 8 questions. The lessons here are deep, and profoundly shape our responsibilities as pricing managers.
Before you jump to match your competitor’s price, you should recognize the market’s willingness to offer you payment that goes beyond the value of the product itself. It is important for you to optimize the marketing attributes of the product in order to optimize the price of the product. You are not at the mercy of the market. Through your actions you can greatly influence the market price of your product. As a pricing manager, you should not just view the setting of price as your only responsibility. You have access to much data about your market and your previous sales and your customers, which you can leverage to determine the interplay between all of the marketing attributes of the product and the price of the product. The price you are able to make is inextricably linked to the actions of your marketing managers, your category managers, and your product and sales managers. And once those actions are executed, you can digest all of your data to pinpoint the optimal price you can charge in the market. Last but not least, as a pricing manager, you are the final decider of the trade-offs your enterprise should make to maximize immediate earnings and establish a long-term competitive advantage: Should you play your violin where it sounds the best but generates the least income or do you play it where it sounds the worst but stands to generate the most income because of high foot traffic? If you do the latter, will those that pay you today have the loyalty to pay you again tomorrow?
So, before you give in to the seduction of lowering your prices to beat your competitors, remember to identify and carefully influence all of the attributes (i.e., don’t just make great music, stand in a great location) that will compel the market to pay you your just reward for the goods and services you provide. The crux of price optimization is not about touching price at all, but touching all the other things that make a price.