At some point, every homeowner learns an important lesson about how to save money on air conditioning during the hottest part of the summer. Generally speaking, it costs less to keep your house at a relatively even, tolerable temperature, then to turn off the unit entirely during the day and blast the A/C in the evening when you are home. The process of re-cooling the entire house each time wastes a lot of energy to get to a comfortable temperature again.
Multiple optimal prices can exist for a product, even in transparent markets. Note that all of the prices in this image apply to the exact same HP printer.
The lessons of efficiently cooling a home can be applied to many scenarios. In business, having a system in place for tweaking procedures continuously is easier to manage over time than are prolonged periods of stasis followed by dramatic transformations. Transformations are complicated. They are often expensive. If too much time passes between transformations, the organization’s inertia coefficient (a 100% made-up term) passes a critical threshold. After that point, two outcomes are the most likely, with a few shades of gray in between: (1) transformation projects mushroom from merely “expensive” to “expensive and painful”, or (2) the company is too lethargic to change, effectively dooming the business to eventual defeat or absorption by more innovative rivals. For the sake of comprehensiveness, I have to acknowledge that for a fortunate few, “federal bailout” must now be added to this list as a third possible outcome. However, in a few years we will see if my suspicion that outcome three eventually finds its way back to outcome two turns out to be correct. Continue reading →
Large brand-name drug companies – Big Pharma in the common vernacular – are not exactly known for competitive pricing or razor-thin margins. For 2008 the industry was ranked third most profitable in the U.S. according to Fortune magazine, with average profit-to-sales margins of 19.3%. That’s a pretty fat comfort zone compared to the scorched-earth landscape of many other industries…or is it? Until recently Big Pharma was pretty consistent at the #1 spot in those rankings. A look under the microscope reveals some troubles bubbling up in the hitherto happy world of magic molecules and blockbuster brands. These days the whole country seems transfixed by the subject of healthcare, and no matter what does or does not come out of the legislative sausage factory this year, some major trends are afoot that have potentially far-reaching consequences for Big Pharma and may influence the normally lackadaisical approach drug makers have exhibited to the prices they charge for their brand-name drugs – in particular when those drugs reach the end of their exclusivity protection period and go off patent. Continue reading →
The National Baseball Hall of Fame recently inducted Ricky Henderson, one of baseball’s most prolific base stealers with a record 1,406 bases stolen in his career – yet, Major League Baseball has failed to deal with scalpers who steal millions in profits from their franchises every year. Scalpers have seized the lost opportunity where Baseball franchises lock in their ticket prices months before the season starts and choose not to adjust prices throughout the season. A more efficient secondary market thrives due to the scalpers’ ability to factor in several game variables (e.g. strength of opponent, seat type, starting lineup, weather conditions, etc.), as well as buyer-specific factors (e.g. age, attitude, clothing, jewelry, etc.) to determine the maximum (and therefore optimal from the seller’s perspective) price that each person is willing to pay. Another advantage for scalpers is their ability to immediately negotiate if the buyer doesn’t accept the first price, carefully moving the price down until both the buyer and seller agree upon a satisfactory price. To help reclaim these lost profits, the San Francisco Giants are now testing dynamic pricing software to help adjust ticket prices based on the expected consumer demand for each game. So what exactly is dynamic pricing, and is it powerful enough to replace the individualized pricing, negotiation, and sales effectiveness of ticket scalpers? Continue reading →