Author Archives: Syeed Mansur

Finding Pricing Excellence on a Roulette Wheel

Posted on by

One of my recent posts, “You Are Not At the Mercy of the Market…”, attracted a rather thought-provoking response posted directly to the blog.  The crux of this response, and others sent directly to me, have all revolved around a similar theme:  With so much uncertainty surrounding consumer behavior, words such as “pinpoint” or “optimize” should not be uttered when it comes to the decisions that pricing and marketing img-cartoon-roulettemanagers must make.  This is indeed a compelling sentiment, and has stirred much discussion amongst my colleagues in industry and in academia (our research organization collaborates closely with professors within the University of Chicago and Carnegie Mellon University).  This discussion has taken on many twists and turns, which we hope to summarize in future posts.  But, there is one particular question that has resonated throughout our discussions:

What are the implications of the words “pinpoint” and “optimal” when market behavior is so uncertain?

In other words, is it possible to find a single decision that will maximize the odds of earning a handsome payoff when the outcome of any decision is uncertain?  In a rather extreme example, in the highly uncertain world of gambling, can I make some decisions that are clearly better than others in light of the uncertainty? Continue reading →

You are Not at the Mercy of the Market: You Have All the Power to Make Your Price

Posted on by

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.”

img-josh-bellAnd 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. Continue reading →

The 5,000 Year Marathon: In the Race to Buy & Sell, Who Wins & Loses? (… Especially When Product Choices Grow Faster than Incomes!)

Posted on by

Inflation rates provide a reasonable yardstick for measuring buyers’ purchasing power.  By comparing income growth with inflation, we can determine how well buyers are able to keep up with rising product prices.  But, there is something that is perhaps much more important in our ever-expanding (or, nowadays, contracting) economy that is unmeasured.  Just comparing inflation with income growth does not allow us to see how well consumers are keeping up with rising numbers of products.  And this product proliferation not only impacts consumers’ purchasing power, it has deep impacts all the way up the supply chain to the purchasing power of retailers, distributors, and ultimately manufacturers.

If there is a lot more to purchase, or a lot more stuff that can be incorporated into the products you make, each party in this supply chain needs to have the financial ability to entertain such a large set of choices.  Looking at income growth and inflation alone conceals the true nature of spending power.  It is not as much about whether or not our incomes today are keeping up with the prices of things we bought yesterday. It’s about whether or not our incomes are keeping up with the additional things we can buy. It’s about whether or not manufacturers’ incomes can keep pace with the exploding set of ingredients they can choose to put into their products, and whether distributors can cost-effectively stock and sell an ever-widening mix of products, and so forth.  The rate at which these new things emerge is faster than the rate at which incomes grow – and therein lays the crux of the pricing problem (firm birth data obtained from U.S. Census Bureau and Income data obtained from U.S. Bureau of Labor Statistics):
img-firm-births

Even though inflation may be growing at a rate that is in line with wage growth, the burgeoning number of items available to consumers (and perhaps even critical to consumers – just a decade ago there was no anti-bacterial lotion, and yet now you can’t walk 10 feet in a hospital without walking past an anti-bacterial gel dispenser) makes consumers have less spending power.

Continue reading →

What a Rainy Day Teaches Us about Pricing in a Recession

Posted on by

As the weather soured this past weekend, our plans for a long outdoor hike morphed into a long indoor marathon of Monopoly™. There were 5 of us, and figured that given the unexpected rainfall, we might as well dust off the Monopoly board and spend our afternoon keeping dry. To make the game a bit more interesting and reflect the current economic climate, we altered the rules – which we referred to as “recession-rules” Monopoly (as opposed to “normal-rules” Monopoly).

Monopoly game use "recession rules"

Instead of each player receiving $1500 at the start of the game, we would each receive $1000 (to reflect the $50 Trillion of wealth that has been lost in the last 18 months), and instead of collecting $200 for passing “Go”, each player would collect only $100 (to reflect the massive wage losses seen in the last 12 months). To further reflect the broader economic climate, no loans were permitted in the game (i.e., players were not allowed to mortgage their properties to receive cash from the bank, nor were players permitted to issue loans to one another). With these altered rules, our goal was to see how purchase behavior and wealth would unfold on this artificial economic landscape. The results were rather eye-opening, and sheds light on the fundamental dynamics of price in a down economy.

One startling feature of the game that remained consistent between “normal rules” and “recession rules” was that the price of any property on the board, or the price of any house/hotel was publicly displayed for all to see. This price conveyed essential market information about the value of “the goods”. Yet, despite the publicly known value of a property, property prices always deviated from the stated value once a buyer wished to purchase the property from a player that already owned it. Moreover, different buyers were prepared to pay different prices for the same exact property and in all cases the offered prices were higher than the stated value of the property (i.e., the price paid by the original buyer). This pattern was held true despite the recessionary conditions that were imposed on the game. There are a few important observations to note here:

  1. Different people were prepared to pay different prices for the same good.
  2. Those prices were always higher than the stated value of the good.
  3. Buying & selling still occurred despite lowered wealth levels.
  4. Buying & selling still occurred despite the unavailability of credit (no mortgages were allowed and no player-to-player loans were allowed).

We observe these same characteristics when… Continue reading →

If Price is Your Most Valuable Asset, Why Put it out There for Everyone to See?

Posted on by

Of all the intellectual property your organization possesses, nothing is more important than your prices.  But, unlike all of your other intellectual property, which you protect with impenetrable secrecy (i.e., the recipe for Coca-Cola, the manufacturing process of an Intel microprocessor, the not-so-open source code for Microsoft Office, etc.), img-colayou indiscriminately broadcast your prices to the market and lay it bear for all to see.  Yet, there is so much proprietary knowledge echoed in this single price, and you essentially give this knowledge away for free to your competitors.

A single price captures everything that makes you special.  It embodies the value the market sees in your product, the value of your product in this particular season, the value your brand wields in the marketplace, the degree to which your product satisfies the needs of specific customer segments, the degree to which buyers are willing to pay for your reputation, the degree to which buyers are loyal to your product despite competing products, etc.

Once you reveal your prices to the world, your competitors instantly know how much brand equity you have, they immediately see how much value your product has in this particular season, they immediately see your reputation is strong, they are able to assess the amount of loyalty you command, and so forth.  By putting your prices out there for all to see, you implicitly give your competitors a leg-up.  To compete against you, all they need to do is see your price and shoot for something just a tad lower.

What would a future world look like where you only… Continue reading →