A Beer on the Beach, and Other Mysteries of Fair Pricing
Katrina Lamb | November 16th, 2009Filed under: Economist Outlook | Tags: anchoring, austrian school, behavioral economics, cost-plus pricing, Daniel Kahneman, decisions that are both fair to the customer and profit-optimizing to your business, fair price economics, fair pricing, Fairness and the Assumptions of Economics, jack knetsch, joseph schumpeter, Journal of Business, late scholastic period, luis saravia de la calle, mark-up, micromarketing, price based on component costs of production and delivery, pricing 4.0, richard thaler, salamancan school, selling decisions in the micromarket, sentrana | 1 Comment »
Businesses want us to view them as fair – there is arguably nothing more important than a reputation for fairness in the daily marketplace of commercial transactions. As business managers what can we do to ensure that decisions we make – about pricing or other actions that are clearly visible at the point of the customer-product interaction – will be seen as fair? Is fairness something absolute, immutable and precisely quantifiable? Or is it situational, capricious and ever-changing? The bad news, perhaps, is that ‘fairness’ is a very elusive notion to pin down with certainty – it’s hard to put fairness in a bottle and label it as such. The good news is that fairness more than anything else is about perception and the relative judgments of your customers and potential customers in varying demand situations. That’s good news because the better you understand the granular contours of your demand environment and the precise needs and propensities of your customers, the more likely you are to understand how to make decisions in that environment that are both fair to the customer and profit-optimizing to your business.
thirst-quenching - but is it fairly priced?
Here’s a test of fairness. Imagine you are lying on the beach on a hot summer day and find yourself craving a cold, satisfying beer. What price would you be willing to pay to quench your thirst? Now imagine two alternative scenarios. In one, the only place within walking distance to buy a beer is the poolside bar of a swanky five-star beachfront hotel. In the other, there is a rather run-down beachfront grocery store that sells beer. Imagine further that both the hotel and the grocery store sell the exact same brand and type of beer. Does your maximum price point change depending on whether you think you are getting the beer from the hotel or the store? Do you think it is fair for two different establishments to sell the same commodity for a different price? Read the rest of this entry »