Katrina Lamb | November 16th, 2009
Filed 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 | 2 Comments »
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 »
Katrina Lamb | October 27th, 2009
Filed under: Managers View | Tags: actively managing the price lever, Adam Smith, Adam Smith's classsical economics, aristotle, B2C, blaise pascal, decision making under uncertainty, demand management, dining out, fair price economics, fair pricing, manage uncertainty toward a more profitable outcome, micromarketing, paul krugman, pierre de fermat, price optimization, pricing under uncertainty, product mix for fairprice, revenue optimization, risk and return, thomas aquinas, uncertainty, What is a fair price? | 5 Comments »
Businesses seek to maximize the value they can obtain from their revenue models. Price is the key lever decision-makers can operate to influence revenue, and in recent years a growing number of businesses have sought to implement strategies for actively managing the price lever – strategies such as demand management and revenue optimization. However businesses are also highly sensitive to the perception by individual consumers and the society at large that their prices are fair, in other words that they do not violate widely held individual or societal norms. Fair pricing matters – it matters to me, and to you, and perhaps ever more so in a climate characterized by economic uncertainty, downward pressure on demand and a perceptible decrease in the citizenry’s trust of public and private institutions.
Fortunately for business decision-makers, fair pricing and optimal pricing are not at odds with each other but can comfortably coexist. Over the course of the coming weeks my colleagues at Sentrana and I will be approaching the rich topic of fair pricing in a series of exchanges on this blog.
debating the age-old question of fair price
What is a fair price? This question has perplexed humanity throughout history. Leading thought output of the ages, from Aristotle’s Nicomachean Ethics to the Summa Theologicae of Thomas Aquinas, Pierre de Fermat’s probability proofs and Adam Smith’s classsical economics, have all weighed in with considered opinions on the fairness and justness of alternative ways to price economic goods and services, and the debate continues today. A series of letters exchanged between Blaise Pascal and Pierre de Fermat in 1654 is often regarded as a primal cause of the development of modern probability theory: this exchange was actually an attempt to establish a scientific basis for the notion of fair price. In his paper “The Unity and Diversity of Probability” Rutgers professor Glenn Shafer shows how these letters created hypothetical games of value that we today can recognize as the application of probability methods to defend a price as ‘fair’ under conditions of uncertainty. Read the rest of this entry »