April 6, 2009

Actual Demand Based Pricing

Kevin pointed out that the example offered in a previous post was over-thought, which is absolutely correct. In my example, I claimed that our increased demand caused the back-end system to proactively increase the price of a flight to Italy. This is not entirely correct. Kevin offered the more realistic situation - we bought all the cheap seats of their promotion, which is a more believable scenario.

This is of course, absolutely correct - Thanks Kevin. According to Wikipedia, the biggest set of encyclopedias ever recorded, demand based pricing
is any pricing method that uses consumer demand - based on perceived value - as the central element. These include : price skimming, price discrimination and yield management, price points, psychological pricing, bundle pricing, penetration pricing, price lining, value-based pricing, geographical and premium pricing. Pricing factors are manufacturing cost, market place, competition, market condition, quality of product.
Couldn't have said it any better myself.

This concept directly relates customer demand to the price of the good sold or the service rendered. This is prevalent in markets where high demand has exhausted the number of goods or services that can be purchased - any market where some customers will walk away empty handed. So Jonas Brothers Tickets, Game Systems (to an extent) and Plane Tickets.

This is a risky strategy - demand pricing can lead to reduced revenues and unsatisfied customers. For example, when Nate & AJ make it big and are selling out arenas, they can increase their ticket price to make more money. They can do this as long as there is high demand. So when they get addicted to drugs and begin to fizzle out, the demand will not be there. If their manager/booking agent/backup drummer keeps ticket prices high they will be playing to unsold venues, which still might be profitable. No one will be willing to spend the big bucks to see a band that has fallen from prominence.

Gauging the maximum price consumers are willing to pay (MPWTP) is a tricky subject and is difficult to generalize. Of course there are boundaries to this scenario - there is a maximum price because very few people would pay $1,000,000 to see Nate & AJ Live (not yet at least). There is also a minimum price, because a free show would mean chaos and riots in the streets (theoretically). In between the two poles is where capitalism takes place.

From here we can take this a variety of different ways: Forget the subject, understand demand, say there is no pattern, or just make a sweet product. Most firms and individuals will price at the most logical point; where they make the most money. But some cases come up with great and horrible ignorance of demand based pricing.

I like sharing my very basic thoughts about Economics, even though they are sometimes shortsighted and incorrect. In the future, I hope to share more detailed concepts and examples.


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  2. Link got messed up in previous comment, anyway for a sweet example of demand based pricing check out Amie Street:


  3. That is a great example. Looks like it would be a great way for people to get their music out there while still getting some kind of revenue.