Episode Description:
What is price elasticity? How does it affect your business? How do you properly price a product? How do you determine the flexibility in that price? How can you increase the value of your product or service to increase the price and become more profitable? How can increasing price reduce your profit? How can increasing volume reduce your profit even at a higher price? There are so many questions to think about my brain just exploded!
Action you can take right now:
- Write down three ways you can INCREASE the value of your product or service.
- Write down three ways you can MARKET the increase to your customers to improve the PERCEIVED VALUE of the product or service.
Episode After-Thoughts
Sadly, we are in a time of serious inflation. There has never been a more important time to review your supply costs, raw material costs, payroll costs, and overhead costs and being to re-evaluate pricing to ensure you are not absorbing increases by sacrificing your profit. Using the actions above take a moment to think about how you will explain to your customers a price increase – and consider the ways you can IMPROVE the value of your product or service instead of diluting it. In addition to inflation and the rise of prices, companies are also cutting service quality and cutting the size or scope of the product or service to even things out. I caution against this – and instead raise prices accordingly but work diligently to IMPROVE the VALUE!
Episode 32 Transcript:
00:00:00
If you were to raise your prices by 10 to 20%, how many sales would you lose?
00:00:07
If you were to drop your prices by 10 to 20%, how many sales do you think you’d gain and which is more profitable?
00:00:15
And how exactly do you determine price elasticity that more coming up on the marketing and service.com podcast?
00:00:32
Hey Justin Varuzzo here from marketingandservice.com the podcast to.
00:00:36
Help you build.
00:00:38
Your business by creating incredible customer relationships.
00:00:42
If you find value in this episode, please take a moment to follow or subscribe.
00:00:46
And if you want to do me a huge personal favor, leave a five star review.
00:00:49
It means so much to me and it’s what helps keeps me going.
00:00:52
And keeps me.
00:00:53
Motivating, I’d love to hear from you, so please hit me up on the marketing and service.com Facebook page.
00:00:58
What marketing challenges are you having with your business?
00:01:02
And what would you?
00:01:03
Love to learn more about let me know.
00:01:05
I’d love to hear from you. Can always send me an emailo I want to jump right into the concept of price.
00:01:14
Elasticity, or the price elasticity of demand and what this means is price.
00:01:19
Elasticity is expn.
00:01:21
Training the flexibility of your price.
00:01:25
Essentially, we know that there are things that if you price them lower, people will buy more of them and there are things that if you price things higher, people will buy less either because they cannot afford it or they choose not to afford it because there are better alternatives.
00:01:42
Available which are affordable.
00:01:44
The secret here is that there is not really a specific formula.
00:01:49
To determine how elastic your price is, of course you can test these things if you bumped up your prices 5%, will you lose a bunch of customers that will create a net loss?
00:02:01
Or might you just lose 1 customer but the other 99 customers will happily pay the additional price and you’ll actually make more money. And I know on the surface.
00:02:10
This sounds like a simple exercise, but I think there’s an element of this that a lot of P.
00:02:16
Miss and to me and I know I’ve discussed this a lot on the podcast.
00:02:21
That element is creating incredible value.
00:02:24
You want to create a great relationship that provides enormous value to your customer.
00:02:31
So while price elasticity of demand as a teaching theory.
00:02:36
Is used in economics and there are specific formulas that can be used to determine the price elasticity of something.
00:02:42
But in the case of a business that’s selling products or services, I think you have to look at price elasticity and.
00:02:49
Think about how much additional value can you provide if you increase your price, and likewise if you start with something too expensive, can you compensate and bring that price and reel it in a little bit and then create the demand that you are initially looking to create?
00:03:08
And I want to say this is.
00:03:10
Very different from supply and demand.
00:03:12
That’s something you hear a lot, especially right now we’re facing rapid inflation, supply chain issues.
00:03:18
Everything in consumer America is a disaster right now.
00:03:22
As I record this.
00:03:23
Podcasts and it is absolutely going to get far worse, and because of that there are some things that have gone up in price.
00:03:30
Like cars, it’s very difficult to buy a car right now because you simply cannot get one on the lot.
00:03:35
What that means is that dealers will charge a premium.
00:03:39
The premium that they’re getting away with charging is not because the car manufacturers.
00:03:43
Are suddenly providing a ton more value in their vehicles.
00:03:46
It is simply because you cannot find one.
00:03:49
So when the dealer does eventually get a car, they have 0 incentive to cut any deals and they’re going.
00:03:55
To charge murp or in a lot of cases more than murp.
00:03:59
Because there are people willing to pay it because of a very small supply.
00:04:05
But when we’re looking at price elasticity, we’re taking supply out of the equation.
00:04:09
We’re just going to assume for the purpose of this exercise, that the supply is plentiful and no matter how many you sell of whatever it is.
00:04:16
That you sell.
00:04:17
You can get more, whether it’s a service you can get more.
00:04:19
If it’s product you can always get more and those costs are going to be fixed for the sake of this example.
00:04:26
So obviously the goal with every product and service you sell is to maximize profitability but also maximize your total sales volume right?
00:04:35
If you sell something and you make a lot of money, the goal is always to sell more, but we know that this is always a bell curve, right?
00:04:41
So if you’re on the lower end of this curve, it probably means that you’re selling a lot more items, but.
00:04:47
If you raise the price, you wouldn’t lose that many customers, and that price increase would make you more profitable, right?
00:04:52
And then on the other side of the bell.
00:04:54
Of course, as a product gets more and more and more expensive, eventually you just price.
00:04:58
About it doesn’t matter how much value you offer, there is a hard limit on a lot of goods, and that is a limit that can often be tested and a limit that has been put to the test in a lot of examples.
00:05:11
So I don’t want to talk about formulas or mathematical equations or any of this really technical economic stuff.
00:05:17
What I want to do is.
00:05:18
Provide some real world examples of where we’ve seen how.
00:05:24
Companies secretly test price elasticity with the consumer and one of the ones that comes to mind, and the easiest one that would come to mind are things that are considered inelastic and what that means is the you know you think of an elastic band or rubber band, right?
00:05:42
Inelastic would be something that doesn’t stretch.
00:05:44
Which means it doesn’t have flexibility.
00:05:46
It means that you’re going to buy it no matter how much it costs.
00:05:48
For the most part, and when you look at this, you can look at something like milk.
00:05:53
Milk is something that families have to have.
00:05:55
They stay healthy and it is normally insensitive to price.
00:05:59
People will of course feel it and they’ll complain they don’t want to pay more for milk.
00:06:03
But you have to have it in the house and you are going to make a cut somewhere else before you make a cut on milk.
00:06:10
Gasoline, of course, is probably the number one because me personally I don’t drink.
00:06:14
A lot of milk but.
00:06:15
Gasoline, I do have to drive my car.
00:06:17
I have to drive to work everyone most people need to drive somewhere.
00:06:22
Gasoline is something that is inelastic, whether it’s $6 a gallon or $2.00 a gallon, you still have to fill your tank and go to work. Now there could be some things that.
00:06:34
Start to curve that demand down with gasoline. If it’s $6 a gallon, you may choose not to do your cross country drive this summer because it would be astronomically expensive.
00:06:45
So those are things that you might put off for a different time, but for the most part you’re going to pay whatever it is because you have to.
00:06:53
Now, of course there is a limit.
00:06:55
Where it could potentially let’s just say it’s $150 a gallon. You might say it’s not even worth going to work anymore at that price and you just stay home. If that happens, then nobody buys gasoline. Nobody makes any money and this whole experiment is a bus.
00:07:10
So again, we’re trying to talk about these things within reason.
00:07:13
I know there’s always extenuating circumstances and there’s times things get kind of crazy and there’s always exceptions to every rule, so don’t take this as the law.
00:07:22
Just take it in and kind of absorb it to think in the back of your mind how companies have done this.
00:07:28
So let’s talk about some things that have shown to be elastic.
00:07:33
One of the first things that comes to mind for me is Apple. Apple introduced the initial original iPhone in 2007 and just a few months after it was released.
00:07:45
I believe it was released if I recall in June of 2007. In September of 2007 they realized they were not selling.
00:07:53
Nearly as many of these, what at the time was a groundbreaking device as they expected.
00:07:59
Now the reason was it was way more expensive than any other cell phone on the market.
00:08:05
And despite the enormous value proposition that was built into that device.
00:08:11
It literally was too expensive.
00:08:14
Everyone complained about it when it came out and they said this is really cool, but there’s just no way we can justify spending this much money on a cell phone.
00:08:22
Obviously today that debate is a moot point, but back then you got to realize most phones were free from their carrier, and if you did buy a phone, you were generally.
00:08:31
Buying it for about 2 or $300. The carrier was covering covering the rest, and even if you bought the phone outright new you were normally spending about four or $500 on top of the line premium phones.
00:08:43
So when the iPhone came out, now you’re talking 6, seven $800 for a phone that was insane.
00:08:49
So just a few months after the phone came out, Apple cut the price $200 on that phone and this was one time and I know Apple has had issues in the past with PR, but this was probably known as one of the worst PR blunders that Apple ever made. They really went out.
00:09:09
With a greedy mindset and said, we can make a windfall on this new device because it’s so cool.
00:09:16
And the bottom line is that consumers just weren’t willing to pay that much for a phone, regardless of what the value was.
00:09:23
Their only solution was to drop the price by $200. When they did this. Of course they had a surge in sales and they sold a lot more phones and we now know looking in retrospect, it was the right thing and it created a revolution.
00:09:36
In cell phones, but in 2007, if you had just bought your phone and now three months later you found out not only is it $200 cheaper, but they dropped the model you bought and it was the next model up. They dropped by two.
00:09:51
They were furious. They were so angry that Apple had actually came out and said we will issue everyone a $100 refund.
00:10:00
Who bought the phone at the original price? $100 is only half of 200. They’re apple. They got away with it. This is not the right way to test.
00:10:12
Now, of course there’s such thing, and it’s very prevalent in the tech world, with early adopters as an early adopter.
00:10:18
You’re the type of person who loves new technology and you’re willing to spend top dollar.
00:10:22
For it and you.
00:10:23
Know that over time the price of that technology comes down.
00:10:26
If you’ve ever bought an electronic device, chances are whatever it is is far cheaper two years later than it was.
00:10:32
Two years before, and in a lot of stuff in tech within 10 years, it’s literally garbage and you’re throwing it up.
00:10:38
Right, so with that in mind, you can charge early adopters more for something that’s brand new because you’ve got to recoup a lot of costs upfront, and the hope is as more people buy the device and the adoption spreads the costs of manufacturing will start to come down.
00:10:54
The processes are improved, the costs of the overall technology starts to come down.
00:10:59
And you have a more profitable device at a more affordable price point.
00:11:03
That’s normal, and that usually happens over six months a year, two years.
00:11:08
It does not usually happen within two months of a product launch, so this was a really bad way to test the waters, but they did nonetheless.
00:11:17
And in their defense, this was something that they had nothing to compare to, so they weren’t quite sure what the perceived value would be.
00:11:25
I’m sure they had a lot of ideas and obviously they were more optimistic than what reality was at the time in 2007. So in that same era, let’s move and look at serious.
00:11:37
XM for a second Sirius and XM were two different companies. They are digital radio in the car and I was an early adopter for XM and at the time I believe I spend probably about 1500.
00:11:49
Dollars to add a satellite receiver and a new stereo and an antenna and all this stuff on my old little Nissan so I could get serious about the time I could get XM Commercial Free radio.
00:12:01
This was before streaming services and before Internet based cell phones, so this was awesome.
00:12:08
Very quickly though streaming services.
00:12:10
Became more prevalent, the iPhone became more popular.
00:12:12
Blackberries were Internet based.
00:12:14
Android phones started coming out and the writing was on the wall.
00:12:17
That more and more people were using services like Pandora.
00:12:21
And there were earlier ones before that, but and now eventually you moved to Spotify and then later Apple Music.
00:12:27
And now most consumers are streaming their music live, but SiriusXM actually really kind of tackled this and I don’t know that they really get the credit they deserve for what they pulled off.
00:12:41
But they knew pretty early that this streaming thing was starting to take off, and it was a threat to their biz.
00:12:47
Except the threat to their business was going to be exponentially worse than the threat that they pose to terrestrial radio, which at the time and still is, was completely free.
00:12:57
But it was AD based. You pay a premium, you get no ads. We know this model. We’ve seen that a lot since the early 2000s, but SiriusXM saw that streaming services.
00:13:08
Was going to become a threat because if you could stream music on your device anywhere you are at any time and it was affordable.
00:13:14
Why would you spend an extra $1215 a month to have digital radio in your car which was commercial free but?
00:13:22
Not on demand, so they couldn’t match the value proposition of the streaming services. So what they did was something that at the time was absolutely insane, but it did pay off in the long run in 2006 Sirius. This was before they merged with XM. Sirius acquired the.
00:13:42
Rights to Howard Stern for what was reportedly a $500 million five year deal.
00:13:49
Now in radio land to make $100 million a year on a radio contract was unheard of, and at the time Sirius got a lot of criticism, especially from investors and just people like me who followed the story and said, Oh my God, what are they thinking? $500 million. How do they possibly ever make that up?
00:14:08
Keep in mind this was before Netflix was streaming. This was early on. I know it feels like it’s been around forever, but Netflix only started streaming in 2007, so $500 million before Netflix was a streaming service.
00:14:22
Sirius XM, I keep saying SiriusXM, it was just serious at the time. Acquires Howard Stern and his show for $500 million. Why?
00:14:33
Because they were creating a value you couldn’t get anywhere else, you can’t get Howard Stern on Apple Music.
00:14:42
You can’t get Howard Stern on Spotify.
00:14:45
You can’t get Howard Stern on Pandora.
00:14:49
The only place you can get Howard Stern is on Sirius.
00:14:53
XM and they knew at the time when they were serious that Howard Stern had an incredible.
00:14:59
Loyal fan base and that a lot of those listeners would be willing to spend 10 to $15 a month just to listen to Howard Stern.
00:15:08
And the reality is, most of the people who did sign up during that time really did probably primarily listen to Howard Stern.
00:15:14
And then on occasion would tune into some other channels, but this started.
00:15:19
This trend of creating proprietary content.
00:15:23
And by creating proprietary content you are creating an environment where it makes it more difficult for someone to find alternatives.
00:15:32
If you loved Howard Stern, you’re probably not going to just fall back to listening to Glenn Beck and have the same experience $500 million later. SiriusXM locks up.
00:15:43
A huge library of what is now proprietary content, which enormously boosts the value of their service and eliminates competitive pressures because nobody else has.
00:15:56
Is this in essence creating their price to be more elastic? They could raise it now a dollar or $2.00 and say, hey listen, we are giving way more than we used to give and we know that it’s worth the extra dollar or two and they have done this. They acquired XM, Sirius and XM.
00:16:16
More vicious competitors.
00:16:17
It was always a downward war on price.
00:16:19
Of course, when they merged, there was some discussion whether it would get regulator approval or if they would become a monopoly.
00:16:28
They did get the regulatory approval.
00:16:31
They basically did become a monopoly of satellite radio.
00:16:34
Streaming and of course the price is despite them saying they had no plans to increase the price at the time.
00:16:40
Within moments of that deal closing, maybe it was within a year it was right outside the regulatory window. The prices went up significantly year after year, and now it’s about triple what it was back in 2006. But they do offer a.
00:16:54
Ton of content you can only get on SiriusXM.
00:16:59
Whether it is the audio broadcasts of television networks, your favorite news, whether it’s CNN, Fox weather, that’s all there and you can’t get that on Spotify, you can’t get that on YouTube and you can’t get it on the other streaming services they had created a value proposition that would allow them to be more elastic and allow them.
00:17:20
To increase the price while still growing their subscriber base and that laid the framework for securing many many more proprietary exclusive deals.
00:17:31
Which leads me to the next one, Netflix, just a year later, they a DVD rental company.
00:17:39
They start getting competitive pressure from the likes of Blockbuster.
00:17:43
Blockbuster was a huge rental house, and even though Blockbuster was on its way out, as Netflix became more and more efficient.
00:17:51
Blockbuster also invested a ton of money into digital streaming services to directly compete with Netflix.
00:17:58
The answer was that Netflix decided to make the show House of Cards.
00:18:04
It was a fantastic show and again it was proprietary.
00:18:07
They spent a lot of money on the production way more than any other company would have at the time. It was very similar to SiriusXM. Spending $500 million on Howard Stern.
00:18:19
The numbers weren’t as large, but they spent a ton of money to acquire the rights to House of Cards, and they spent a ton of money on production to make sure that it was the best show on television.
00:18:30
And by all accounts at the time it was, and it was a huge.
00:18:34
Huge hit again. It’s set the groundwork for Netflix to say we’re only charging $8.00 a month for streaming.
00:18:41
How can we move the needle on this and continue to have new adopters and new subscribers and increase our price another dollar, another dollar, another dollar, another dollar?
00:18:53
And they did this by?
00:18:54
Building out a huge library of proprietary content.
00:18:58
And when you think about, it makes a lot of sense, because the way they were doing it, they had to license these movies from all the big studios.
00:19:04
And there were probably amazing costs involved in doing that, and now they make their own content.
00:19:10
They can do whatever they want with it.
00:19:11
They’re not paying licensing fees and and it’s there.
00:19:14
So again, it’s proprietary content you cannot get anywhere.
00:19:18
Else, in fact, TV networks were almost giving away the old TV shows because nobody was going to spend money for things like Seinfeld or the office at the time.
00:19:30
These shows had had their run and it wasn’t realistic that people were going to go back and re watch them and no one was willing to pay for them.
00:19:36
So Netflix secured a lot of these.
00:19:38
Deals to stream these TV shows for pennies on the dollar of what it probably should have been in for what it generated for them.
00:19:45
It was brilliant, so this is another example of adding enormous value and giving you the ability to be more flexible on your price.
00:19:55
Now here’s the thing.
00:19:56
If Netflix was to cut its price in half today, would they double their subscriber base?
00:20:03
My guess is not.
00:20:05
I think that anyone who has Netflix has it because they know the value of it.
00:20:10
I also think that if Netflix raised their price two or three dollars a month, they probably would get away with it.
00:20:15
At this point, but we’ll see and I’ll keep my fingers crossed because I really don’t want to pay for anymore streaming services.
00:20:22
Another company we can look at as a case study would be Tesla.
00:20:26
Tesla offers full self-driving software on all of their new cars. It doesn’t actually exist yet, but they are giving the promise that if you pay now in the near future, you will have semi autonomous driving capability with your car. This started out, I believe it’s $6000.
00:20:46
It quickly went to $8000 for the option. Then Elon Musk said, listen, I think this is going to be so great it’s going to save you so much money we’re going to move it to 10,000 and there he has speculated that he will probably move it up to $14,000.
00:21:02
Soon, so there’s a couple things going on here.
00:21:05
We got to think about, but first he’s selling something that doesn’t even exist yet.
00:21:09
So again, he’s kind of in that iPhone territory where he’s testing the waters.
00:21:13
What is it worth for someone to have a car that drives itself?
00:21:17
And that’s a kind of tough question, because you could be the type of person that if you could be on your cell phone.
00:21:23
In answering emails, when you would normally be in your car for an hour a day, maybe you could generate $1000 an hour or $1000 a day in additional revenue because of the work you can accomplish while you’re in your car being driven around, it gives the luxury of.
00:21:40
Of that first class black car experience that the which rich and powerful will use to be more productive.
00:21:49
And it brings it down to the middle class.
00:21:51
Now we could all have a car that comes picks us up at the door and brings us to where we need and we don’t have to be involved in the process and continue to work and earn and produce, but again.
00:22:01
It doesn’t exist yet, so it’s really hard to determine exactly what that value is worth.
00:22:06
What Tesla did was a little bit different than Apple, because again, they’re selling this, and it doesn’t exist yet, so they sold to people early on and they said, hey, it’s going to be $8000 and then they raised the price to 10,000.
00:22:19
Now that people who paid 8000 aren’t going to be upset, the price went up. My guess is way more people.
00:22:26
Than they expected actually shelled out the 8 grand.
00:22:29
My guess and again I’m not there.
00:22:31
I don’t know.
00:22:32
I’m just making assumptions.
00:22:33
My guess is that they had a target in mind and they blew past it. They raised the price to 10,000.
00:22:40
And my guess is again more people than they thought were willing to pay the $10,000. Then Elon Musk comes out and threatens to raise it to $14,000.
00:22:51
Again, you’re not going to alienate any of your existing customers.
00:22:53
They’re going.
00:22:54
They’re only going to get happier.
00:22:55
They’re going to feel they’ve gotten more value now, literally, the value of their car.
00:23:00
Is going up every time he increases the price on this add-on.
00:23:05
So maybe saying 14,000 is just to drive more people to 10,000. Or maybe he really will increase the price to 14,000 and really test if that is the right price.
00:23:15
And of course, if a ton of people pay that and it does not have a negative effect on the adoption rate, maybe it goes up to 15,000. Maybe it goes up to 20,000 this.
00:23:25
Is a brilliant way to test the waters for price elasticity.
00:23:29
What’s happening right here is you’re selling a product that doesn’t exist at a value that you don’t know what the value is.
00:23:35
It’s almost like a reserve auction on eBay.
00:23:38
It’s really kind of wild so.
00:23:41
For some people, I’m sure they’d be willing to pay much, much more than 15,000, and for a lot of people they probably say, yeah, it’s not worth 15 grand to not have to hold the wheel while I drive to work in the morning.
00:23:51
The other brilliant part about this model is if he does need a quick cash grab.
00:23:57
Let’s say it’s the end of the fourth quarter.
00:23:58
The numbers aren’t looking quite as good as they.
00:24:00
NB He’s already increased the price of 14,000. He can send a little note out to every Tesla driver says hey buy this before the end of the month.
00:24:09
And here’s a coupon for $4000 off. Keep in mind he’s just unlocking software here, so there is no associated costs with each additional car that’s added on. That’s the brilliance of software licensing. It’s what’s made Microsoft.
00:24:21
Google and Apple, the richest companies on the planet.
00:24:25
So another place we see price elasticity is actually by the government I talked about, economically speaking and a little more tech.
00:24:32
Nickel in this case we can talk a little bit more legal.
00:24:36
I’d mentioned before about monopolies with satellite radio and the regulators and the challenges that XM and Sirius had in their merger deal.
00:24:44
So this is something I learned in researching this episode.
00:24:47
The government actually uses something called an SSN IP test.
00:24:53
And that stands for small but significant and non transitory increase in price. What this is is a test that says if an organization can profit from a 5% increase in their prices for at least one year.
00:25:10
Then that company is will say eligible for further investigation. Now they’re not saying if you can increase your prices 5% and be profitable that you’re a monopoly.
00:25:20
What they’re saying is really the opposite, which is Part 2 of this.
00:25:25
If consumers can find alternatives that would create a loss for that.
00:25:30
Company then there is absolutely no case or basis for challenging a monopoly.
00:25:37
So I realize they should probably write this the other way around, but really what you’re testing is if this company increases the price.
00:25:45
Is there someplace else for people to go? For example, if Netflix tomorrow said they’re going to make it $50 a month, would a lot of people just cancel and stick with HBO Max and be happy with it or Paramount?
00:25:57
Or Hulu, or all the other streaming services?
00:26:00
Or would they all just pay it and deal with it because they have to have all those shows that are on Netflix?
00:26:05
I would guess that a lot of people would at 50 bucks a month, would probably find alternatives that were more affordable and say that $50 a month is not worth watching The One Show that I really enjoy.
00:26:16
That’s a proprietary Netflix show.
00:26:18
I’ll see it at someone elses house, but again, this is an interesting test because here we are applying a specific mathematical formula.
00:26:25
To determine
00:26:26
If an organization that you suspect could be a monopoly is even eligible to be legally pursued as a monopoly, right?
00:26:35
Because the bottom line is, if a monopoly raises their price 5% and they’re non monopoly anymore and there’s alternatives, then they’re not really monopoly in the 1st place, and I think that’s kind of what we saw with SiriusXM.
00:26:46
And the regulators at the time, they said listen, there’s streaming services.
00:26:50
There’s other things.
00:26:50
There’s alternative ways to.
00:26:52
That music on demand in your car and it doesn’t matter if we monopolize satellite radio because the satellite is just a delivery mechanism and a cell phone is delivering.
00:27:02
There’s other competitive delivery mechanisms, so going through all these stories, what really is the bottom line and what do I want you to understand my goal.
00:27:12
Is that you understand that?
00:27:14
Creating additional value can afford you the ability to increase your prices and in turn hopefully your profit, not necessarily with an underlying cost increase, right?
00:27:29
So if you sell a product, if you can somehow create more value.
00:27:34
In that product you can obviously raise the price, even though the cost of the product doesn’t change.
00:27:41
And the better you can increase the value, the more elastic your price is going to be, and the more you can charge.
00:27:48
And we see this all the time.
00:27:50
Come on, this isn’t new.
00:27:51
You know you’ve been to businesses you buy.
00:27:52
You’ve probably bought something really stupid and overpriced in your lifetime because you just had to have it, because in your mind there was some incredible value.
00:28:00
That was offered that you couldn’t get elsewhere. I mean, fashion is the epitome of this right? There’s a reason that a Michael Kors bag can be 3 or $400, or that Louis Vuitton luggage could be $20,000 in people buy it.
00:28:16
Is it really worth $20,000 in materials and construction? There’s no way, of course not. They create a value proposition and they have price elasticity.
00:28:25
Now here’s the thing. If they lowered the price, if you could buy that same Louis Vuitton luggage for $500, would they sell a lot more? Oh yeah.
00:28:35
Yeah, they’d sell way way more, but you have to think about this as you sell more.
00:28:40
Liam, there’s a lot of associated costs that start to drive up rapidly.
00:28:45
You have storage costs, warehousing costs, transportation costs.
00:28:48
Now you have to hire more warehouse workers, you’ve got forklifts, you’ve got palletizing going on, you’ve got shipping mechanisms, you have to keep track of all sorts of logistics from suppliers and supply chain.
00:28:57
We see this today.
00:28:58
It’s a disaster.
00:28:59
I started to show that the supply chain
00:29:01
Today is nuts and just because you can make more money in theory with a fixed costs.
00:29:08
By lowering the price doesn’t actually mean you’re going to make more money as we see with these fashion designers the cost of warehousing and distributing 20 million pieces of a Louis Vuitton luggage set is actually going to be dramatically more expensive per unit than if they’re handcrafting one at a time in a factory.
00:29:28
Somewhere and then shipping them off at $20,000 apiece, and you see this with lots of luxury goods, right? Like a Ferrari could Ferrari drop their price and be?
00:29:36
A $20,000 car and probably not. They’d have to make a lot of things changed and different to accommodate that price point.
00:29:45
But yeah, of course they’d sell a lot more cars.
00:29:47
They could also be little and devalue the perceived value of the Ferrari brand if they did that.
00:29:54
And sometimes you get away with it, we’ve seen.
00:29:57
BMW do it right. BMW’s were in the 80s, cars that only rich people do.
00:30:01
And now they keep introducing less expensive and more economic models, right? You have a Model 1 now you can get into a BMW for under $30,000.
00:30:10
Some companies take that, but Mercedes done the same thing in the in the 80s.
00:30:13
If you drove a Mercedes, you were rich.
00:30:15
Now, if you want to lease a Mercedes, it’s not all that different than leasing an Acura or any luxury.
00:30:20
Car, for that matter.
00:30:21
But it’s certainly not out of the realm for a hardworking middle class person to have a BMW or a Mercedes, but these are decisions.
00:30:29
Things that are not binary decisions.
00:30:33
There are a ton of factors that you have to take into consideration.
00:30:37
There’s a lot of thought and there’s a lot of testing and like the apple example, you’ve got to be super careful on how you test this.
00:30:46
You can’t just have these wildly crazy prices that are going to swing.
00:30:50
Up and down and hope that you find some sweet spot and that’s what makes it so difficult is that you can’t test it and you know I’ve said on this show a million times.
00:30:57
Test, test, test test that everything is about testing.
00:31:00
The more you test, the better and the more efficient you can become, the better your campaigns will be, the better your advertising.
00:31:05
We just test, test, test.
00:31:06
Test test.
00:31:07
You can’t really do that with pricing.
00:31:10
You’ve got to be really careful, so like Apple did, you’ve got to take all the information you have and hope for the best.
00:31:17
And if you are off, those changes have to come slow and maybe quietly, especially if you start something that’s too expensive and you get.
00:31:26
A decent adoption rate, but you know that you really need to bring that price down.
00:31:30
You can’t do it overnight, and if you’re going to start to decrease the price on something and you.
00:31:36
Have existing customer.
00:31:37
There’s you’ve got to figure out a way to give value to those older customers so they don’t feel like they got ripped off.
00:31:43
Hey, that’s all I got for you today.
00:31:44
I I I know this is kind of a obscure discussion and there’s not really a lot of action items you can take right now.
00:31:51
But given the supply chain issues and seeing a lot of the new technology that’s coming out these days, it really made me start thinking about.
00:31:58
How much would I pay for certain things? How much would I pay for Netflix? I know if it went up a dollar I wouldn’t cancel it. I know if it went up $2.00 a month I wouldn’t cancel it.
00:32:09
If it went up $10 a month, I might cancel it. I can tell you during COVID I cancelled every subscription I have because I had a fear of the unknown and I didn’t want to waste money on television and entertainment with with the unknown of whether or not there would be any money coming in the next week. The next month the next year. Who knew what was going to happen? Those were the 1st.
00:32:29
Things to go for me was the streaming services. They’re expensive, it adds up. SiriusXM, Netflix, Hulu, Paramount, Apple music, Spotify.
00:32:36
Before you know it, you’re spending 100 to $300 a month on all these streaming services. It’s insane. It ends up being more expensive than cable in the long run, because every network.
00:32:45
Knows that they’re going to hook you on one piece of proprietary content that makes it worth it for you.
00:32:52
As a business owner, you’ve got to think about what is that piece of value that you can add to your product or service.
00:33:00
That will make people less price sensitive and in effect make your product more price elastic.
00:33:08
Listen, thanks so much for listening.
00:33:10
If you find value in this episode again, please just take a moment to follow or subscribe.
00:33:15
Leave a review.
00:33:16
Hit me up on Facebook marketing and service.com. There’s always some extras in the show notes on the website thatsmarketingandservice.com and if you might get in touch with me. 00:33:28
At marketingandservice.com thanks so much. I’ll catch you on the next line.