Why fixed pricing is always wrong
Or to be more precise… when you have a single fixed price
It’s always wrong.
Essentially it goes back to the basics of economics. I have always been fascinated by economics – so much so that I took a degree in it. One of the most important things I learnt was the theory of the equilibrium price.
Or in other words the fact that price should be set where the supply and demand curve intersects.
When you look at a visual representation of that it shows an area above the equilibrium price and below the demand curve that is the consumer surplus.
That is also the amount of profit available if we can tap into the fact that different customers will pay different prices.
You can watch the video here.
The concept of magic price
In a previous video I looked at the concept of magic price and how you figure out your magic price. I looked at the situation of you selling a tax return that costs you £50 in terms of costs to deliver. In this scenario I imagined three potential customers.
The first, customer A, is willing to pay you £200.
The second, customer B, is willing to pay you £150.
The third, customer C, wants to pay £100.
The analysis shows that if you charge £150 you maximize profits which are 50% higher than if you chose £100 or £200 because you will earn £100 profit from the first and second customers making a total profit of £200.
But, charge exactly what each customer is willing to pay then guess what?
You can earn more.
Customer A pays us the £200 which, minus the £50 cost, gives us £150 of profit.
Customer B will only pay £150 but we still make £100 profit.
Customer C pays us the least at £100 but we still make £50 of profit.
Now we have made £300 in profit – 50% more than if we chose any of those three price points and charged every single customer the same price.
That is the power of price discrimination.
If you only have a single, fixed price it’s wrong.
If you want to find out more read my book – “Effective Pricing for Accountants”, available either as a physical copy or PDF.
Wishing you every success on your pricing journey
Chartered Accountant, public speaker and #1 best-selling author of
“Effective Pricing for Accountants”
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