Who Sets The Price? Buyer or Seller?

I often see people and companies making the mistake of thinking that they can set the price. They see the rare example of Apple setting the price and getting away with it. However, even as a fan of Apple, I would not buy a new iPad when other tablets like the Kindle Fire are 10% of the price.

If you own a home, then you might ask, what is our home worth? But you cannot know what it is worth until you agree to sell it to somebody. Sure there are proxies for value out there from when your neighbors sold their homes, but it isn’t the same.

In the picture above, this vendor has large quantities and varieties of fish. In addition, just one street down, there is probably another vendor selling fish. The buyer has numerous choices, and they will determine the price that they will pay for the fish.

[ Price – Cost = Profit ] Becomes [ Price = Cost + Profit ]

Mathematically, these equations are equivalent, but not psychologically. In the first, the person sets the price then the cost comes out and what remains is profit. This equation erroneously provides the power to the producer to set price.

However, the producer cannot set the price that it will sell at… I could make a lot of profit selling $500 hammers, but who would buy?

The second equation psychologically implies that the price is fixed by the marketplace, and thus the only way to increase profits is by reducing cost (without reducing quality) or increase the volume of sales.

Price Fixing Schemes Only Work If The Marketplace Accepts Them

Over the past year, we have seen more price fixing schemes from board game publishers. If your game warrants (and the marketplace accepts) a $60 MSRP, then a sizable and growing cross-section of Gamers will only be willing to pay $40-45 online for it.

While there might not be an exact replacement for your game, there is a replacement (consider all of the games being made). Therefore, you will lose sales.

There goes increasing the volume of sales, so you will need to turn to cutting the cost. And if you cut the cost, the likelihood of the marketplace accepting your pricing goes down further. Cutting costs while maintaining or even increasing quality is tough work.

Conclusions:

Fighting the customer on the price they are willing to pay is a losing battle.

Just because there is somebody out there that is willing to work harder, work smarter, and work for less doesn’t mean that the answer is price fixing.

-Michael

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