10 Things that Affect your Products Pricing or The Efficient Market Hypothesis of Product Pricing

» Posted by on Dec 4, 2012 in Business Strategy, Marketing, miscellaneous | 0 comments

10 Things that Affect your Products Pricing or The Efficient Market Hypothesis of Product Pricing

 Like everyone else in the country, I spent a portion of last weekend shopping for a few gifts, some for my family and some for me.  As I shopped, I was struck with the concept of how product pricing has changed.

Pricing a product has always been challenging. In the old days (you pick the time frame) you would spend some time in determining your costs, what you needed to make to stay in business, and what similar products were selling for. You mix it all together, say a prayer to your heathen god, and then set your price. Then, come hell or high water, you would stick to the price until forced to change it. Price was the last thing that you changed.

 That worked pretty well for a very long time. People would pay “the going rate” for a product and not think much about it. Competition was in place but it was a “rough cut”; you could not be over the going rate by a large percentage.

 Economists who study the financial markets on a macro level have named a concept to help explain the current market in terms of stock pricing: the Efficient Market Theory. Sometimes called the Efficient Market Hypothesis, it states that markets are “informationally efficient.” This means that it is nearly impossible to get better than average returns on a stock these days – any information available to the public (that would be any information that you won’t get sent to jail for using) is available to the entire public, and therefore already baked into the stock price.

 It seems to me that the product market is now also “informationally efficient.” Being aware of it will help you to remain competitive.

 What has changed:

  •  The Internet. The internet allows for easy comparison of prices and access to many sellers. Let’s use a technology product as an example: say that you want a 40 inch TV. Rather than go to a local store and purchase one, as you might have done 10 years ago, you have the option of searching for both that same TV (the exact make and model) from any number of retailers (both internet and brick and mortar) for price and availability. It is relatively easy now to determine exactly the lowest selling price for your new TV. If you allow for the concept of “substitute goods”, in this case other TV that are similar to the one that you were looking for, there will be several (or many) brands of 40 inch TVs that you might find acceptable and you may get an even lower price for one of these.
  • Shopping Holidays. Not that many years ago, there was no Black Friday or Cyber Monday. Depending upon who you ask, the idea of selling goods at discount the day after Thanksgiving was used as far back as 1924 with the Macy’s parade.   The term Black Friday goes back to the 1970’s. (Some feel that is was from the fact that so many cars were on the road and others that it is when the retailers first turned profitable for the year – with finances “in the black”.) The term Cyber Monday was coined in 2005 and some feel it coincided with faster internet access to homes which allowed for on-line shopping.   These shopping “holidays” are used to extend the holiday shopping season and the trend is to extend these holidays to get a jump on other retailers. They are not likely to go away anytime soon.
  • Review Sites. Pick the product and you can now find at least one if not several websites that will review and compare the product that you are looking for. The days of looking things up in a battered library copy of Consumer Reports are long gone.
  • Loss Leaders. This is an old concept updated. In the past, companies would discount prices on a limited number of products to be below their costs. Why? Because it gets you into the store, and studies have shown that if they get you into the store they have a better idea of selling more things when you are there. Stores still use this concept to sell more goods (like a particular model of TV at a very low price, but only if you go into the store, and in limited quantities.)
  • Discount Sites. With timed offers, sites such as Groupon, Living Social, Google Offers and others change the way that consumers think about the price of products.
  • Mobile Devices. The ability to walk along an aisle in a store with your phone and review what you can purchase that product for on-line or at other stores, acts to drive home the “efficient market” for goods. If you do not match the going rate, you will increasingly not get the sale. This leads to the next point.
  • Free Shipping. Internet and brick and mortar retailers now use discount or free shipping to entice shoppers. I had a big box retailer ship me a 400 pound stove (off-season) for free to get my business. (Which they did!)
  • Energy Costs. Countries like the US are currently energy importers, but the advent of new technologies to drill for oil and gas are expected to make the US energy independent or even an energy exporter in the decades to come. This changes the pricing of manufacturing and transport.
  • Internationalization of Money and Manufacturing. “ Made in China” with low labor and less restrictive environmental laws have changed manufacturing. Product companies need to show that their product is not comparable, or match the price of the import.

 

This “Efficient Market” for goods as a result of these changes makes prices of goods more consistent. It is nearly impossible to compete on dollar pricing alone. What to do? To be competitive, companies (like yours if you work in a large company that produces consumer goods) have been forced to think about pricing in new ways. The concept of pricing is more fluid, and will continue to be going forward.

 

Submit a Comment

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>