Join Stefan Michel for an in-depth discussion in this video Pricing economics, part of Value-Based Pricing.
- The second capability we are talking about is pricing economics. You need to understand the different aspects of your cost structure. That does not mean that you should base your price solely on cost, that would be cost-based. You still want to capture what the customer is willing to pay but you need to understand the costs of your company in order to figure out the best price. Just to give you one example out of many, if you are a book seller, you have a book store and you bought a book for $5 and the regular price is $10 but it's in the shelf, no one bought it for a year.
Which price should you charge for this book? Now you can say, "well, I can not go below $5 "because then I would lose some money "because I paid $5 for it." But if you think about it, the $5 you have paid already whether you sell it or not. So actually, these $5 are considered sunk costs and they should not matter. So for you, being the owner of that book that apparently no one wants, what you can do is you can sell it for $1, you can sell it for $4, or you can keep it in the shelf for $10 and wait until someone buys it or you can throw it away and just say, "This book will never sell." So there are different costs that apply and it's not just the variable cost, how much you paid for the book, but also the opportunity cost of using that bookshelf for a book that apparently no one wants to buy.
So one aspect of pricing economics is to have a better understanding of which costs are relevant for a pricing decision and which costs are not relevant.