In this video, learn about basic supply and demand.
- [Instructor] The cornerstone of pricing is supply and demand. The concept of supply is simply the amount of a product that businesses will make more sale based on its price. The supply of a product is determined really by how much the product sells for in comparison to how much it costs to make. If a product sells for a lot more than it costs to make and profits in making it are very high as a result, then many different businesses will flock to make that product and supply rises.
If profit margins are low, then supply falls. We can represent all of this graphically with a supply curve. This is an illustration of a supply curve. As we see, the line slopes upward. That indicates that as product price rises, businesses produce a greater quantity of that product. The higher the price, the more the businesses produce. This is the supply side. Now, the other side of the coin is the customer.
We refer to the customer side of the business equation as demand. Demand is just the amount bought by consumers, our customers. Demand curves slope down just as supply curves slope up. Now the reality is, as probably everyone who's been involved with business knows, cheaper prices, all else equal, lead to more sales. When prices are cheaper, people will buy more of any product. Pricing analytics is about balancing supply against demand and maximizing profits as a result.
We can represent this balance between supply and demand graphically. So our demand curves slope down. As prices fall, people buy more of any given product that's out there. When we unite supply and demand, we determine what our optimal price is. So this graph shows us our supply curve sloping up and our demand curve sloping down. Where supply and demand meet, that point is the price that'll be charged in the market.
The question for businesses is how to maximize their profits given the supply and demand they face.
- Reviewing the pricing strategies available to firms
- Analyze pricing relationships
- Identifying different types of price discrimination
- Using pricing and revenue drivers to maximize profits and revenues
- Assessing the impact of competition and the competitive landscape
- Using variance analysis walks to analyze price and do cost analysis
- Gathering data to build pricing models and assess profit impact