Comments on: What’s the relationship between cost and price? http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/ Sat, 20 Mar 2010 18:05:10 +0000 http://wordpress.org/?v=2.9.1 hourly 1 By: Will people pay for the New York Times online? cdixon.org – chris dixon's blog http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-5957 Will people pay for the New York Times online? cdixon.org – chris dixon's blog Mon, 18 Jan 2010 16:06:24 +0000 http://www.cdixon.org/?p=723#comment-5957 [...] The reason people are willing to pay for the Journal has nothing to do with their unwillingness to share or pirate financial information. It’s quite simply the fact that the Journal is a valuable business input that can’t be found anywhere else. Most people, when presented with something of value that is scarce and reasonably priced, don’t pirate (especially when they can charge it to their business). The revenue-maximizing price of any good – including digital goods – is determined by value and scarcity, not the cost to produce. [...] [...] The reason people are willing to pay for the Journal has nothing to do with their unwillingness to share or pirate financial information. It’s quite simply the fact that the Journal is a valuable business input that can’t be found anywhere else. Most people, when presented with something of value that is scarce and reasonably priced, don’t pirate (especially when they can charge it to their business). The revenue-maximizing price of any good – including digital goods – is determined by value and scarcity, not the cost to produce. [...]

]]> By: Links and Thoughts, Monday 10/19/09 | Recess Mobile Blog http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4757 Links and Thoughts, Monday 10/19/09 | Recess Mobile Blog Thu, 12 Nov 2009 17:05:41 +0000 http://www.cdixon.org/?p=723#comment-4757 [...] Dixon cites SMS in What’s the relationship between cost and price?: People who gripe about the price/cost gap of SMS messages seem to not realize the telecom industry [...] [...] Dixon cites SMS in What’s the relationship between cost and price?: People who gripe about the price/cost gap of SMS messages seem to not realize the telecom industry [...]

]]> By: Thorsten Claus http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-5763 Thorsten Claus Tue, 27 Oct 2009 03:11:55 +0000 http://www.cdixon.org/?p=723#comment-5763 Whoever tried to replace parts of an oven knows this: the plastic button on the front panel costs about 10cents for manufacturing. The "Kit" for installation sells for about $9, shipping is also $9. Replacing the whole front and top after a fire is about $400. I talked to some friends in appliance manufacturing. Pricing these spare parts really goes like "consumers can decide to buy a new oven for $1,400 or spare parts for $600, just below a used model for $800-$1,000." Whoever tried to replace parts of an oven knows this: the plastic button on the front panel costs about 10cents for manufacturing. The “Kit” for installation sells for about $9, shipping is also $9. Replacing the whole front and top after a fire is about $400. I talked to some friends in appliance manufacturing. Pricing these spare parts really goes like “consumers can decide to buy a new oven for $1,400 or spare parts for $600, just below a used model for $800-$1,000.”

]]> By: Thorsten Claus http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4458 Thorsten Claus Mon, 26 Oct 2009 20:11:55 +0000 http://www.cdixon.org/?p=723#comment-4458 Whoever tried to replace parts of an oven knows this: the plastic button on the front panel costs about 10cents for manufacturing. The "Kit" for installation sells for about $9, shipping is also $9. Replacing the whole front and top after a fire is about $400. I talked to some friends in appliance manufacturing. Pricing these spare parts really goes like "consumers can decide to buy a new oven for $1,400 or spare parts for $600, just below a used model for $800-$1,000." Whoever tried to replace parts of an oven knows this: the plastic button on the front panel costs about 10cents for manufacturing. The “Kit” for installation sells for about $9, shipping is also $9. Replacing the whole front and top after a fire is about $400. I talked to some friends in appliance manufacturing. Pricing these spare parts really goes like “consumers can decide to buy a new oven for $1,400 or spare parts for $600, just below a used model for $800-$1,000.”

]]> By: kellyford http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4363 kellyford Wed, 21 Oct 2009 12:37:50 +0000 http://www.cdixon.org/?p=723#comment-4363 It's amazing how even supposedly sophisticated multinationals miss some of the fundamental elements in this post. I've worked for companies which insist on initiating pricing discussions based not on what the market will bear, but based on a "fully loaded cost" (including amortized fixed costs for general company overhead) grossed up to meet a minimum margin requirement.<br><br>It's easy to see where that type of logic can lead. Depending on the price elasticity of the category/product, far fewer units may end up being sold at this "grossed up" price than the theoretically optimal market demand price. That can cause the company to allocate even GREATER fixed overhead per unit to the product and maybe even raise prices further to continue to meet the margin goals. <br><br>And pretty soon you've priced yourself out of business. It's amazing how even supposedly sophisticated multinationals miss some of the fundamental elements in this post. I've worked for companies which insist on initiating pricing discussions based not on what the market will bear, but based on a “fully loaded cost” (including amortized fixed costs for general company overhead) grossed up to meet a minimum margin requirement.

It's easy to see where that type of logic can lead. Depending on the price elasticity of the category/product, far fewer units may end up being sold at this “grossed up” price than the theoretically optimal market demand price. That can cause the company to allocate even GREATER fixed overhead per unit to the product and maybe even raise prices further to continue to meet the margin goals.

And pretty soon you've priced yourself out of business.

]]> By: Links and Thoughts, Monday 10/19/09 | Recess Blog http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4326 Links and Thoughts, Monday 10/19/09 | Recess Blog Mon, 19 Oct 2009 21:54:37 +0000 http://www.cdixon.org/?p=723#comment-4326 [...] Dixon cites SMS in What’s the relationship between cost and price?: People who gripe about the price/cost gap of SMS messages seem to not realize the telecom industry [...] [...] Dixon cites SMS in What’s the relationship between cost and price?: People who gripe about the price/cost gap of SMS messages seem to not realize the telecom industry [...]

]]> By: chris dixon http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4247 chris dixon Sun, 18 Oct 2009 11:33:44 +0000 http://www.cdixon.org/?p=723#comment-4247 Probably true. Maybe room for 2-3 newspapers bought primarily for business purposes (WSJ, FT etc) Probably true. Maybe room for 2-3 newspapers bought primarily for business purposes (WSJ, FT etc)

]]> By: Josh Young http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4238 Josh Young Sun, 18 Oct 2009 03:18:40 +0000 http://www.cdixon.org/?p=723#comment-4238 The supply of content produced by newspapers will crater soon enough, sure, but I doubt that the supply of sufficiently close substitutes will diminish enough that newspapers regain significant pricing power. Those days are simply gone, no? The supply of content produced by newspapers will crater soon enough, sure, but I doubt that the supply of sufficiently close substitutes will diminish enough that newspapers regain significant pricing power. Those days are simply gone, no?

]]> By: sfrancis http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4237 sfrancis Sun, 18 Oct 2009 02:10:58 +0000 http://www.cdixon.org/?p=723#comment-4237 PPL don't literally care about the exact margin, its perceived value vs. cost. Costco's premise is that 14% is the "right number" for retailing that won't drive customers away and earns their trust. Maybe they're right? It certainly makes it easier for me to know I'm not overpaying when I buy there - maybe I don't get the best price, but I'm not getting the worst price either. <br><br>Just because it works for Costco doesn't imply what the accepted margins should be for other businesses. A higher percentage is accepted and expected in professional services, for example. <br><br>Incidentally, I think the high degree of piracy for Windows is an indicator of people thinking that they are being overcharged for something. It isn't the right response, but I think it reflects the lengths people will go to to avoid paying more than they think something is worth. PPL don't literally care about the exact margin, its perceived value vs. cost. Costco's premise is that 14% is the “right number” for retailing that won't drive customers away and earns their trust. Maybe they're right? It certainly makes it easier for me to know I'm not overpaying when I buy there – maybe I don't get the best price, but I'm not getting the worst price either.

Just because it works for Costco doesn't imply what the accepted margins should be for other businesses. A higher percentage is accepted and expected in professional services, for example.

Incidentally, I think the high degree of piracy for Windows is an indicator of people thinking that they are being overcharged for something. It isn't the right response, but I think it reflects the lengths people will go to to avoid paying more than they think something is worth.

]]> By: awaldstein http://cdixon.org/2009/10/16/whats-the-relationship-between-cost-and-price/comment-page-1/#comment-4233 awaldstein Sat, 17 Oct 2009 22:02:36 +0000 http://www.cdixon.org/?p=723#comment-4233 I'll try.<br>If you are selling hard goods through a channel, you have cost, channel discounts, your need for margin. Price is pretty well set with some variation.<br>If you are selling SaaS, you have some sunk costs and the competitive landscape as the eco-environment to place yourself in.<br>If you are selling, stuff within a virtual world or a plug in for WordPress, or an interactive component of an ad on Facebook, pricing is somewhat arbitrary outside of how you position the product. <br>Does that help? I'll try.
If you are selling hard goods through a channel, you have cost, channel discounts, your need for margin. Price is pretty well set with some variation.
If you are selling SaaS, you have some sunk costs and the competitive landscape as the eco-environment to place yourself in.
If you are selling, stuff within a virtual world or a plug in for WordPress, or an interactive component of an ad on Facebook, pricing is somewhat arbitrary outside of how you position the product.
Does that help?

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