Pricing Part 1 – General Pricing Theory

This blog will be the first in a series about how companies price goods and services. Each week we will ask a question for discussion that will lead into the next week’s blog. The series will conclude with some analysis of our pricing philosophy at HOCK international and our sister companies HOCK Training and HOCK Conferencing.

Whenever I teach pricing, I remind my classes that there are actually two pricing decisions that need to be made: the company must determine the minimum price that they are willing to accept for what they are selling, and the customer must decide the maximum price that they are willing to pay. When we compare these two prices, there are three possible results:

  1. The two prices are equal. In this case, the sale takes place and even though both parties agreed to the sale, neither is very happy because they both accepted their own worst-case price. In other words, the buyer paid the most that they were willing to pay, and the seller accepted the minimum amount that they were willing to accept.
  2. The buyer’s maximum price is below the seller’s minimum price. In this case, there is no sale because the maximum price that they buyer is willing to pay is less than the minimum price that the seller is willing to sell for.
  3. The buyer’s maximum price is above the seller’s minimum price. In this case, there is a sale and both sides will be happy to some degree. How happy each side is will be determined by the price; if the price is closer to the bottom of the range then the buyer is happier, and if the price is closer to the top of the range then the seller is happier.

For example: a customer has determined that the maximum price that they will pay for a widget is $30. A seller determines that the minimum price that they will charge for that widget is $20. Given these amounts, any price greater than $20 and less than $30 will be acceptable to both parties. If the price is $21 then the buyer is happier, or if the price is $29 then the seller is happier. In either case, however, both parties are happy.

This week’s question is: does this pricing theory actually happen in reality? Leave a comment with your thoughts, and next week we will continue with Pricing Theory in Reality.

Brian Hock, CMA, CIA

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