Pricing Part 2 – Pricing Theory in Reality

This blog is the second 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.

Last week, we discussed general pricing theory and how buyers and sellers approach pricing, and we asked if this pricing theory actually happens in reality. We think that it does, though with one small but significant change: in reality, sellers usually have set prices. When the buyer already knows the seller’s price, this may influence the maximum price that they are willing to pay. For example, someone may be willing to go above their original maximum purchase price if they see something that they really like and think, “It is not too much more than I wanted to pay, so I will get it anyway.”

The fact that companies have to set prices puts them at risk for “leaving money on the table” because they do not know the maximum price that a buyer will pay. In order to prevent charging less than the consumer is willing to pay, what some companies do is set a price significantly higher than their minimum price and hope that people will buy at that price. If no one buys at that price, the seller offers progressively bigger discounts until they get to a price that buyers are willing to pay (i.e. the buyer’s maximum price). As long as the discounted price is above the seller’s minimum acceptable price, then the seller is happy – they make a profitable sale and the buyer has paid the maximum price that they were willing to pay. By doing this, the seller does not leave any money on the table.

However, not only does this approach of discounting put the buyer at a disadvantage, it is also not reasonable in the sense that the budget of the buyer should not impact the value of the item being purchased. I remember one time I was looking at office space to rent, and when I asked how much the space cost, the real estate agent replied, “What is your budget?” There should not be a connection between the amount of my budget and the value of the office space; that value exists independently of my budget.

Where this can get even more interesting is in a commodity market, where the products offered by different companies are very similar to each other. Common examples of commodities include wheat, sugar, or gold.

This week’s question is: is exam-based training like a commodity? Before you answer, keep in mind that the list of topics on any exam is well known, and all of the courses should cover the same information and have the same goal – to help you pass the exam.

Leave a comment with your thoughts, and next week we will continue with Comparative Pricing for Commodities.

Brian Hock, CMA, CIA