I'm covering for my Store Manager who had to leave early, so I have a few extra minutes to write another post which I hope will be of value to you 
Supply and demand theory is an out-dated model which doesn't work in all circumstances anymore. For those that aren't familiar with it, it really only says that if the supply of a particular product is increased, eg: a million more TVs are made in China this month than last month, that prices you can charge for them will decrease. It is based on the assumption that consumers seek to optimise their purchases and get them at the best possible price.
Why's that wrong? A few reasons.
1. It doesn't take into account problems of information. A consumer in Phoenix might not know that he can buy a TV 20% cheaper in Buckeye, AZ (hey, I'm working in my limited knowledge of AZ geography. Woohoo!).
2. Loyalty and brand value. Supply and demand doesn't account for consumers being loyal to their favourite brands, and thinks they'll swap suppliers as soon as a better deal comes along.
3. Limitations to consumers' willingness to keep searching. It's unreasonable to think that a customer will evaluate all options before buying. If the TV meets a few key criteria, it's within their budget, and the likelihood of finding something better/cheaper which meets the criteria is low, a sale is made. It's called "satisficing", just an egg-head term for making-do with something that meets your needs well enough so that you stop looking for alternatives. That's why people work in $20K jobs. It's enough (for them).
"Big whoop", you say. What's in it for you? A little lesson that you'll need to lean in to hear, as it's not one we should announce to the world: cheapest price probably won't win you the game.
A better option is to charge a higher amount, make sure your product meets the customer's checklist of needs and wants (find out what critical criteria they have in their heads when they are evaluating your products for purchase), price it at the upper end of their budget, and make sure it's easy to find and obtain them. Cutting price is counter-productive. You may get a few extra sales from price-aware customers, but increasing price allows you to minimise the information problem (more money to tell people about your product), increase criticial and desired product features (easier sales because the products meet more decision-triggers), and your profits will be healthier than competitors. Sadly for them, they'll probably cut their price further to encourage more sales and perpetuate the cycle until their business dies or they learn a lesson.
Oh, and there's the added benefit of increased quality perceptions resulting from higher prices, and decreased overhead (sell 100 units to break even versus 1000 cheap units).
I had a few interruptions writing this, but I hope it makes some sort of sense, and that you can apply it to your own business thinking
Daniel.
Supply and demand theory is an out-dated model which doesn't work in all circumstances anymore. For those that aren't familiar with it, it really only says that if the supply of a particular product is increased, eg: a million more TVs are made in China this month than last month, that prices you can charge for them will decrease. It is based on the assumption that consumers seek to optimise their purchases and get them at the best possible price.
Why's that wrong? A few reasons.
1. It doesn't take into account problems of information. A consumer in Phoenix might not know that he can buy a TV 20% cheaper in Buckeye, AZ (hey, I'm working in my limited knowledge of AZ geography. Woohoo!).
2. Loyalty and brand value. Supply and demand doesn't account for consumers being loyal to their favourite brands, and thinks they'll swap suppliers as soon as a better deal comes along.
3. Limitations to consumers' willingness to keep searching. It's unreasonable to think that a customer will evaluate all options before buying. If the TV meets a few key criteria, it's within their budget, and the likelihood of finding something better/cheaper which meets the criteria is low, a sale is made. It's called "satisficing", just an egg-head term for making-do with something that meets your needs well enough so that you stop looking for alternatives. That's why people work in $20K jobs. It's enough (for them).
"Big whoop", you say. What's in it for you? A little lesson that you'll need to lean in to hear, as it's not one we should announce to the world: cheapest price probably won't win you the game.
A better option is to charge a higher amount, make sure your product meets the customer's checklist of needs and wants (find out what critical criteria they have in their heads when they are evaluating your products for purchase), price it at the upper end of their budget, and make sure it's easy to find and obtain them. Cutting price is counter-productive. You may get a few extra sales from price-aware customers, but increasing price allows you to minimise the information problem (more money to tell people about your product), increase criticial and desired product features (easier sales because the products meet more decision-triggers), and your profits will be healthier than competitors. Sadly for them, they'll probably cut their price further to encourage more sales and perpetuate the cycle until their business dies or they learn a lesson.
Oh, and there's the added benefit of increased quality perceptions resulting from higher prices, and decreased overhead (sell 100 units to break even versus 1000 cheap units).
I had a few interruptions writing this, but I hope it makes some sort of sense, and that you can apply it to your own business thinking
Daniel.
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