5 ms·

Cool article and informative anecdotes, and I ultimately agree that a $500 of wine is overpriced but for different reasons. I can't agree with the article's rea

by jeff18 17y ago

Cool article and informative anecdotes, and I ultimately agree that a $500 of wine is overpriced but for different reasons. I can't agree with the article's reasoning which is essentially: products should be priced based on how much they cost to manufacture. A couple counter examples: Apple computers and high-end cars. A few more extreme counter examples, where the cost to "manufacture" is almost $0: a $30 ebook, a web app subscription, or a top 10 iPhone app. If you are going to say something should be priced based on the cost to produce, I think you need to prove that it has been commoditized. What I mean by that is that if there are, for example, one hundred different pure gold nugget distributors, you should choose the cheapest, pure gold you can find since it is all exactly the same. If you pay more than the base value for your gold nugget, you are truly paying for nothing more than the packaging, marketing, and other fees, since the end result is simply a pure gold nugget. So has wine been commoditized? That would be a more interesting article, and I don't know the answer myself without doing more research. My grandfather founded a famous California winery which actually holds its own against ye olde European vineyards in many high profile taste-tests. He was an engineer at SRI and produced wine with a scientific philosophy, happy to share his "secrets" with anyone, so my guess is that he would agree. I'd love to ask him his thoughts but sadly I can only speculate.

illumin8 17y ago
I assure you that your counter examples of an ebook, web app subscription, or top 10 iPhone app do not have a zero cost. Since when is anyone's time free? Good books are not written overnight, and neither are top 10 iPhone apps. Good web apps have similarly thousands of man hours of coding behind them.
- jeff18 17y ago
  What I meant was that they have a single fixed cost (which may actually be very small) and the cost to manufacture an infinite number of them is near zero, despite charging a pretty penny for each one.
pchristensen 17y ago
Egad. Cost to produce = (Fixed cost / total units) + marginal cost. That's why design-heavy items like software, music, books start out expensive and get cheaper over time as the fixed cost is amortized, while "manufactured" items like cars or wine are heavily dependent on marginal cost of each item. For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost. Whether high prices that pay for marketing are justifiable is a different discussion, because the heavily marketed product is arguable more valuable to the customer because they don't have to take the time to discover it.
- lionhearted 17y ago
  > For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost. With the quote marks, I'm not sure if you're being serious or not, but a fair deal is one that both sides agree is good for them. Now often, there's a range of prices that make sense for the seller to sell at (anything $40 or higher will be fine for them) and a different range that is okay for the buyer (anything $60 or lower). Anywhere between $40 and $60 they can do the deal and be happy, and it'll be a fair deal so long as it's voluntary and nothing crazy is happening. As for efficiency - again, there's no ideal profit margin. If anything, if you really like a field, you want higher profit margins in that field, because it encourages new competition and investment and innovation. Getting good value is more important than ensuring the person selling is making a small margin. For instance, McDonalds only marks its food up a tiny bit, but it's still not a good value for me because I don't value McDonalds highly. But there might be some Brazilian food that's marked up 50% or 80% that seems like a real bargain for me. tl;dr - "Everything is worth what its purchaser will pay for it." Publilius Syrus, ~100 BC in Rome.
  - pchristensen 17y ago
    The Syrus quote is exactly what I meant when I put the quotes around fair and efficient. I still remember when I learned that lesson: when I took my comic collection to sell and got maybe $50 for what the Wizards guide said was worth $700 or so. I couldn't find anyone willing to pay guide prices so it was actually worth much less than what I thought was 'fair'.
inboulder 17y ago
The word you're looking for is 'marginal cost', econ 101 goes into your points in great detail.

by jeff18 17y ago

illumin8 17y ago

I assure you that your counter examples of an ebook, web app subscription, or top 10 iPhone app do not have a zero cost. Since when is anyone's time free? Good books are not written overnight, and neither are top 10 iPhone apps. Good web apps have similarly thousands of man hours of coding behind them.

jeff18 17y ago
What I meant was that they have a single fixed cost (which may actually be very small) and the cost to manufacture an infinite number of them is near zero, despite charging a pretty penny for each one.

pchristensen 17y ago

Egad. Cost to produce = (Fixed cost / total units) + marginal cost. That's why design-heavy items like software, music, books start out expensive and get cheaper over time as the fixed cost is amortized, while "manufactured" items like cars or wine are heavily dependent on marginal cost of each item. For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost. Whether high prices that pay for marketing are justifiable is a different discussion, because the heavily marketed product is arguable more valuable to the customer because they don't have to take the time to discover it.

lionhearted 17y ago
> For items where the cost per unit is dependent on marginal cost of each item, it's 'fair' or 'efficient' if it is priced with a reasonable markup over the marginal cost. With the quote marks, I'm not sure if you're being serious or not, but a fair deal is one that both sides agree is good for them. Now often, there's a range of prices that make sense for the seller to sell at (anything $40 or higher will be fine for them) and a different range that is okay for the buyer (anything $60 or lower). Anywhere between $40 and $60 they can do the deal and be happy, and it'll be a fair deal so long as it's voluntary and nothing crazy is happening. As for efficiency - again, there's no ideal profit margin. If anything, if you really like a field, you want higher profit margins in that field, because it encourages new competition and investment and innovation. Getting good value is more important than ensuring the person selling is making a small margin. For instance, McDonalds only marks its food up a tiny bit, but it's still not a good value for me because I don't value McDonalds highly. But there might be some Brazilian food that's marked up 50% or 80% that seems like a real bargain for me. tl;dr - "Everything is worth what its purchaser will pay for it." Publilius Syrus, ~100 BC in Rome.
- pchristensen 17y ago
  The Syrus quote is exactly what I meant when I put the quotes around fair and efficient. I still remember when I learned that lesson: when I took my comic collection to sell and got maybe $50 for what the Wizards guide said was worth $700 or so. I couldn't find anyone willing to pay guide prices so it was actually worth much less than what I thought was 'fair'.

inboulder 17y ago

The word you're looking for is 'marginal cost', econ 101 goes into your points in great detail.