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"Pricing for physical goods is simple. For example, if you are manufacturing staplers, all you need to do is to calculate cost of production and distribution, s

"Pricing for physical goods is simple. For example, if you are manufacturing staplers, all you need to do is to calculate cost of production and distribution, slam 20% margin on it and there you have the price you can sell your shiny stapler machines for." Not true. In fact, a lot of Maker businesses get hung up here. The pricing of physical goods depends on the market every bit as much as the pricing of software or web services. In fact, large companies rely on that all the time--case in point is P&Gs Swiffer Sweeper, that they charge much more than the manufacturing cost for the sweeper and for the refills. Many small business owners I've run across actually feel guilty if they charge "too much" (say 100% markup) for their physical goods they are selling, even though their competitors sell at that price. The price elasticity of demand applies just as much for physical goods as it does for non-physical.

roel_v 16y ago
To an extent I agree with the sentiment of your post, but the practicalities are different imo, and "The pricing of physical goods depends on the market every bit as much as the pricing of software or web services." I don't agree with at all. Many non-software products and services (staples, pies, chimney sweeping, plumbing, ...) are much more commodities than software. Efficient markets, lemon problem etc. drive down the markup to a low (single to low-double digit) percentage. Since cost is also much less variable (costs in terms of resources, labor, capital investments etc. for a pie from one baker is going to be very similar to those of another down the street) the end-price is going to be not very flexible; and any eventual elasticity will just drive down consumption rather than price. The degree of availability of substitution options is a major influence. That's why even major supermarket chains operate with low single-digit profit margins, even on a product (food) where there is obviously a constant and high demand. Compare that to software where no two offerings are direct substitutions (the degree varies, of course) and where one company can upset a market with new technology very easily without his competitors necessarily being able to duplicate (for skills reasons, legacy investments, ...). An incumbent can enter the market with fixed costs that are 75 or 50 or 25 percent of the established players. Such an incumbent can do two things: go deep on price to get market share, or get fat off 500% profit margins. I don't know of many such situations in physical goods businesses. (of course the same could happen with physical goods, it's just much more common in technology)
ZoFreX 16y ago
This article was overall a very shallow economic analysis, they should have gone into marginal costs and price differentiation for this problem. Maximising income from customers by charging more to those willing to pay more is a very well studied problem, and solutions to it are observable in every shop on the high street.

roel_v 16y ago

To an extent I agree with the sentiment of your post, but the practicalities are different imo, and "The pricing of physical goods depends on the market every bit as much as the pricing of software or web services." I don't agree with at all. Many non-software products and services (staples, pies, chimney sweeping, plumbing, ...) are much more commodities than software. Efficient markets, lemon problem etc. drive down the markup to a low (single to low-double digit) percentage. Since cost is also much less variable (costs in terms of resources, labor, capital investments etc. for a pie from one baker is going to be very similar to those of another down the street) the end-price is going to be not very flexible; and any eventual elasticity will just drive down consumption rather than price. The degree of availability of substitution options is a major influence. That's why even major supermarket chains operate with low single-digit profit margins, even on a product (food) where there is obviously a constant and high demand. Compare that to software where no two offerings are direct substitutions (the degree varies, of course) and where one company can upset a market with new technology very easily without his competitors necessarily being able to duplicate (for skills reasons, legacy investments, ...). An incumbent can enter the market with fixed costs that are 75 or 50 or 25 percent of the established players. Such an incumbent can do two things: go deep on price to get market share, or get fat off 500% profit margins. I don't know of many such situations in physical goods businesses. (of course the same could happen with physical goods, it's just much more common in technology)

ZoFreX 16y ago

This article was overall a very shallow economic analysis, they should have gone into marginal costs and price differentiation for this problem. Maximising income from customers by charging more to those willing to pay more is a very well studied problem, and solutions to it are observable in every shop on the high street.