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This article I think comes very close but never answers the central question here: how to find the price that generates maximum revenue. I have a hypothesis th

by mojuba 7y ago

This article I think comes very close but never answers the central question here: how to find the price that generates maximum revenue. I have a hypothesis that price tolerance follows Pareto distribution, i.e. the function of the number of people willing to pay any given price for the same product must have the same shape as the overall wealth distribution among your customers. Therefore it should be theoretically possible to find your peak price that yields maximum revenue in the following three steps: (1) take measurements at several different price points (A/B test) (2) find the Pareto parameters for your customers (3) solve the differential and find the peak. The same in a bit more detail: https://medium.com/@hovm/finding-the-max-revenue-price-mark-for-digital-products-24cef24f746d https://medium.com/@hovm/finding-the-max-revenue-price-mark-...

Darkphibre 7y ago
Reminds me of the articles that came out in 2016, where we --finally saw the first comprehensive Supply/Demand curve in the wild: http://freakonomics.com/podcast/uber-economists-dream/ http://freakonomics.com/podcast/uber-economists-dream/
- feral 7y ago
  >first comprehensive Supply/Demand curve in the wild That's a huge claim. Anyone doing dynamic price optimization is doing this, long before 2016.
  - Darkphibre 7y ago
    Well, the guy has written textbooks on economics, you can take it up with him. :) From the interview: LEVITT: The very first class you take when you go and enroll in economics — introductory economics — typically on the very first day they put a demand curve on the board. And like every other economics student, when I showed up my freshman year in school and saw that demand curve, I just accepted it. I said, “Well, they put it on the board; it must be real.” And I never questioned anything about demand curves. I always just thought of demand curves as something that exists, like buildings or trees. They have a sort of a physicality to them. But then when I went to write my own textbook with Austan Goolsbee and Chad Syverson — now this is before Freakonomics, so maybe 13-15 years ago — I actually had to sit down and write about demand curves. And I thought for the first time, “what really is a demand curve?” And I thought to really bring it to life, I think I have to find one, I have to show one to the students. And I looked around, and I realized that nobody ever had really actually estimated a demand curve. Obviously, we know what they are. We know how to put them on a board, but I literally could not find a good example where we could put it in a box in our textbook to say, “This is what a demand curve really looks like in the real world,” because someone went out and found it. DUBNER: So you’re saying that the demand curve as it exists in economics and economic literature is kind of a fiction or an invention of economists to explain the rest of the transactions around it? LEVITT: Exactly. It’s an artificial construct, which turns out to be incredibly valuable for organizing the world and knowing how to analyze problems. And in that sense, who really needs to see one or to find one? But I’m a very tangible person, and I thought, if I could really have an example of a demand curve maybe I could push up the learning of the students. It took me, I don’t know, 15 years between when I took the beginning economics to when I wrote the textbook to actually think hard enough about demand curves to really understand them. I thought if I could show someone a real demand curve, I might help the students learn about it much faster. ... LEVITT: Yeah, so we aren’t faking it. I think that’s the wrong way to think about it. What I’d really say is that we completely and totally understand what a demand curve is, but we’ve never seen one. I don’t know if it’s fair to make physics comparisons, but you can imagine something like in the old days when the models had figured out something about protons and electrons, but we hadn’t actually figured out how to literally see an electron. And we knew it had to be there from the theory and then it was just a matter of making the colliders go fast enough or whatever it takes to see an electron, and then it was confirmed that they were there. So, in economics, it’s even easier because it’s not that we have to wonder whether demand curves exist or not, because we know they exist because we define them and they’re there. But I wanted to touch one; I wanted to hold a demand curve, and I had never had a chance to do that until I took Uber and it suddenly occurred to me that here was a chance to hold a demand curve in my own hand.
    - feral 7y ago
      I'm sure he has, he's a very famous economist. And you didn't need to copy-paste all that, I had read the article. I stand by my post, the claim in the article is exaggerated. No intention of taking it up with him, I'm sure he knows this; I was writing for the readers here.
AmericanChopper 7y ago
A/B testing prices is an existing practice (though one that has the potential to upset customers, should they find out). You can also test different pricing hypothesis in different markets. But I think this is most common when there’s little competition in a market/segment. In a competitive market, you already have a lot of information to base pricing decisions on (what do my competitors charge, what are their margins, what pricing changes have they made in the past...)
- hermitcrab 7y ago
  Bear in mind that A/B testing of prices may not be legal in some countries/jurisdictions.
  - chii 7y ago
    I've never seen any country have laws against giving targeted coupons/discount code to some customers.
cperciva 7y ago
I think it depends on your context. If the alternative to buying your product is not buying your product, people may be willing to pay an amount proportional to their wealth; but if the alternative is a lower-priced competitor, the price they're willing to pay will be anchored. Jeff Bezos is far wealthier than I am, but I don't think he would pay a million dollars for a hamburger.
- mojuba 7y ago
  True but I think competition is already factored into the hypothesis as the lowest price nobody is willing to pay, which in case of a hamburger and given the competition could be only say $25. So you will be looking for a peak in the range say $10-25.
- franciscop 7y ago
  I've heard about American people who take a plane only for eating something specific on Europe. The direct price might not be so much, but that's still on the thousands.
- bjelkeman-again 7y ago
  I have a friend who used to be a hairdresser. Some of his customers flew across the Atlantic to Europe to get a haircut... maybe not a million dollars for a burger, but thousands for a haircut, and at least a few days spent.
  - thaumasiotes 7y ago
    > thousands for a haircut, and at least a few days spent. This conclusion is sound if the schedule looks like fly out -> get haircut -> fly back. If you do anything else while you're in Europe, then the travel cost is being amortized over everything you do. Maybe I was willing to pay a few thousand dollars for some Yarg cheese, and the haircut was a happy bonus.

by mojuba 7y ago

Darkphibre 7y ago

Reminds me of the articles that came out in 2016, where we --finally saw the first comprehensive Supply/Demand curve in the wild: http://freakonomics.com/podcast/uber-economists-dream/ http://freakonomics.com/podcast/uber-economists-dream/

feral 7y ago
>first comprehensive Supply/Demand curve in the wild That's a huge claim. Anyone doing dynamic price optimization is doing this, long before 2016.
- Darkphibre 7y ago
  Well, the guy has written textbooks on economics, you can take it up with him. :) From the interview: LEVITT: The very first class you take when you go and enroll in economics — introductory economics — typically on the very first day they put a demand curve on the board. And like every other economics student, when I showed up my freshman year in school and saw that demand curve, I just accepted it. I said, “Well, they put it on the board; it must be real.” And I never questioned anything about demand curves. I always just thought of demand curves as something that exists, like buildings or trees. They have a sort of a physicality to them. But then when I went to write my own textbook with Austan Goolsbee and Chad Syverson — now this is before Freakonomics, so maybe 13-15 years ago — I actually had to sit down and write about demand curves. And I thought for the first time, “what really is a demand curve?” And I thought to really bring it to life, I think I have to find one, I have to show one to the students. And I looked around, and I realized that nobody ever had really actually estimated a demand curve. Obviously, we know what they are. We know how to put them on a board, but I literally could not find a good example where we could put it in a box in our textbook to say, “This is what a demand curve really looks like in the real world,” because someone went out and found it. DUBNER: So you’re saying that the demand curve as it exists in economics and economic literature is kind of a fiction or an invention of economists to explain the rest of the transactions around it? LEVITT: Exactly. It’s an artificial construct, which turns out to be incredibly valuable for organizing the world and knowing how to analyze problems. And in that sense, who really needs to see one or to find one? But I’m a very tangible person, and I thought, if I could really have an example of a demand curve maybe I could push up the learning of the students. It took me, I don’t know, 15 years between when I took the beginning economics to when I wrote the textbook to actually think hard enough about demand curves to really understand them. I thought if I could show someone a real demand curve, I might help the students learn about it much faster. ... LEVITT: Yeah, so we aren’t faking it. I think that’s the wrong way to think about it. What I’d really say is that we completely and totally understand what a demand curve is, but we’ve never seen one. I don’t know if it’s fair to make physics comparisons, but you can imagine something like in the old days when the models had figured out something about protons and electrons, but we hadn’t actually figured out how to literally see an electron. And we knew it had to be there from the theory and then it was just a matter of making the colliders go fast enough or whatever it takes to see an electron, and then it was confirmed that they were there. So, in economics, it’s even easier because it’s not that we have to wonder whether demand curves exist or not, because we know they exist because we define them and they’re there. But I wanted to touch one; I wanted to hold a demand curve, and I had never had a chance to do that until I took Uber and it suddenly occurred to me that here was a chance to hold a demand curve in my own hand.
  - feral 7y ago
    I'm sure he has, he's a very famous economist. And you didn't need to copy-paste all that, I had read the article. I stand by my post, the claim in the article is exaggerated. No intention of taking it up with him, I'm sure he knows this; I was writing for the readers here.

AmericanChopper 7y ago

A/B testing prices is an existing practice (though one that has the potential to upset customers, should they find out). You can also test different pricing hypothesis in different markets. But I think this is most common when there’s little competition in a market/segment. In a competitive market, you already have a lot of information to base pricing decisions on (what do my competitors charge, what are their margins, what pricing changes have they made in the past...)

hermitcrab 7y ago
Bear in mind that A/B testing of prices may not be legal in some countries/jurisdictions.
- chii 7y ago
  I've never seen any country have laws against giving targeted coupons/discount code to some customers.

cperciva 7y ago

I think it depends on your context. If the alternative to buying your product is not buying your product, people may be willing to pay an amount proportional to their wealth; but if the alternative is a lower-priced competitor, the price they're willing to pay will be anchored. Jeff Bezos is far wealthier than I am, but I don't think he would pay a million dollars for a hamburger.

mojuba 7y ago
True but I think competition is already factored into the hypothesis as the lowest price nobody is willing to pay, which in case of a hamburger and given the competition could be only say $25. So you will be looking for a peak in the range say $10-25.
franciscop 7y ago
I've heard about American people who take a plane only for eating something specific on Europe. The direct price might not be so much, but that's still on the thousands.
bjelkeman-again 7y ago
I have a friend who used to be a hairdresser. Some of his customers flew across the Atlantic to Europe to get a haircut... maybe not a million dollars for a burger, but thousands for a haircut, and at least a few days spent.
- thaumasiotes 7y ago
  > thousands for a haircut, and at least a few days spent. This conclusion is sound if the schedule looks like fly out -> get haircut -> fly back. If you do anything else while you're in Europe, then the travel cost is being amortized over everything you do. Maybe I was willing to pay a few thousand dollars for some Yarg cheese, and the haircut was a happy bonus.