A dictionary will define price as something like: “The amount of money for which something is sold’
Pretty obvious.
However, price can mean many different things to different people in different contexts.
Years ago, I ran a food manufacturing business that sold product through multiple distribution channels. Supermarkets, route trade, distributors, food service, direct via our own vans, and export.
The pricing architecture had a common starting point, the ‘List price’ after which everything changed depending on a wide range of factors such as: the relative power of the channel, volumes, payment terms, negotiated promotional and incentive programs, supply and demand at any specific time, geography, variable freight charges, seasonal factors, clearance prices, rebates, and others.
Exactly the same products, subject to a whole range of variations, both formulaic and negotiated.
In that complexity, how do you define what the ‘right’ price is?
At one point we made the attempt to calculate the actual price based on the net cash flow from the products and customers. In the days before flexible digital tools, this was a brain buster, and consumed too much time and effort to deliver a return, but was a good idea at the time.
Added to the complexity which discourages most from developing the understanding necessary to optimise whatever the net price ends up being, is the impact of unintended consequences and the channel conflict that is almost inevitable.
For example, the small retailers we serviced saw their competitors as the supermarkets and were very noisy indeed when they could buy a case of product at Woolies cheaper than they could buy it direct or via a distributor. They did not care about the nuances of our pricing architecture, or the fact that they might buy a case, and a supermarket buy multiple truckloads. Their concern was serving their customers by not having them go to Woolies for cheaper prices, while remaining profitable.
As a young bloke doing the backpack thing around Europe, I stayed at one point for a few weeks on a small Greek island. On the occasions a cruise ship came in, the retailers of all types simply substituted one price list and price display for another, somewhat more expensive. The locals knew not to buy that day. Amazon takes that flexible pricing strategy to the limit with its use of your browsing and purchase history to automatically set the price their algorithms indicate gives them the best combination of the purchase being made at the maximum margin.
So, what is the right price?
Whatever you and the buyer who completes a transaction determine it to be, in those circumstances, on that particular day.
