Supply and Demand

4P's of Marketing

• 1. Product

1. Price

   1. Place

   2. Promotion

Supply and Demand

Pricing Strategies

Supply and Demand

The Supply and Demand chart addresses the relationship between Price and Quantity and how the Demand or Supply inversely affects the other. For instance, Stan Lee, one of the main creators for Marvel comics once sat at Comic Con and gave away free autographs. He used to talk with fans, take pictures, and sometimes drew on comics and personally inscribed them to his enduring fans. The demand for his autograph and to meet the Marvel creator was not in high demand.

However, with Marvel Comics coming to life circa 2005, it would cost you a minimum of $100 for each signature, standing in line for hours, and getting a photo with him or anything beyond a signature became impossible. And, even though Stan Lee signed tens of thousands of items, his passing in 2018 has increased the value of these signatures as no new products can be signed.

Consider the following statements and how Supply and Demand plays a major role in pricing products:

• When the Supply provided matches the Demand for a product, we have Equilibrium.

At equilibrium, the market (consumers and businesses) has determined the optimal price for selling a product and the amount of product that is desired at that price. We should end up in a situation where all products supplied to businesses, are sold at the desired price. Businesses opening retail price is often represented as the Manufacture's Suggested Retail Price (MSRP).

• If the Price of an item is too high, there will be a Surplus.

When we attempt to price an item too high, it can often result in consumers not buying our product. Products that go unsold take up space and tie up monies that could be used towards the development of new products, purchasing new products, or expansion. This is known as a Surplus (excess amount of stock).

While a surplus is often seen as being a negative thing, there is one exception that can lead to intentionally pricing a product higher than what consumers are willing to pay: scarcity. When a product is highly desirable, but there is a limited amount, availability, or future limitations, this will often result in people paying higher prices for items having a higher perceived value due to rarity.

In 2000, Sony's Playstation 2 had an issue with manufacturing and their orders were cut in half for the holiday season. While Playstation blamed production, some say this was a marketing ploy to drive up interest for after holiday sales. Due to the limited supply of Playstation 2's, many were paying double to triple the cost of a new console on eBay. Read this article, Playstation 2 Makes its North American Debut.

While some consumers need to be the innovators or early adopters, the majority of consumers typically ignore unavailable products and rising prices since a new shipment will be delivered at the beginning of the year. Some say Sony lost money on the table from not being able to deliver their product before Christmas, but the social buzz about the product and sales into the new year proved otherwise.

• If the Price is too low, there may be a Shortage.

Pricing an item too low, may often result in consumers purchasing your entire inventory. While this may seem like a good problem, there are two issues that arise: 1) you have no stock for other people who may need that product 2) you will have made less profit then if you sold it for more.

Why do I need to keep products in stock? In some cases, like grocery stores, having everyday items is integral for consumers who need a product (eg. water, rice, meat, butter). If consumers go to a location that does not have this item, they are likely to leave and shop elsewhere. Should it happen more than once, consumers often view this as a problem of inconsistency and a waste of their time. This can lead to consumers deciding to switch their shopping habits, by going to a competitor that they consider to be more reliable.

Is an extra dollar that important? Imagine if you could sell 10,000 items for $99 versus 10,000 items at $100. The difference would be $10,000 that you could use towards more inventory, paying employees, advertising, business expansion, or creating the next product. Business is always about maximizing profits when possible. While we want to sell all of our items to avoid holding onto them or spoilage, we need to consider our margins. Additionally, if everyone else were to run out of the product, you would be the only one left and could set your prices accordingly.

There are always exceptions to the rule. Take the following example...

• Drop prices when you have a Surplus

So if we are attempting to maximize our margins or use the concept of scarcity, why would we drop prices? Sometimes we drop prices due to the risk of spoilage, not enough space for new inventory, to get new customers for a product, to free up monies for other business activities, consumers no longer find it desirable or valuable, and to simply get rid of items that may have outlived their product life cycle (eg. winter jackets).

Think About It: Supply and Demand

• • Why is equilibrium desired?

  • Would you consider Supreme NYC prices at equilibrium?

  • Why do you think shoe stores have a Buy One, Get One (BOGO) sale?

  • Would you rather put items you have not sold into storage until the next time you can sell it or drop price to move the product?

• • https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pages/pricing-5-common-strategies.aspx

  • https://blog.hubspot.com/sales/pricing-strategy

  • https://www.investopedia.com/terms/v/valuebasedpricing.asp

  • https://www.pricingbrew.com/insights/value-based-pricing-premium-vs-preference/

  • https://www.seattletimes.com/life/travel/airlines-in-hawaii-price-war-offer-9-inter-island-flights/

  • https://www.webstaurantstore.com/article/129/restaurant-menu-pricing.html