Supply, Demand, and Pricing: Part Three, Pricing

In the music world, someone who really gets that content/value point is Trent Reznor. There’s five different prices for one of his albums, ranging from free to $300–the $300 “limited edition” version sold out in less than 24 hours.

The third deadly sin is cost-driven pricing. Most American and practically all European companies arrive at their prices by adding up costs and putting a profit margin on top. And then, as soon as they have introduced the product, they have to cut the price, redesign it at enormous expense, take losses and often drop a perfectly good product because it is priced incorrectly. Their argument? ‘We have to recover our costs and make a profit.’

This is true, but irrelevant. Customers do not see it as their job to ensure a profit for manufacturers. The only sound way to price is to start out with what the market is willing to pay – and thus, it must be assumed, what the competition will charge – and design to that price specification.

Cost-driven pricing is the reason there is no American consumer electronics industry any more. If Toyota and Nissan succeed in pushing the German luxury car makers out of the US market it will be a result of their using price-led costing.

Starting out with price and then whittling down costs is more work initially. But in the end it is much less work than to start out wrong and then spend loss-making years bringing costs into line.

Specifically (from Drucker):

“Customers do not see it as their job to ensure a profit for [businesses]. The only sound way to price is to start out with what the market is willing to pay–and thus, it must be assumed, what the competition will charge–and design to that price specification.”

(from — full piece well worth a read)

I’ll argue that we’re just scratching the surface of global demand for (paid) digital content delivered to mobile devices (specifically and primarily smartphones, but I’d include Kindle in there too).

For an eye-opening look at mobile phone usage (especially payment) in emerging markets, check out “txteagle: Crowd-Sourcing on Mobile Phones in the Developing World” at:

— Andrew

On Mar 30, 2009, at 5:34 PM, Richard Nash wrote:

But what if demand collapses? The model below presumes pretty inelastic demand. If it is more elastic, as I suspect, then the entire model of acquiring, editing, designing and marketing content gets completely blown up, as demand collapses in the face of lower cost alternatives the consumer considers sufficient for his/her edification and entertainment.

It does seem like a very different new model will evolve. I don’t know that an industry survives whose business model is predicated on treating its costs as fixed and its customers as in effect owing it a living. I recall Andrew’s recent interview in Forbes where he reminds of the Drucker-ist position that cost-plus pricing is the road to perdition…

new blog:
twitter: @r_nash

On Mar 30, 2009, at 5:18 PM, Peter Brantley wrote:

evan has a blog! and he tackles on his first post pricing
and revenue from ebooks. very interesting analysis –

“And therein lies the dilemma … how does the publishing
industry fund the creation, editing, design, production,
marketing, e-warehousing, and sales of ebooks, if the income
isn’t there? How do ebooks cover the huge advances needed to
buy books if we cannot generate the cash, especially at their
extremely low, discounted prices, cover the advances that an
entire industry has come to require? The answer is that
ebooks, alone, cannot.

“What this means is that unless a very different model evolves,
ebooks can never become the dominant version of content sold
by book publishers. It means that ebooks will always be priced
to sell, but sold as an afterthought, not as the primary
version of a work. It means that the need for blended e plus p
models will evolve, in order to take advantage of all the
great qualities of ebooks, while providing the financial
support and structure that print offers. It means that
consumer ebooks, as a stand-alone version of an intellectual
property, must fail.”

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