Tag Archive for: pricing

Image Info

Don’t Leave Money On The Table

“The more you learn, the more you earn” – Warren Buffett

In this true story, we hide the names to protect the players and don’t tell you the venue, either.

In 2014 (A), we ran three market Y value equations (not shown).  All showed that Project X was under-priced.  We find validation of these projections in 2021, as used X versions sell for more than their original $1M price (also not shown).  X sold amply, with 300 units in the market by 2021, and if C’s assumptions were correct, it made a profit, too (D).  Joy in Mudville!  But wait a minute.

Had X’s producers studied Y’s Demand Frontier (B), they might have noticed its negative slope of -1.24.  That means that at the limiting slope, had X’s price been raised to $1.34M, it would have made more revenue, despite the sales drop.  Also, with fewer units, recurring costs fall (C).

The overall effect in D is that selling Project X too cheaply costs Y both revenue and profit.

Hypernomics notes it’s easy to think that if a project makes a profit, it is doing well. But if we learn about all the market forces at work, often we’ll find well isn’t well enough.  Don’t leave money on the table because you didn’t study your market thoroughly.

#hypernomics #innovation #markets #marketanalysis #pricing #analytics

Image Info

Bounding Problems

In countless games, the parameters, once set, never vary. There are only a given number of spaces on the chessboard. American football always uses an elliptical spheroid built to strict specifications. All NBA basketball rims are the same diameter, ten feet in the air.

Markets seem different. They don’t have instruction manuals. At first glance, it would seem you could do anything you want in them.

Still, they have rules. Not understanding them can sink a project.

In addition to DeLorean not understanding the value of horsepower (see the last post), they also failed to appreciate the Demand Frontier they faced in 1981. As A shows us, DeLorean thought they could exceed that limit by nearly two standard deviations, despite no one else beating it by half that much.

In this and many other markets, Product Market Demand Curves form. Always flatter than the overall Demand Frontier they build, they describe the product price limits as quantities sold increase. These curves set boundaries producers must consider before they enter any market. Ignoring them can have disastrous consequences.

How do Product Market Demand Curves compare to their Learning Curves? Look to the next post for answers.

#markets #demand #pricing #boundary #innovation #business

Image Info

DeLorean CSI

In October 1982, the US government charged John DeLorean with cocaine trafficking in a deal he thought would stave off bankruptcy for his self-named company.

How did it all go wrong?

His DeLorean Motor Company sports car (A) came with several sales features. It had a rear-mounted engine, brushed stainless steel body panels, and its iconic gull-wing doors. Its original designation was the DMC-12, the “12,” reflecting its price, in thousands. But, when it came time to start taking orders, DeLorean dropped the name and raised the price.

The renamed DeLorean entered the market with 130 horsepower, priced at $25,000. As we see in B, no car with that amount of power came close to its price. The 1981 Audi 5000 Turbo, with the same horsepower, sold for $7,000 less.
Statistics reveal the sustainable prices for 1981 cars were a function of their horsepower and units sold (both P-values < 0.01).

As shown in C, the DeLorean’s predicted sustainable price was $15,500; its posted price was nearly three standard deviations too high.

To sell all 7,500 units it produced for $25K, D shows us its installed horsepower should have doubled to 262. As 1981 ended, it only sold 3,000.

Moral of the story: do market math.

#innovation #marketanalysis #valueanalysis #pricing #cars