As a consumer we all value products differently and even value the same product differently based on time and context. That defined our willingness to pay. For a marketer that is a complex problem to solve. How should they price their products so they are making all profitable sales that are possible and not leaving any money on the table?
A consumer would love to leave with a “smile on their face” after paying a price for a product. A marketer on the other hand would like to completely “wipe that smile off the face”, that is extract all consumer surplus. But how can the marketer do this for every consumer?
Intuitively we can see here that at a given price some consumers are priced out, some leave with a smile and the rest leave with no smile.
In “The Price We Pay” I talked about an hypothetical device that can tell consumers how much they value a certain product. Now let us invert that device, this time it helps marketers. Every time a consumer walks in, the marketer points the device at them and it tells the consumer’s true willingness to pay and the marketer gets to charge them that. Just like the previous one this device does not exist as well. This is the reason for the different price discrimination schemes and multi-version pricing. All designed to maximize profits.
The question is how best to do this. This is a whole lot science that just art. Look for more articles on these topics in the coming weeks.