Here is a comment on an old article of mine titled, Enough with the marginal cost argument,
Rags, there may be a pony in here somewhere, but I’m having trouble finding it.
In competitive markets with many substitutes, marginal cost is a the key to pricing. You may not like it, but it’s true. The start up costs may impact new players, but if the startup costs are already sunk, they are irrelevant. A rational player will grow market share by cutting prices until marginal cost is met. If you tried to compete with YouTube by charging to make up for your startup costs, you’d lose, right?
Now here is what the same commenter had to say in his own blog about low prices (of course I cannot be sure about the identify of the person who commented on my blog, looking at the phrases it is highly likely the two are the same)
If you build your business around being the lowest-cost provider, that’s all you’ve got. Everything you do has to be a race in that direction, because if you veer toward anything else (service, workforce, impact, design, etc.) then a competitor with a more single-minded focus will sell your commodity cheaper than you.
Cheapest price is the refuge for the marketer with no ideas left or no guts to implement the ideas she has.
I like his second version of the pricing principle. May be he had a change of mind? It is far better to find a segment that values your product and deliver them a version at a price they are willing to pay than try to capture market share with a commodity product at or near marginal cost.
Marginal cost is relevant only to set the floor and not the price you should charge. You don’t have to like it, but it s true.