Continuing to explore the theme I started yesterday, about why we pay what we do for things, today we’ll explore the concept of supply and demand and how it affects what things are worth.
My example of a pub lunch that cost $4.00 in 1977 and $15.00 raised the question of why I would be willing to pay so much more some 38 years later, for basically the same thing. Part of the answer is I could afford it easily.
Another part of the price equation is demand. For the pub owner the more people that want to buy the lunch the more likely he (or she) is to raise the price. It’s pretty intuitive that demand is linked to price however it really is a complex relationship and demand is driven by far more than just price.
Lets Consider Desire (Demand) and Availability (Supply)
In fact if the purchaser has more funds (e.g., through inflation) they can afford to pay more. In this case it is possible desire for the product is driving the purchase decision as opposed to cost. (Think, ” I want it”). Additionally, as we know, affordability can be enhanced by borrowing, in these cases the purchase ultimately costs more (the interest on the loan) but we get it now and satisfy our desire. Clearly cost was not the prime factor in the decision.
Desire is also linked to availability. “It’s the last one I better snap it up regardless of price” or “There are ton’s of those on the market, no hurry to buy, let’s wait the price will probably go down”
A key to successful product marketing is to raise desire. That is help you understand the reasons you need a thing – a low price can be one of these reasons. In conjunction with desire it helps to give impression of urgency (hurry before they are gone).
The underpinning of the purchase though is definitely affordability. This is why things can cost more, because not only did the price go up but incomes rose as well so we can afford it (inflation affects both cost and revenue).
How about branding?
A product’s brand is just a label for what people think about the product. That is things like reliability, value, quality. Consider two automobiles – a Ford and a BMW. Both are just molded tin on wheels that take you places – basically perform the same function but the brands have very different impressions and these contribute to demand (also the availability of the product from the automakers) and thus drives the price.
What’s Next?
Tomorrow’s post will continue on this theme focusing on the impacts of deflation and recessions on the pricing, supply and demand.