POP QUIZ: Imagine you (and only you) had the cure for incurable disease. Moral issues aside, how much would you charge?
I hope you said ‘as much as possible’.
Because this, dear reader, is a little secret everybody learns in Economics 101 and then forgets:
A product( such as the cure for an incurable disease) is something that will be very price inelastic. Knowing which items are price inelastic, is a valuable business tool. In practical terms, we use a substitute measure to identify price inelastic itesm. This short-cut is known as KVIs - Known Value Item (KVI).
Every consumer has a limited range of KVIs in their 'evoked set' - and by that I mean customers remember only a limited range of products and even a smaller number of price points associated with those products.
EXAMPLE: Do you know the price for a kilogram of table salt?
Few people do.
How much would you pay when you pop into the supermarket to buy salt?
- Would you buy it if I told you that it was $2.50 for a 750g container of salt?
- Would you still buy it if it was $3.00 a container?
- What about $5.00?
It is actually around $1.70 in Aldi Supermarkets.
I am pretty confident you would be prepared to pay more, AND I am confident you wouldn’t have done a comparison shop for anything under $5.
This means that they COULD have charged 50% -300% more, and not have lost any sales!
APPLICATION: The moral of the story is that KVIs are price elastic, and non-KVIs are inelastic. If a product is ‘price inelastic’ you can and should put the prices up! And keep doing it until the results suggest otherwise.
To the non-marketing readers, here is a little practical tip that shows this principle in action – and you may avoid the ‘trap’ in future. (Never say that I don’t offer helpful advice.)
A supermarket may advertise a ‘special’ – say 2L milk at 99c. Everyone knows that is a good deal because milk is a KVI. They selected milk as the ‘loss leader’ and this does two things:
It creates the perception that this store is ‘price competitive’, and since no-one goes to a supermarket to buy only milk, you will end up buying other things. And importantly, you won’t be paying much attention to prices because you already ‘know’ they are ‘cheap’.
At the heart of this concept is an important profit generator: In order to be perceived as affordable, you only need to be price your KVIs at the appropriate price points. Everything else (-the salt-) should be approached differently.
It may not be a ‘million dollar’ question, but it may well be a ‘hundred-thousand-dollar’ question:
What is the ‘salt’ in your business?
And once you know… go and put the prices UP!
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