Thirty years ago in 1994 I was entering university to get my Business degree.
One very interesting theory that I learned right from the beginning was Michael Porter’s cost-based competitive advantage. Porter points out that if your company does a great job of keeping its operational costs low, it could practice lower prices than its direct competitors, thereby achieving a “competitive advantage.”
There was no Internet when Porter proposed that theory. Globalization was moving at baby steps, so the entire global business dynamic was different from today’s.
Years later, the competition between global companies started to get more intense. Consequently, the need to develop business disciplines that could manage things happening outside a company’s boundaries began to emerge, such as Marketing.
Professor Philip Kotler was the prominent author within the Marketing field who had put pricing into the equation but from a different perspective.
He proposed the well-known theory of the “4 Ps” of Marketing:
Product (or service): how it stands against its competitors;
Place: the market, the territory, the type of venue where the product would be sold;
Promotion: putting the word out about the product so it would be noticed by its target customers; and finally
Price: of the product or service.
Price within this particular context would result from the analysis of existing competitors, the price of their products, and the business strategy defined from the outside to inside the company. For example, company A will promote product A with a lower price than product B from company B just to cause instability in the market, even if product A is sold at a loss or at a negative profit margin. That would not matter much because, in this case, we are talking about “market-driven pricing.”
I’m not a business author, nor a researcher, let alone a “guru” or a content creator. I just write essays like this one to materialize my thoughts based on what I observe.
With that said, what I see happening a lot in startup circles is “greed-based pricing,” which consists of setting a product or service price not based on operational costs (plus margin) or market elements like competitors or consumers (and the priceanalysis they do in their heads). Greed-based pricing is done by business owners when they define first how much they want to personally make (per month or per year) out of their business.
— “I want to make 10k per month,” as many are saying now. I suspect 10k is a kind of mantra now.
They will then check how many paying customers they have in their customer base, the average ticket price at a given period, and overall running costs. With that put on the spreadsheet, it’s easy to adjust the numbers to calculate the final price of a product.
These particular business owners don’t care much about their operational cost structure or the price competitors are putting in the market. What really matters to them is to satisfy their greed and keep the wheel spinning.
About Prof. Michael Porter
https://www.isc.hbs.edu/about-michael-porter/Pages/default.aspx
About Prof. Philip Kotler
https://www.pkotler.org/bio/