Price is Just a Number

Readers! Welcome to the first chapter of our series on Understanding the Consumer Products Industry, where I'm attempting to level the informational playing field between consumers and the companies that sell us the stuff we buy. Today's post is an introductory conversation about pricing.
In the retailing and consumer products industry, almost everything happens for a reason. The prices you see for the goods you buy aren't arbitrary or set by accident. In most cases prices are a function of predictable forces that consumers can anticipate--and take advantage of.

But first of all, let's get a little bit meta here and ask a question: what is a price, really?

On a simple level it's just the stated cost of an item. In my old field of investing for example, the price of a stock or a bond is simply a number at which buyers and sellers agree to exchange merchandise. And when there are no buyers for a stock and lots of sellers, guess what? That stock's headed lower. Likewise, if there's a ton of demand for a stock and nobody wants to sell, the price is headed higher.

The same logic holds to a large extent in the consumer products world. When the first Mazda Miata came out, it was such a ridiculously popular car that people happily paid two times the retail price to get one. The first consumer-targeted VCRs cost $2,000, yet they didn't even record. Heck, remember when people happily lined up overnight to get a chance to pay $599 for the first iPhones?

Now of course, iPhones are much cheaper, and you can get a DVD player for twenty bucks. And just as there were opportunities to buy Citigroup stock at $55 in 2007, and opportunities to buy it at $1.00 a share in 2009, there are similar instances where consumer products are deliciously, or nauseatingly, divorced from their value.

The thing is, everything has a price (except my journalistic integrity of course), and that price can vary wildly depending on the circumstances. And that's a source of enormous opportunity for consumers.

Moreover, companies love, and will take maximum advantage of, consumer enthusiasm for new popular items. This shouldn't surprise anyone, especially a savvy CK reader. In some instances, consumer products companies will even go so far as to create real (or imagined) shortages of goods in order to stoke consumer fervor and drive still more perceived value for their products.

What does this mean for consumers? It means that fortune favors the patient. If you can fight off the urge to be an early adopter, if you can resist the urge to always need the latest new, new thing, you will save a substantial amount of money. And the best thing is, you can still have that latest new, new thing. You just have to wait a little bit.

Of course this means resisting the urge to join the herd of other consumers, something impossibly difficult for the vast majority of people.

But think about some of the most prominent human herd activity over the past several years. In the last decade alone I can come up with three herd activities that everybody did, all of which ended terribly: buying technology stocks in 1999-2000, buying stocks at all in 2007-2008, and owning big homes (or worse, second homes) that of course would never go down in price.

Okay. Think about those awful exercises in herd behavior, all of which ended in tears, and then think about products in retail that have driven herd behavior in the past: Pet Rocks, Cabbage Patch Dolls, Tickle Me Elmo, Pokemon cards, Webkins, Silly Bandz Bracelets, etc. (Seriously, need I go on?). When you think about the nearly insane enthusiasm consumers collectively had for these varyingly silly products, the herd starts to seem a bit to easier to resist, doesn't it?

Here's the important concept behind today's post: in the consumer products industry there is often a highly tenuous relationship between the price of something and its true value. Furthermore, time is on your side. Urgency to buy something means you will pay more, often much more, for goods that you can most likely get at far lower prices later. Consumers should always keep this paradigm in the backs of their minds whenever making purchases.

You'll find goods and services priced at all sorts of levels, some absurdly in excess of their value, some absurdly cheap relative to their value. And much like with our body weight, the price of something is an often one-dimensional number that rarely tells the whole story.

Readers, what thoughts can you share?

Stay tuned! We'll have more posts in our series of Understanding the Consumer Products Industry coming up shortly. Please head here for the series main index page.

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Kimberly said...

Ha, I have been caught by some of those trends (early adopter!)...

Lately I have been trying to remind myself of price anchoring, especially if I see something "on sale". It helps me keep pricing in perspective.

chacha1 said...

The early-adopter premium is but one of many reasons why a Honda CR-Z is on my wish list, and not on my MUST BUY NOW list.

However ... here's a question for ya, Dan. I wonder, when it comes to food items, just how much of the price is determined by the cost of growing the food.

Why, for example, is a purple or orange cauliflower four times as expensive as white? Are the colored ones really harder to grow, or is the premium purely due to rarity, or is it because colorful & unusual produce are on trend?

Same applies to yellow/orange/purple bell peppers. Or yellow/orange tomatoes. Or (list goes on). What's your take on the "luxury tax" applied to fancy produce?