Most of the time proponents of price-elasticity make me laugh. And, I do say this with respect. I used to be one of these proponents. I inhaled business book after business book once done with engineering school. And, I played the game. And I got my ass handed to me.
In the real world price elasticity works within a very narrow range that is industry and product specific and can --and usually is-- highly dependent on a huge number of external factors.
Discounts are one of my favorite. Believe me when I say that I've played that game multiple times. I used to own an electronics manufacturing business that made products for industrial and professional applications. I had to face the reality of product from Korea and China entering the market at half my price and offering 60% of my value. The result, no matter what I did, was the huge sucking sound of sales leaving for the competition.
Lower your prices you say? Did that. Multiple times. In multiple creative ways. Eventually matching their prices and accepting lower profits. "We'll make it up in volume". Bullshit! Maybe I sold 1% more product. That's it.
OK, how about more value. Did that. Multiple times. Added features. Added mind-numbing technology. No-go.
We are talking about products costing thousands of dollars per unit here. The fact was that people, particularly as the economy got worst, wanted Walmart, not Gucci. And so the business went to what they perceived to be the cheapest they could get.
Don't get me started on Asian companies dumping to kill-off competition. Nasty.
OK, well, how about the high end. I had very high end product as well. $50K per unit and above. High performance. The best of the best. Volume, just like the taylor in the article, sucked. We could make these "Ferrari's" but it was sheer pain and suffering, financially speaking. The general theory was that we'd sell a high-end unit and also sell a lot more lower-end units along with them. Nice dream.
So, raise prices? Sure. Why not? The problem is that people are only willing to pay so much for what they are buying. The "how much" is a multivariable problem that is nearly impossible to solve. This is certainly true for a taylor who only makes a few dozen suits per year. He can't experiment with pricing too much as word of mouth would destroy his business. If customer B learns that he paid more for the suit that his friend, customer A bought all hell breaks loose.
I know I sound very negative about this. I am just looking at it from the perspective of having experienced failure in price elasticity due to the product I was pushing existing in a very narrow trading margin. Volume couldn't really scale at the bottom or at the top due to different factors and price at the top was limited by what people were willing to pay for the product category.
Perhaps he can charge more for additional services that he might not be monetizing. One example might be to extend the delivery time on his standard $4,000 suit and charge a $1,000 fee for faster delivery. In effect he would be raising his actual per-unit price, but it would be in the context of easily communicable value. In the prior example, customers A and B would have on issue with what each paid because the conversation would quickly identify that B got his expedited, which costs money.
He could also take in an apprentice and see about offloading some of the work. My family owned several clothing manufacturing plants and so I am also familiar with aspects of this business. There's a lot that can be done by less skilled workers if one is smart enough to setup systems to make this happen.
Finally, he might be very well served taking his problem to a local business school to see about getting help from one of their various programs. His business could very easily become the subject of a class and he could have a small army of consultants helping him move it out of the garage.
> He can't experiment with pricing too much as word of mouth would destroy his business. If customer B learns that he paid more for the suit that his friend, customer A bought all hell breaks loose.
I agree he would need to be careful. But in this case because there are so many trivial ways in which he can differentiate the products in ways that will sufficiently justify price differences:
* Use more expensive materials. And mark it up heavily.
* Provide a luxury service: Visit the client for measurements with a couple of pretty assistants instead of having them come to you, and make the service look more upscale. Send someone over with samples and pictures to get feedback a couple more times than usual.
* Make things take longer to give the impression of more effort. There's a shoemaker in London that takes 6 months to produce your pair of shoes. They can optionally provide additional pairs to the same measurements, for a measly additional sum of 500 pounds per pair - the price for their first pair is not listed. I'm sure there are more - that's just one I stumbled over. But this one presents the long time it takes as a mark of quality and status: Most people just go to a store and buy shoes, but you, your shoes take 6 months to be ready. Of course it costs.
* Add on lots of stuff that indicate higher quality but that the client has no idea of the real cost/effort for: Finer stiching; more complicated patterns; more detailing inside. etc.
As you point out, he could also charge extra for faster delivery (on top of making his new "premium" service take longer by default, even), or flat out state that due to the demand, there is a waiting list, but a limited number of "rush" order will be processed if you pay a substantial premium.
This is very different from most technology products - suits, or fashion in general, is a very visible status symbol, and beyond a certain quality level, a higher price will often make the product more desirable even when there are no quality differences other than minor visible visual cues that lets those in the know realize that you've paid twice as much.
I think the economics of pricing your labour are different from the economics of pricing something you manufacture. I mean, yeah, in this case, he's manufacturing something, but his whole value proposition is that something constitutes an enormous amount of labour.
Yeah, he can hire underlings, but managing people is a completely different skillset. (I mean, to manage skilled people, you need to have a pretty good knowledge of that skill... but you also need to know how to manage people.)
Under those conditions? eh, I think that raising prices when you are turning away business makes a lot of sense. I mean, right now, I'm doing the same thing with consulting type work. I apologize and usually hand out referrals when I quote a price, but eh, I don't need the work. If I scare off the customer, good.
I think people are also more understanding about you changing the price of your labour than about you changing the price of a mass-manufactured good. Most people understand that you have busy times and not so busy times.
also note, in most expensive things? customers pay different amounts based on their negotiation skill and perceived ability to pay. I mean, I'm trying to sell co-location, and, well, mostly failing using the 'here is the price on the website; everyone pays this price' model. I even lowered existing customer's prices when I lowered the price for new customers. Nope. Nobody cares. In co-location, if you want to sell, you give 10%- for the life of the customer, including upgrades to the salesguy. (mind you, for the small fish, my customers, this guy just throws you an email and you take it from there. He does no work ongoing) Obviously, as my margin on the larger co-lo packages isn't all that much more than 10% (which is completely reasonable; it's not that much work for me... most of it goes to the data centre owner. I mostly just handle the network.)
Anyhow, I guess my point is that most customers, when buying expensive things, are absolutely used to the situation where you spend two weeks fucking around on the price, where everyone pays a different price and nobody knows what the renewal price will be. Sometimes, in fact, it seems to me like they prefer that model.
Incredibly in some cases this increases value, because it creates a product that is narrowly specialized and fulfills very specific need. People with that need would rather buy a product that does exactly what they need instead of something that also does it. Specialization and a higher price point serve as indicators of higher quality, and through that - a higher value.
Tried that too. Didn't work. I was Gucci. People wanted Walmart. At one point the entire thing becomes highly illogical. For example, people knowingly choosing to buy product that is known to be of low quality and unreliable. One of my resellers back then told me "if we sell ten of those, twelve come back broken". Still, people, for some reason, continued to buy that product. This is just one example of what woke me up to the reality that price elasticity only applies to specific, and sometimes only textbook, examples.
In the real world price elasticity works within a very narrow range that is industry and product specific and can --and usually is-- highly dependent on a huge number of external factors.
Discounts are one of my favorite. Believe me when I say that I've played that game multiple times. I used to own an electronics manufacturing business that made products for industrial and professional applications. I had to face the reality of product from Korea and China entering the market at half my price and offering 60% of my value. The result, no matter what I did, was the huge sucking sound of sales leaving for the competition.
Lower your prices you say? Did that. Multiple times. In multiple creative ways. Eventually matching their prices and accepting lower profits. "We'll make it up in volume". Bullshit! Maybe I sold 1% more product. That's it.
OK, how about more value. Did that. Multiple times. Added features. Added mind-numbing technology. No-go.
We are talking about products costing thousands of dollars per unit here. The fact was that people, particularly as the economy got worst, wanted Walmart, not Gucci. And so the business went to what they perceived to be the cheapest they could get.
Don't get me started on Asian companies dumping to kill-off competition. Nasty.
OK, well, how about the high end. I had very high end product as well. $50K per unit and above. High performance. The best of the best. Volume, just like the taylor in the article, sucked. We could make these "Ferrari's" but it was sheer pain and suffering, financially speaking. The general theory was that we'd sell a high-end unit and also sell a lot more lower-end units along with them. Nice dream.
So, raise prices? Sure. Why not? The problem is that people are only willing to pay so much for what they are buying. The "how much" is a multivariable problem that is nearly impossible to solve. This is certainly true for a taylor who only makes a few dozen suits per year. He can't experiment with pricing too much as word of mouth would destroy his business. If customer B learns that he paid more for the suit that his friend, customer A bought all hell breaks loose.
I know I sound very negative about this. I am just looking at it from the perspective of having experienced failure in price elasticity due to the product I was pushing existing in a very narrow trading margin. Volume couldn't really scale at the bottom or at the top due to different factors and price at the top was limited by what people were willing to pay for the product category.
Perhaps he can charge more for additional services that he might not be monetizing. One example might be to extend the delivery time on his standard $4,000 suit and charge a $1,000 fee for faster delivery. In effect he would be raising his actual per-unit price, but it would be in the context of easily communicable value. In the prior example, customers A and B would have on issue with what each paid because the conversation would quickly identify that B got his expedited, which costs money.
He could also take in an apprentice and see about offloading some of the work. My family owned several clothing manufacturing plants and so I am also familiar with aspects of this business. There's a lot that can be done by less skilled workers if one is smart enough to setup systems to make this happen.
Finally, he might be very well served taking his problem to a local business school to see about getting help from one of their various programs. His business could very easily become the subject of a class and he could have a small army of consultants helping him move it out of the garage.