The Pricing Power in Constraints

tied handsWhere are the constraints?  Look around your company, your industry.  These constraints provide pricing power.

Think about supply and demand.  Years ago I wrote a blog post on how supply and demand aren’t typically related to pricing because supply is usually abundant.  Implicit collusion, not supply and demand holds prices above costs.

Today, let’s think about when supply is limited.  We see this for consultants who have more business than available hours.  We see this for airlines and hotels during the holidays and other busy times.  Each year, some toy will become the hot, unattainable plaything that every kid clamors for.

In each of these cases, demand exceeds supply.  This means ideal pricing is driven by supply and demand.  Excess demand is an opportunity to increase price.

We see that airlines and hotels charge higher prices during their busy times, when demand exceeds supply.  Savvy consultants do the same.  Ticket scalpers for sold-out events are taking advantage of excess demand while new dynamic pricing methods are trying to capture more of that profit for the venue and promoter.

Constraints don’t mean you have to raise prices, but it is an opportunity.

Remember when Volkswagon re-launched their Beetle.  It was a huge hit and there were long waiting lists to purchase one.  However, VW did not raise their prices.  Notice that because VW didn’t increase prices, some entrepreneurial people were able to buy a Beetle off the showroom floor and then sell it aftermarket for a profit.

The same is true for the new video game consoles when they are first released.  Usually there is a temporary “used” market at prices higher than what the manufacturer charges.  Of course this market goes away once the supply constraints go away.

Constraints can drive higher prices even if you are constrained and your competition isn’t.  Since the constraint means you can’t completely serve all of your customers, you may choose to only serve those with the highest willingness to pay.  This often means raising prices.  Of course, be clear about what may happen when your constraints diminish and you try to win back lost customers.

Now apply this concept to your business.  What constraints can you foresee?  Are there super busy times, or a lack of supply of a critical component, or not enough hours in the day?  Plan now what you will do when these constraints arise.  It is much easier to make these decisions logically when customers aren’t screaming for more.

Constraints often look like challenges, but pricing power is frequently a silver lining

If you think of any other constraints I haven’t mentioned, please share with the community.

 

Photo by Hanna