What is “What the Market Will Bear”?

BearWhen asking business people how to set price, I often hear the answer, “Charge what the market will bear.” Think about that answer for a second. What does it mean?

The underlying sentiment is positively spot-on. We should set prices based on what our customers are willing to pay, not based on our costs. However, what is “the market” and how much “will it bear”?

The problem with this statement is markets are made up of companies and/or people. Each one is different. Each has a different willingness to pay. “Charge what the market will bear” implies a single price for a large group of companies or people.

If you price low enough, this single price may capture the whole market. However, you will be giving many customers a much lower price than they are willing to pay.

If you price high to capture the profit from those who will pay the most, you will be missing out on profitable business at the lower end.

Of course you can choose somewhere between as a compromise, so you give up some at the low end and some at the high end.

Which price, low, high or middle, is what the market will bear? Regardless, whichever you answer it is not the price that maximizes profit. The best answer is price segmentation. Create smaller segments that consist of customers with similar willingness to pay.

Next time you hear someone say “We should charge what the market will bear,” smile and know they have good intentions, but then dig deeper and set prices and pricing strategy based on much smaller segments. You will be much more profitable.