The article on pricing commercial real estate properly is not just theoretical . The world of commercial real estate aside, we see the importance of proper pricing play out every day in very practical ways. Airline tickets, clothing, automobiles, your labor, and millions of other items are increased and decreased in price based on supply and demand. A company releases their new bacon flavored water for $2.99 a bottle, find an enthusiastic consumer base, the price may increase. Conversely, bacon water is so popular and profits are so handsome that the Coca Cola Company enters the market and chances are the bacon water gets cheaper.**
It is also true with noodles, specifically Maruchan brand Cup of Noodles. This is typically my lunch of choice as I sit at my desk, so I buy in bulk with a unit cost of .19 cents per cup. In short, I eat a lot of Cup of Noodles, which means I could eliminate sodium intake for the rest of my life and would still be over the limit—but that’s beside the point.
Several times per day I make a trip to the break room of our sister company, Kline May, to fill up my coffee cup and can’t help but notice a vending machine filled with these same Cup of Noodles, but priced at .75 cents per cup. Are you seeing the opportunity here? I start offering my Cup of Noodles to anyone interested at .50 cents per cup; a handsome profit margin. This goes on for a few months before the vending company becomes aware of my “side business.”
They cut their price to .25 cents per cup. It becomes clear—I control the noodle market in the Kline May break room. They drop their price as an attempt to drive me out. It’s not happening—I don’t have the overhead they do—no machines to maintain, no labor to restock, free product storage. I can win this war of attrition. So I cut my pricing to .23 per cup with the goal of minimizing their profit margin to a point where I drive them out. Once successful, I start capitalizing on my Cup of Noodle monopoly and begin increasing prices. Beautiful.
I don’t plan to stop trying to manipulate the market (back off SEC & FTC). In fact, I hope to expand my market influence—I’m thinking now that I have mastered noodles, I will turn my attention to currencies. What could possibly go wrong?
By the way, if you just read this article and not the one on proper pricing in commercial real estate, don’t be embarrassed— 90% of readers do the same according to the analytics. However, 90% of people are missing out of some really good stuff in the other article. What do you say—give it a shot?
**Illustration purposes only. This article was not intended as a study in all of the complex nuances of economics and pricing mechanisms. It is understood that this is a simplistic explanation and does not consider substitutes. However, if you took issue with the example, please feel free to give me a call at 540-271-7525. I love economics and would love toSHARE