Monday, July 13, 2009

Leaving money on the table

Pricing perfectly is a science, nay an art.

I just realized how difficult it is to price something well and not leave money on the table when I paid my laundryman. The guy charges the lowest prices per piece I have ever seen anywhere in the country (and by extention anywhere in the world). His prices are atleast one-tenth the prices I would pay if I took it a professional shop thats a 10 min drive from here. And the poor guy ends up borrowing money in advance to tide over his expenses during the month.

Clearly, he could easily raise his prices without losing customers.

Or can he? Now, he is one of the two laundrymen who service the apartment complex where I live. And both of them charge the same rates. If he raises his prices, there is a good chance customers could switch.

So whats his way out?

He has two basic options. One - collude with the other laundryman to raise prices. Or Two - start differentiating, for e.g. offer a premium service at a higher price point and attempt to move customers up.

Again, how much could he raise prices?

Pricing theory says one could raise prices all the way to the point till customers see value, capped by prices of comparable alternatives. In this case, if I were a representative customer, he could raise prices almost 10-fold (assuming he could match the professional service shop) or atleast 2-3 fold at his current service level. I'd imagine that the money he's leaving on the table could solve most of his monetary problems. But does he realize it?

One factor in this is the availability of quality information. A lot of pricing that happens in practice (even in large firms) is through benchmarks. For the laundryman, the only comparable is his competitor. And this makes him leave money on my table.

This underpricing is something I've noticed in a lot of the unorganized labor in the place where I live. And this is quite sad for it feels almost exploitive to be keeping back money from people who are more in need.

Finally, it is interesting to look at professional services available in this town. Quite a opposite to the unorganized, they seem to follow the maxim 'when in doubt, price up'. With scarcity on their side, they rule the roost. To cite the contrast again, I've never seen professional services priced so high anywhere else in India.

Gurgaon is an interesting city.
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