During the weekdays, those of us who are responsible for category and price management, are extremely productive and laser focused.We talk metrics and KPIs, workflow optimization and team cooperation improvement terms, build charts and graphs, negotiate suppliers’ partnership conditions and prepare our weekly progress and margin reports.
However, on Saturday mornings we all find ourselves struggling when our beloved children enquire. This is an exact conversation a friend of mine had with his son:“Dad, what are you doin’?”“I’m working, Sweetie!”“Yes, I know, you’re always workin’ on Saturday mornings, but what are you actually doin’ for work?”
The next moment after that question he found himself right there: Interrupted in the middle of a work email, chaotically looking around, juggling ‘margin-demand-elasticity’ words in his head, and pronouncing continuously ‘Mmmm hmmm...’ to a child standing next to his home desk.For those who’ve ever felt like this, or possibly might be in such a situation, I’ve prepared a simple illustrated guide based on my friend’s story (thanks, Mike!).You can use it to explain the most popular pricing strategies to a child and hopefully drop a few entrepreneurial seedlings in some growing minds.
Start Pricing Strategy Explanation with the Basic Statements
“... what are you actually doin’ for work?”“I’m applying pricing strategies to sell more goods. Do you know what the pricing strategy is?”“No...”“It’s easy to explain and takes no more than ten minutes. Do you want me to tell you a story?”“Yes, I do!”, the Boy left his car behind when Dad plopped him on his knee.“Look, do you see this apple?”“Yes, sure.”“And you like apples, right?”“Of course! Everybody does!”“Sure you do! Once upon a time there was a girl who found a tree. The tree was full of sweet, beautiful, crisp, and juicy apples.”
“The Girl tasted one of them. It was just as tasty as the ones of those we have on our table. She thought her classmates would probably like these tasty apples too — just as much as you do, sweety. So she decided to collect them ...”
“... wash them ...”
“... and sell them at school, during lunch. She also decided that every apple will cost a dollar. At the end of the day her basket with apples was empty, but her wallet became stuffed with dollar bills.”
A Simple Step to Explain to a Child Cost-Based Pricing
The Boy was unable to sit still! His eyes were shining. He was listening to the story and dreaming of one day doing the same kind of business himself, and then spending a fist full of dollars on that fancy Fast and Furious radio controlled car he saw yesterday in the toy store.“But it was only in her imagination, son. When she tried to gather the apples, the gardener showed up and told her she’s forbidden from doing that unless she pays him 10 cents per apple.”
“She paid. Then, when she was ready to wash apples in the school kitchen, the cook stopped her: ‘Hey, the water isn’t free here! You need to pay if you want to wash your apples!’”
“And then, when she finally paid and washed the apples, she went to the school garden. It was the beginning of a big school-break, and the most popular guy in the school just started playing basketball. She asked him ‘Hey Joe, are you hungry? Maybe you’d like to buy some apples?’ He stared at her for a second, then at her basket full of shiny clean apples and answered: ‘No, but I can help you sell them. And you’ll pay me 30 cents for every apple sold. Otherwise, I’ll tell everybody your apples are wormy and stolen!’”
“Dad, but that’s not fair! The apples are excellent!” the boy was very upset. “Yes, you’re right. That’s not true, but he is still a popular boy and classmates trust him more I guess.” “As you can see, everything went wrong. Instead of earning a dollar per apple. After all the expenses, the girl might get only 40 cents. So she had to use different pricing approaches to set prices instead of just imagining how much she wanted to earn. The best pricing approach she could use in this situation is called the cost-based pricing. It’s one of the oldest and simplest pricing strategies in the world.”“To use this pricing, the Girl had to sum up the desired profit-margin and all expanded costs fully and correctly distributed between all products. So if the Girl still wants to earn $1 per apple, the final price for her classmates would be $1.60”“The biggest advantage of the cost-based approach is its simplicity. It’s neither rocket science nor complex math.”
Simple Explanation of More Complex, Discount- and Competitor-Based Pricing Strategies to Your Child
“Son, did you get the idea of cost-based pricing?”“Yes, sure dad! That was super easy!”“Ok, good. Now imagine some of the girl’s classmates brought their own apples for lunch. They’re not as shiny or tasty as her’s, but still, you know, it’s apples. They can be eaten. What can the Girl do in this case?”“Take their apples away, so they will definitely buy her’s!”“Good idea,” Dad laughs, “But what if she wants to play nice?”“I don’t know...”“It’s easy, too. The Girl can suggest that other children buy her apples for a discount. For example, if they buy more than one apple, they pay less. This is called discount-based pricing. There are different kinds of such approach: Scope (quantity) discounts, cumulative, seasonal, etc… Here, take a look at the picture I drew for you.”
“However, it’s expected that some of her classmates who also want to earn a couple of bucks will copycat her. They’ve started selling apples too, sometimes for even cheaper. Luckily, our Heroine-Girl was already building a strong reputation as a tasty-apple-distributor, so she doesn’t need to drop her prices much. Yet, she still needs to keep a balance between her product quality and her classmates’ prices. It’s called competitor-based pricing.”
Answering a Child Regarding the Main Question of What a Pricing and Category Manager Does
“And that’s what I’m actually doing in my day job. I sell products via the internet, so imagine the same apples except on a website ...”
“I need to consider all costs associated with selling this apple, all competitors’ prices, and all customer behavioral sets to set the right prices on a different product. However, in my case there are thousands of products, so I use a particular pricing platform from your uncle Alex to set all the prices. Also, I use a set of rules that change apple prices automatically when something on the market changes.”
“Have you got a pretty good idea of what I’m doing, son?”“Yes daddy, It was easy. Can we go play outside now?”“Yeah sure, but only after breakfast. I can already smell it: Your mom’s pancakes are ready!”
Well, let’s leave that here. They had a beautiful weekend together after this conversation. You can use this explanation as well to teach pricing strategy to your child, or you know, your curious neighbor, if you happen to have one! :-)Sincerely yours, Alexandr Galkin.