The Dark Art of Pricing

The Dark Art of Pricing

All too often, we as engineers think the only honest way to price something is to take what it costs, add a reasonable margin on top, and call it a day. And get outraged when someone has the gall to charge money for goods and services. How many of you pay for YouTube premium? I’ll telling you that way of thinking - that just adding a reasonable margin on top - is wrong.

I mean it’s reasonable and makes sense from first principles, but we’re not in first principles territory here, even for a brand new product because we’ve been paying for things with money since money was invented in prehistoric times. The sooner we learn that the price of something has nothing to do with what it cost to make, the better we’ll all be for it. Now obviously we want the price to be greater than the cost, for longevity reasons, but nothing lasts forever, so things frequently can be found on sale for less than it cost to make them.

The price, and value of something is whatever someone is willing to pay for it. If an eccentric billionaire wants to buy a newspaper for $44 billion, then it’s worth $44 billion. Similarly if someone wants to buy used underwear for $300, that’s just what it’s worth. We’re spoiled by our stores charging a fixed, same price on items to everybody. We never have to face the fact that the numbers are all made up anyway.

Market forces are the best way to find the intersection of supply and demand given a marketplace of suppliers and consumers, but we’ve gone too far with it and lost the plot. The price for baby formula should be $0, not locked up behind the counter in low-income areas.