Monday, December 20, 2004

a diversion

Finally I cracked and decided to blog this. Following Joel Spolsky's recommendation and my habit of occasionally reading business books I got the classic

It's got to be the book on the subject because I did not die of boredom and
actually have enough interest to keep on reading, despite the semi-technical flavor of the book. The secret is that the technicalities are first explained conceptually, then mathematically and then reinforced by examples, which make the whole thing digestible. Another reason I like the book is that it explains things about pricing that you see in the real world, which the consumer (me) better ways to think about values of things and the mental mechanizms businesses use to occasionally get you. The chapter I was reading just right now is on 'reference point' that people use making pricing decisions. The basic idea is simple: we use the price of competing products as a reference point for eveluating other products. Their real-life examples are great, here is a couple:
"Vasiline Intensive Therapy" lip balm is 1400% (no mistake in zeros)
more expencive than a regular tub of vaseline, which is the same
stuff. What allow this markup is competition with "Chapstick", which
sets the reference price.
Another good example is Jelly Belly candy. You will never see them sold in your grocery store next to other jellybeans - the huge markup against the generic reference point would not allow this. Instead they rely on being sold in gourmet candy stores where the reference point is going to be, for example, some expensive chocolates. Another thing not openly mentioned in the book (so far) is that
reference point is really a relative term.

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