Sherri walks into CVS to purchase some shampoo for the Herman household. She sees Pantene for $6.45/bottle or Sunsilk for $9.99/bottle (totally made up numbers). Sherri has a specific price in mind she wants to pay for Shampoo based on her proprietary valuation system (special needs, bottle shape, accessibility, etc) and based on this specific value, she is able to decide between Pantene and Sunsilk.
Pantene and Sunsilk are offering (pricing) their products at these price levels because they have done a comprehensive supply/demand curve and have optimized where they should price their product for the optimal (not always most) amount of buyers. This is done through market and competitive research as well, as, historical sales scenario planning data.
In this scenario, the marketplace appreciates pricing obfuscation: it’s simple for the consumer and it’s simple for the business. The consumer never sees the profit margins (unless they are purchasing from a public company and even then, how many consumers read financial reports) and the business never knows how much the consumer was really willing to pay (potentially more). There is not really a tension here – if a product’s price is not adequate for a consumer, they will move onto the next product on their list.
For the media/advertising world, things are changing. A once very opaque industry is changing. Agencies and brands are becoming much more quantitative and are understanding how to value inventory for the first time (I took liberty for “first time”). Most publishers do not appreciate this – and the obfuscation/opaqueness that once existed that provided healthy margins is dissipating.
Let me reprhase the last sentence:
Most publishers do not appreciate this in the short-term. Historical obfuscation of pricing/valuation has lead to healthy margins that have existed for years (why do we have 3 Martini lunches? Why are media teams making custom nike sneakers with reps?) for the sell side. The long-term opportunity is tremendous, if the sell side could get over the initial short-term shock.
Some say that the bigger they are, the harder they fall. The problem with this is that the major media companies such as Conde Nast (Advance Publications), Hearst Corp, and Tribune are all very large private companies and are potentially going to fall very, very hard. Note: I’m not saying that they cannot get back up again… They can. But they are going to have to fall first.
If/when major media buyers (marketers, agencies grouped together) have the ability to buy on value, not price en mass, this will be a major market shift. Some of us are here today but when even more of us are here tomorrow, the sell side will become much more comfortable as more dollars move into the industry to satiate cash flow statements.
Since however the market appreciates obfuscation in pricing (it’s just plain simple!) we may never get to this efficient place, but it would help the actual buyers and sellers reap much longer term benefit that short-term margins.
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