Willingness To Pay – A Lesson From Baseball | Strategic Pricing Solutions

I am a lifelong fan of the San Francisco Giants. I waited a long time before they finally won a World Series in 2010, and then again in 2012 and 2014. Of course, now that they have won it a few times, I want them to do it more often; and I pay close attention to the roster moves they make. Recently I have been lamenting the salaries they are paying to some players, wishing the players would simply be paid for performance. Then I realized – baseball is just a good example of customer willingness to pay and is not different from other markets. Determining customer value compared to their next best alternative and pricing accordingly is an important part of maximizing profitability.

There was a time when baseball players had to play for the team that drafted them or had traded for them. Once the players were drafted, there was only one possible buyer for their services. Likewise, the teams did not have multiple options for potential suppliers of services. They had to either draft or trade for the players they wanted. There was no competition for buyers or sellers, so prices in the market tended to be limited. Once players were granted free agency, they could sell their services to any team. Similarly, teams could go after any player who was selling his services on the open market. With those conditions, baseball started behaving like a real market and pricing changed.

…

Why am I writing about baseball players and hedge funds? Because they illustrate the point about customer value and willingness to pay. The value of your product or service to a customer is always an amount compared to their next best alternative. Customers may be able to get something cheaper, but if they are convinced your offer provides something the alternatives don’t, they will be willing to pay more. Figure out what your customers are willing to pay and set your prices accordingly, even if those prices are substantially higher than competitor offers.

Read complete article here:

Willingness To Pay - A Lesson From Baseball.