Bubble Gum and Pricing

8 Aug 2011 | written by Chris Finken for the Small Business Tips section(s)

Bubble Gum and Pricing
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Ready for a second grade story problem?  Oh, good.  Let’s say you buy a few packs of delicious bubble gum for fifty cents each.  Should you sell them to your friends for 75 cents or for a dollar?  This may seem like a no-brainer: charge as much as you can and laugh all the way to the bank.  But let’s say there are 10 kids who want to buy gum.  Three of them will buy from you if you charge $1, and seven of them will buy if you charge 75 cents.  Go ahead, crunch the numbers.  (I’ll wait here.)  Done?  If you charge $1, you make $1.50 (50 cents profit each on three packs of delicious bubble gum).  If you charge 75 cents, you make $1.75!

The takeaway here (beside making me want some bubble gum) is that how much you charge depends on what you want. Does the price you charge make any difference?  Well, if you consider whether you make money and stay in business a difference, then, yes.  The right price can lead to booming business, and the wrong price can put you out of business.  So what’s the trick?

These four considerations might help:

Determine your break-even point

Sure, the pack of gum cost 50 cents.  But did it cost you anything to go to the store to get it?  What about your time? Do you need to mail it to anybody?  What about the “Buy your gum today!” signs you put up around school?  The posters?  The smelly markers?  Your time? Take all your costs into consideration before you determine your break-even point.  Could you sell the packs of gum for 25 cents?  Not if you want to make money…and I have the sneaky feeling you want to make money.

Get a handle on your target audience

Are your customers high-rollers?  Are you aiming to be seen as a bargain or is quality more important?  Do you want to build the VIP recess brand that only a few kids can afford (and therefore charge $1) or do you want to monopolize the playground and keep other kids from selling gum (and therefore charge, say, 55 cents)?  Figure out who you want to sell to and build your price and brand around it.

What’s everyone else up to?

Look around and see what the competition is doing.  Is there a third grader selling gum that lasts longer and tastes even better?  If the kids are used to paying $2 for a pack of gum, they might think $1.75 is a bargain.

Try, try, again

If no one bought any gum when you charged $1, try again the next day for 75 cents.  You’ll have to tinker with prices for a while, so keep trying to find the best sustainable price that allows you to make a healthy profit, grow your business, and please your target audience.  Trial and error is your best friend in small business (and in life), and pricing is no exception.

Whether you sell bubble gum or army jets or anything in between, applying these tips will help your price problems disappear.

5 Comments

5 Comments

  • Bob Thompson |   Aug 20th, 2011 at 6:34 pm

    Great post Chris and this makes a great point about making money.

  • Brian Yang |   Aug 23rd, 2011 at 6:59 am

    Short, simple, and sweet story. Get’s the idea across well on how to manage prices.

  • Steve R |   Aug 25th, 2011 at 5:01 pm

    Actually, you make $2.50 by pricing at $.75.

    3 are willing to pay at most $1, 7 are willing to pay at most $.75. Thus, 10 (not 7) would buy at $.75

    10 * ($.75-.50) = $2.50

  • Andrew S |   Oct 11th, 2011 at 6:56 pm

    Not necessarily.
    It could be that seven, including the three willing to pay $1, will pay $.75. The remaining three (knowing you only paid $.50) might only be willing to pay $.60.

  • Juliemarg |   Apr 22nd, 2012 at 11:39 pm

    I’m late to the discussion, but my experience from 20 yrs of working with small businesses is that they mainly charge too little. The numbers are more likely that 6 will buy at $1.00 and 7 will buy at $.75. So you make $3.00 gross profit at $1.00 and $1.75 gross profit at $.75 per pack.

    Because they’re afraid to raise their prices, they let inflation cut away at their margins for years before becoming desperate to raise. The $55 hair cut that’s been the same price for 5 yrs, now needs to be $70 but no one wants to have that kind of price jump.

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