We have four young adult drivers in our family, in addition to my wife and myself, and our two primary cars each have only a single key fob. This leads to a lot of trading fobs between drivers (and occasional frustration when someone drives off in one car while also inadvertently carrying the fob for the other car as well.) However, I had not previously had an additional key fob made for either car, because the cost quoted to me by the dealership was over $300.

That approach ceased to be practical the day the key fob to my car disappeared.

There was significant dispute as to who had last had the fob, and everyone insisted they had returned it to the key holder after using it. But the thing that was clear was that the fob was missing, and without it my car was not drivable.

It’s a fundamental premise of Value Based Pricing that the value of something is measured compared to your next best options. With my car unwilling to start, my next best options were very expensive: Have it towed to a dealership where they would then charge me $300+ for a new key. Get a new car.

So, I took the least expensive (though still expensive) option and called a mobile automotive locksmith who would come out in person and make a new key.

How much?

$350.

It was cheaper in both time and money than having it towed to the dealership, though not much. In this sense, even as I gritted my teeth at the expense, I had to admit the locksmith had his pricing dialed in. He was taking full advantage of my willingness to pay and was still providing a better value than my next best option.

Once I had him there, working on the car, I asked him how much it would cost to have him make a second key fob. I figured that if I had him out there anyway, I might as well eliminate the frustrations of six people sharing a single key fob.

How much?

$350.

How about $150 for the second one, I asked. $500 total.

He considered, then offered $200 for a second one.

Nope. It’s got to be $150. Otherwise, I’ll just stick with the one.

He called his boss, then agreed. $500 for two key fobs.

Behind this negotiation are two key pricing lessons.

The first lesson I already described: When your potential customer has a problem where all the other solutions are very expensive and/or inconvenient, you have a lot of pricing power. All the mobile locksmith needed to do in order to get my business was be less expensive than having the car towed to a dealership and paying them to program a new fob. By pricing slightly less than the cost of both towing the car and having the dealership provide the fob, they maximized their profits while still winning my business.

However, once the locksmith was on site, there’s another important pricing lesson at play: The power of add-on pricing with an already acquired customer.

What is your most expensive piece of marketing? Acquiring a customer.

So once you have acquired a customer, it makes sense to maximize that customer’s total purchase. This is even more the case here, where the locksmith had already incurred the cost of driving out to my house to work on my car.

If he provided me with a second key fob, his costs were the physical fob (which I have to assume is actually quite low) and the addition of perhaps ten additional minutes of work at a stop he had already traveled to. In that sense, the discounted second fob might actually be higher profit than the full price first fob, which came with the cost of customer acquisition and travel.

I knew that he would probably accept a significantly lower price for that second fob for that reason. And indeed it would have been smart for him to offer a “buy a second fob for 50% off” option to all customers in order to increase his average total revenue per visit.

If you’re setting prices for a business, you need to make sure that your minimum revenue per sale is as high as possible. That means figuring out what the customer’s next best option is and pricing to offer a savings versus that next best option, but capturing as much of the value as you’re delivering to the customer as possible. This makes your work in acquiring the customer and making that first sale pay off.

However, you also want to offer attractive up-sell opportunities: bundles (which is essentially what I negotiated with a discounted second fob), upgrade options, a “good, better, best” product or service array. That is how you increase your average revenue per sale and make your whole business more profitable. It is usually more profitable to sell more to each existing customer than it is to have to go acquire additional customers.

I list eight reasons why businesses have discounts and talk about the benefits and pitfalls of each.

With a house full of teenagers and young adults, I’m used to having to dole out advice on “adulting”, but what struck me most about this question was not my daughter’s buying decision but that something serious had gone wrong in the pricing department of one of the world’s biggest and most successful companies.

Discounting can be a powerful tool for either taking a number of hesitant, potential customers and converting them into sales today or for reaching customers who are not quite willing to pay your normal prices but would be willing to pay a somewhat lower price.

However, discounts can also destroy the value of your product in your customers’ eyes and create a situation where customers are unwilling to buy your product at full price or even delay making a purchase at one discounted price because they believe there will be a lower discounted price soon.

The first of those problems happens when regular and prominent discounting results in what we call “shadow pricing”.

A prominent example of shadow pricing is when a brand conducts regular sales which result in customers re-setting their expectations of the “right” price to pay for a product.

For example, for many years I was a loyal buyer of Brooks Brothers non-iron dress shirts. Their theoretical list price was about $99 per shirt. However, four or five times a year they would hold sales when you could buy them at 4-for-$200 ($50 each.) The fact that I knew I could regularly buy them for $50 each made me very reluctant to ever pay the higher price. I would wait for the sale. And many other customers must have been the same, because their sales became more frequent and deeper — right up until Brooks Brothers went through bankruptcy in the summer of 2020. Since then, they’ve been trying to build their pricing back up, but once you’ve trained your customers to buy only on sale (and you’ve decreased your quality in order to fit the product to the prices your customers are willing to pay) you’ve begun a long term slide out of which it’s very hard to escape.

If the danger with shadow pricing is that customers no longer consider your list price to be a real one, the other danger with discounting is instead of your discount strategy causing customers to hurry up and buy, it instead encourages your customers to wait for a better deal.

This is one aspect of the “shadow pricing” trap. Brooks Brothers, with their heavily publicized and regular discounting of around 50% off regular price, created a situation in which customers would delay their purchases till the next sale.

But when sale prices are progressively getting lower over time, or when you announce a major discount ahead of time, you may cause your customers to delay purchases in order to wait for a better price.

This is what my daughter was doing. And she was right. Because a few days later, Amazon dropped the price on the AirPods to $79. Now she’s wondering if it will get any lower by Black Friday or Cyber Monday.

Nor is the discount discretion which Apple is allowing its resellers like Amazon at the moment the only problem. I myself have been waiting to replace my old set of AirPod Pros. Those are currently marked down from $249 to $219 on Amazon, but on the Apple website, there are banners telling users that starting on November 28th, you can get a $50 apple gift card if you buy the AirPod Pros there.

In other words, their published discount strategy is telling you that you should not buy right now.

This is not what a discount strategy is supposed to do.

How should you avoid this trap?

Discounts should be used sparingly, they should not be too deep, and you should very clearly communicate when you are offering a “lowest price of the year” kind of sale.

Sparingly: For the kind of purchase which people might plan ahead of time, I would recommend that you not have a deep discount more than twice a year. You might have a smaller sale one or two times, but if you put a product on sale 4+ times a year, you are going to convince people that the full price is not the real price. Also, those sales should feel like they are short. Don’t advertise them for weeks ahead of time lest you cause people to delay their purchase. If most of the communication your customers hear from you is about sales, they will expect to buy your products on sale. Plan to have 75% or more of your communication be about your company, new products, value, etc. and at most 25% of your communication about sales.

Not too deep: The deeper the discount, the less relevant your everyday price seems. A 50% discount is so deep it makes customers think they are being ripped off paying the full price. There’s not a firm rule, but if you want to continue to sell most of your products at full price, I would recommend that you not discount deeper than 20% to 25%.

Clear communication: Don’t make your customers guess when the deepest sale is coming or how long it will last. Tell your customers when it’s the deepest discount of the year and how long they will have to act. This will achieve the goal of a promotion: converting the largest possible number of price-driven potential customers into actual buyers within a short time. The last thing you want to do when you’re already taking the brand risk of running a deep discount is to have some of your potential customers sit it out because they think a better deal may be coming soon.

Historically, Apple has had some of the greatest price discipline of the major brands. I’m not sure why they’re letting these things happen this year, but it doesn’t seem like an encouraging set of choices. However, I will probably replace that old pair of AirPod Pros come November 28th.

My new job is as the head of pricing at a company that makes industrial resins (unsaturated polyester resins and vinyl ester resins as well as gel coats, if you’re interested in the details which I am currently busy learning.)

Something which is fairly unusual about this role, and which was a major motivation for me in taking the opportunity, is that it reports directly to the CEO and is on the leadership team. This means that although my official title is Senior Director of Pricing it is effectively that unicorn of pricing roles which is talked about much more often than seen: a chief pricing officer.

Now, let me start out by saying that while I think that more companies could benefit from having pricing represented on the leadership team — and despite being on the board of advisors for chiefpricingofficer.com, which has the goal of encouraging investors, boards, and senior management to take strategic pricing leadership seriously — I’m not necessarily a huge fan of the title Chief Pricing Officer.

For one thing, CPO more commonly stands for Chief People Officer or Chief Product Officer, so pushing for a less common meaning for CPO creates confusion.

Additionally, having lots of c-level roles cheapens the terminology. At an aesthetic level, I think a company should not have more than half a dozen c-roles. Not every person on the leadership team needs to have a “Chief Something Officer” title.

But why does pricing belong in this group at all?

This points us to the question of what the leadership team exists for and why the leader of any particular function within the company is included.

Companies are made up of humans, and the human person can only communicate efficiently in groups of a limited size. Across the company, there is detailed knowledge of all of the company’s functions and data, knowledge which could inform all decisions in detail. However, in order for decisions to be made that information and experience needs to be gathered into a group which is small enough for efficient interchange of ideas and decision making.

This is what the leadership team should accomplish. The leadership team should encompass the leaders of the key functions or regions which can allow the team, working as a whole, to make informed decisions for the entire company, while considering all of the trade-offs which may be involved.

The functions which need to be included in this group may vary across industries and companies and even across time for the same company.

For instance, a company which is going through a major transition in its IT infrastructure and processes may need a Chief Information Officer on the leadership team, and let at another point when such major changes are not underway, there may not be a need for a CIO to be on the leadership team at certain types of companies.

Companies where the ongoing development and direction of a core set of products are essential to the strategy of the company may have a Chief Product Officer, while in other companies the management of product strategy may be represented by the head of Marketing or even Operations.

Some companies fill all their leadership team slots with heads of functions (sales, marketing, operations, HR, etc) while others have the heads of different regions, and many companies take a blended approach, with some functions represented on the leadership team by global heads and others rolling up under the heads of regions.

However these roles are allocated, the goal is to provide a structure in which all of the important factors in setting strategy are well represented on the leadership team so that when they work to set company strategy and plans, no important factors are neglected.

So why and when should pricing be represented on this team?

Pricing may at first seem an odd fit for the leadership team, because the size of the team represented is not very large. Most of the other functions which are represented on a leadership team have a fair number of people in them.

However, it’s not the number of people who are in a function which is the key factor. Instead, it’s what combination of leaders can be put together to set strategy for the company as a whole while taking all important factors into account.

Pricing is indeed an important factor, in that it is the way in which the value delivered to customers is turned into revenue and profits. There are other functions which which can plausibly speak to pricing, but often they come with their own limited frames of reference.

To the Finance function, pricing may primarily be seen as a profit lever: make sure no one is priced too low and that we take our regular price increases to maintain margin rates. To Sales, pricing is the way of staying in price position with the competition and closing sales. To Marketing, how the pricing will sound when communicated to the customer, both on its own and in reglation to competitors, may seem like the most important factor.

In fact, all of these views of pricing are true, and if everyone on the leadership team is bringing these perspectives to their discussions and thinking about how to satisfy those goals with pricing, they will end up have pretty healthy pricing as a company even if the actual pricing teams do not go above the manager level are and embedded within some other function.

However, this requires the heads of all the major functions to think constantly about how pricing can best be set to achieve the company’s goals. Often, the leaders of those functions are most focused on is their own core functions. This can leave pricing as an afterthought.

This is where having a head of pricing on the leadership team can be very useful for a company, especially in times of transition when they are trying to improve their profitability or change their pricing practices.

The goal of having a pricing leader on the leadership team is not to speak up for pricing in some isolated or niche way, but to look at all aspects of the company from a pricing point of view.

Are there ways that the product offering could be changed or diversified in order to be able to charge higher prices while delivering greater value to some particular types of customers? Or is there an opportunity for a stipped-down product at a lower price to capture a new market segment? Could the structure of product support be changed in a way that would allow the company to price more as a service offering than as a product? Is the marketing conveying the value in a way which allows the company to price for it? Are lead generation efforts going after the kind of customers which are willing to pay the most for the company’s products?

Whether a company has pricing focused functional leaders, or a company-focused pricing leader (ideally, a company should have both) these are the kinds of questions that the leadership team should be discussing in order to command the highest margins for the value they are delivering.

For companies large enough to sustain a pricing function with an experienced pricing leader (typically, companies with $400M a year or more in revenue) this could be a good reason to have a pricing leader on the leadership team. For companies that are smaller, the company’s existing leadersip team needs to bring this kind of broader and more strategic focus to pricing, thinking of it not just as a tool to either juice profits or close sales, but as the key way in which they can realize the value they are providing.

What’s the common thread between that acquaintance who likes to tell you about how he got a huge payment from the developers who wanted to cut down the trees at the edge of his property and the AI scientists that Meta is offering $100 million pay packages?

It’s that being the last piece of the puzzle, which allows a larger project to get done, creates a unique pricing power.

In this episode of the Pricing Evolution podcast, I go through examples ranging from real estate and programmers to rivets, discussing when small components in big projects have outsize pricing power, and when they don’t.

Links:

Pricing Evolution: The Power of Low Dollar Pricing

WSJ article on Meta offering AI scientists on “the list” of top talent up to $100M to join their AI development group.

Doug sells LED lighting to larger commercial buildings like warehouses and factories. His typical customer is lighting an indoor space larger than a football field.

He’s not a trained pricer, he’s an entrepreneur running his own business, but I was struck by how he talked about pricing in his posts on LinkedIn. And after we’d talked, he agreed to come on and talk about his business and how he prices and sells his products.

There are several key lessons I’d highlight from Doug’s business which would apply to other businesses:

1. He’s clear on what types of customers are willing to let him compete on value rather than price, and he simply does not deal with customers who are only interested in price. (He doesn’t answer RFPs.)

2. He recognizes that customers want to hear about the savings he can deliver and the price for his products first, so rather than a long proposal with the price on the last page, he starts with the money saved and the price it will cost, and then provides the background.

3. He focuses on the key value he can deliver customers: Saving energy if they are converting from incandescent to LED, and providing greater brightness if they are upgrading old LEDs. He focuses on those customer-centric value measures rather than other metrics that people have more trouble understanding.

I always think it’s interesting to get a look into a type of business I haven’t thought about before, and I hope you’ll enjoy this conversation as much as I did.

And if you need to light a large commercial space, give Doug a call.

They are, however, very much a continuing presence for pricers and for many businesses.

Part of the issue is that the tariff situation keeps changing, and so for businesses which are affected by tariffs it becomes necessary to update the actions the company is taking to deal with the tariffs on a near weekly basis.

As I discussed a while back on an episode of the Pricing Evolution Podcast, uncertainty itself has a high cost for businesses. That’s certainly something that I’ve seen at the company I work for and at others where I’ve talked with pricing and business leaders recently. The hours we’ve collectively put into dealing with tariffs have crowded out a lot of other things we could have been doing this year.

But another thing which has been in the news recently is that major retailers which have been holding off on increasing prices due to tariffs (as they first attempted to find alternate sources and wait to see if negotiations would result in a near-term end to tariffs) have gone ahead and announced price increases.

Walmart, Best Buy, and Macy’s are three of the highest profile retailers to make such announcements so far.

This naturally led to some politicians (notably the president) observing that these retailers make lots of money and that they should absorb the tariffs rather than raising prices.

It’s pretty common to hear politicians and pundits arguing that retailers should absorb some cost or other, whether it’s tariffs, increased wages, or fuel/freight costs. Part of the issue is that our largest retailers are very large, and so it seems like they should have the resources to play chicken with an economic freight train and win.

However, it can be useful to look at the actual numbers. According to Forrester research, the entire retail industry had net profits of $133 billion in 2022. Walmart, the nation’s largest retailer and one of its largest companies overall, had a net profit of $15 billion in 2024.

By comparison, the total tariffs collected by the US government in May of 2025 were $68 billion, an increase of $30 billion from May of 2024.

If we annualized that $30 billion increase, it would mean be a $360 billion cost. Obviously, not all the products being charged import duties are going to retailer. Many of them are products destined to be used by US manufacturers or other B2B businesses rather than consumer retail.

But since the annualized cost of the current tariff level is almost three times the total profit of all US retailers, I think it’s reasonable to say that US retailers do not make enough money to absorb tariff costs.

The classic children’s novel Hans Brinker relates the story of the brave little Dutch boy, who uses his hand to plug the hole in a dike and thus saves his village from being flooded. But just as it’s questionable whether a boy shoving his hand in a hole in a dike would actually be successful in stopping a flood (outside the constrains of a moral tale) it turns outs that retailers are also not able to hold back the ocean of tariffs.

This points to an important lesson for business owners which is the flip side of the insight that a small increase in price can significantly increase your profits:

Because the average company has costs much greater than their profits, they do not have the ability to absorb a significant increase in cost without passing it on in the form of a price increase.

Concretely: The average US public company has a net profit of 8.5%. This means that their total costs (including product cost, overhead, taxes, etc.) are equal to 91.5% of the company’s revenue.

If total cost increases by just 5%, more than half of the company’s profit is gone.

Companies do not have the resources to just sit back and absorb significant cost increases. For those bringing in material from Europe, the cost is up 10%. For those bringing in material from China, the cost is up 30%.

For those companies that are bringing product or even raw materials in from abroad, it is going to be virtually impossible to avoid passing on some cost. The companies simply do not have the resources to avoid it.

And retailers have some of the lowest margins. Walmart had a net margin of 2.9% in 2024. Kroger had net margins of just 1.5%.

While even low single digit margins on a total revenue of hundreds of billions can run to serious money, it simply is not within the power of a major retailer to absorb significant cost increases without passing them on. The entire retailer business model is, effectively, one of passing costs through while doing very efficient operations.

Even for other, more profitably businesses (say, Apple with its massive manufacturing base in China) it would be difficult for a company to experience a double-digit tariff and not pass it through eventually in prices. And sure enough, Apple uses its political influence to get a “phones and electronics” exception to the tariffs early on.

Large companies generally know this pretty well. Whatever they may say publicly, they are in the business of passing their costs on.

But small companies can sometimes be led astray by rhetoric about what “responsible businesses” will do in the face of various cost increases, including import duties.

So this is my key message to small and medium size businesses: If you find yourself facing significant cost increases due to tariffs, first try to offset that cost increase by changing where you are sourcing your products or via other cost savings. But once you’ve done everything you can to avoid tariff costs, you must go ahead and do the difficult work of passing the price increase you have experienced on. You probably do not have the resources to absorb it yourself.

There will be customers (some of them much bigger than you are) who tell you that it is your job to absorb the cost of tariffs. And you should do everything you can to find other savings to mitigate their impact.

But once you have done everything you can to avoid the tariff impact, if there remains any significant cost increase to you, it will have to be passed on to customers. If you don’t, you put yourself at risk for a massive decrease in profitability, which can have far reaching effects on your business.

That means that in terms of the years an average person would have to work to buy a car, the cars of 1905 (which had about the power of a modern lawn mower and a top speed of perhaps 30 miles per hour) took as long to save up for as a modern Corvette Z06 Supercar or Porshe 911 Turbo.

This all changed with the Ford Motor Company as with development of the Model T Ford.

The Model T was the first truly mass produced car, and after launching in 1909 at a price of $850 (about $30,000 in today’s dollars) Ford developed efficiencies which allowed it to drop the price of a Model T to $260 by 1925.

Given that by 1925 the average US worker make $1,200 per year, that means that a Model T was equivalent to less than three months of wages for the average American. And a result, sales went from thousands of cars a year to millions.

In this week’s episode we look at how passing on the savings from manufacturing efficiency can turn a tech product enjoyed by the few most fanatical fans into a mass market phenomenon.

And after looking at this trend in the early days of automobiles, we examine it in personal computers and smart phones.

You can see why people think this way. If you have just one product, which takes a specific amount of work for you to produce, then surely it should have just one price, right?

However, this is looking at only one side of the equation that defines a price. A price is how the value which the product delivers to the customer is turned into value for the seller. But since there are many different customers, and the same product may have different values to those different customers, there are many different possible prices, though each of those prices might capture a different number of customers.

You’ve probably heard the classic examples: You can sell umbrellas for more on a rainy day than when it’s sunny outside. You can sell water for more in a desert than you could in the supermarket.

Those examples, however, often sound exploitive. Why, people ask, should you charge the person in the desert more just because he’s desperate? (One answer might be that it’s harder to get water out to the middle of a desert.)

It might make things clearer if we consider variation on the selling side. Picture an artisan-made shirt, hand sewn by a skilled tailor and made from hand-woven cloth and on the other hand, a standard mass-produced shirt. Perhaps the artisanal shirt is priced at $1000 while the mass produced one is $40. In today’s economy, only a collector with an interest in artisan-made shirts would pay the $1000 while everyone else who just wanted something to wear would buy the mass-produced shirt.

But in a world before mass production, everyone had to buy the time (and thus cost) intensive shirt. Tailors and weavers weren’t taking advantage of people by charging what today would be high prices. Indeed, they were much poorer than people today. But it was only the advent of mass production and its lower prices which allowed the sorting out of who cared about artisan production and who just wanted something to wear.

These are extreme examples, but within a given company’s range of customers, there are different customers who buy the company’s products for different reasons, and as a result, they place different values on the same product.

Sometimes it’s the arrival of new competition which reveals those different customers.

Picture a company which sells circular saw blades. The blades are of medium quality, and they are the only company selling such blades. Everyone from do-it-yourselfers to job-site professionals buys the same saw blades. Some people use them to cut 2x4s and plywood. Some people use them to cut rebar or sheet metal as well.

Then a new competitor enters the market. They sell carbide tipped metal cutting blades, specifically for cutting sheet metal and rebar. The blades cost three times as much, but they last longer for the pros who often have to cut metal. So those customers leave for the higher end specialty product.

Yet another competitor arrives, but this one is selling super basic steel sawblades. They’re not as well made as the original companies, and if you’re cutting construction debris which might have nails or screws in it, they’ll jam up instead to cutting through. But if all you’re cutting is new 2x4s and plywood, they’ll get the job done, and they’re half the price. This company strips away most of the do-it-yourself customers.

Our original saw blade company didn’t realize that within their customers they had multiple groups: some didn’t value all the quality they provided, and others were actually willing to pay significantly more if they could get even more quality for specialized purposes.

But importantly, while they could perhaps recapture the low-end customers if they dropped their price down to match the low-end product, they can’t recapture the high-end customers who left unless they produce a different, higher quality product. If they wanted to keep all customers profitably, they would need to produce three different products which fit the three different customer needs.

In another business segment, the lines might be a little fuzzier. Picture a fast food restaurant. Some of their products sell because they’re quick, cheap calories. Value menu items often fit this niche. Others sell because they are indulgent, like a double bacon cheeseburger or an ice cream sundae. And yet other products sell because they fit specific needs: healthy options or meatless options.

You can much more easily increase price on an “indulgent” product than a “quick calories” product. But you need to test your customers to see which type they are. And it may be that a mix of “cheap calorie” and “indulgent” customers are buying the same product. In that case, a company might need to split them out, offering the “cheap calorie” customers a more basic product at a low price, while encouraging the “indulgent” customers to buy a new, more premium offering.

While these are just a couple simple examples, all companies have differing segments of customers who are all buying the same product, and those different segments of customers will respond differently to changes in price or features. This is why customer segmentation is an essential part of pricing.

By figuring out what different types of customers are all buying the same product, and what different things they value about the product, companies can work to satisfy all of their customers while adjusting their pricing to reflect the value they are delivering to each customer group. Whereas, if they simply increase prices across the board when they need to increase their margins, they risk losing their most price sensitive customers while some of their customers who value their products most are still paying significantly less than the maximum price they would willingly pay.

This pricer has seen too many pundits pontificating that the economy had adjusted to tariffs and we can see that because the stock market is back to where it was on April 2nd before President Trump announced his reciprocal tariffs on countries across the world.

I discuss the speed at which companies are actually adjusting to tariffs and how it will be 3-6 months before you can really expect to see the effect of tariffs on what’s on store shelves and price tags.

I also describe how companies are still in the process of figuring out what the full impact of tariffs is on their costs because there are many layers of suppliers many of whom have not yet responded to the tariffs.

This is a little closer to opinion journalism than most of the podcast episodes, and I’ll try to be back at the end of the week with another episode that has fun and interesting insights into pricing dynamics, but in the meantime, this is a pretty real view into the things that pricers and other people at the center of the tariff maelstrom are seeing.

But what drives gas station pricing and how do gas stations make money?

I recently had a chance to sit down and chat with another professional pricer who had experience with setting gas station prices at one of the major chains. What she said confirmed some things I’d heard before and sent me off to do some additional research so that I could share the findings here.

As with any retail price, the dollars per gallon you pay at the pump are based on a number of different of elements.

The cost of crude oil typically makes up just over 50% of the cost of a gallon of retail gas.

An additional 14% of the retail price goes to cover the cost of refining the crude oil into usable gasoline.

Of these two, the cost of crude oil varies over time, according to the crude oil prices we sometimes see in financial reporting, though there’s a delay in how it affects actual prices at the pump.

Refining is more of a fixed cost per gallon, but there is some variation due to availability of refinery capacity. This can especially come into effect when there’s a major effect on refinery capacity, such as a hurricane which affects the refineries along the Gulf of Mexico.

On top of these costs are federal, state, and local gas taxes, which are included in the retail prices we see at the pump. These average about $0.50/gallon nationally but can vary quite a bit from state to state. If you see the price of gas change significantly when you cross a state line, it’s likely due to the different gas tax rates in the two states, not due to market factors.

Another 8% of the cost of a gallon of gas goes into distribution — getting the gas from the refineries to the individual gas stations using the tanker trucks you occasionally see on the highway or filling up the underground tanks at stations.

This leaves stations with about $0.40/gallon in gross profit on their gas sales. The precise amount will vary, because in addition to following the cost changes they experience from their distributors, gas stations also try to match prices from local competition and will often increase prices during weekend, particularly holiday weekends, while being more competitive during the week. The general industry wisdom is that weekend and particularly holiday drivers are less price sensitive while workday drivers are more price sensitive.

However, gross profit is not what the gas station owner gets to deposit in the bank at the end of the day. Out of that $0.40/gal he needs to pay for the cost of actually running the gas station. All the rest of the fuel price just goes to getting fuel into the pump and paying taxes on it. The $0.40/gal is how he pays the wages of his workers, the rent or mortgage on his property, maintenance, utilities, etc.

Suffice it to say that the actual gas station profit is often going to be only around 1% of the price of a gallon of gas.

However, there’s another way that gas stations make money too, and that’s on the snacks, drinks, and other products they sell in the gas station store.

While the gross margins (the difference between the price the gas station sell the product for and their cost to acquire the product, before they deal with covering operating costs) on gas are a little over 10%, the gross margins on food, drinks, and other merchandise averages around 50%.

This creates a surprising dynamic where although the 70% or more of a gas station’s revenue comes from selling gas, often only around 30% of their profits come from gas sales.

And while in-store sales average 30% or less of a gas station’s revenue, they are often responsible for 70% or more of their profits.

This dynamic has only become more pronounced in recent years as gas stations have seen total gallons of fuel sold decline. According to industry publications, the summer of 2024 saw same store sales in gallons decline by 4.5% versus 2023. And since 2019, the drop is huge: 24% or 20,000 fewer gallons per station sold in the summer months of 2024 versus 2019.

While I would at first be inclined to think this is a result of people driving less since Covid, according to the US government the number of miles actually being driven on US highways is actually up. So fuel industry studies believe that this is the result of the increasing number of electric vehicles and increasing fuel efficiency of gas-powered cars.

As a result, now even more than in the past, although we call the business a “gas station” and getting fuel is the primary reason why people stop there, fuel sales are not what provide gas stations with their profits.

This makes sense when you think about how highly advertised (and competitive) fuel prices are. The price per gallon of fuel is typically advertised on a big sign along the street or highway. Although branded gas stations like Exxon and Shell, charge slightly higher prices than un-branded stations, in general the price of gas is highly competitive and competition between locations keeps the margins on gas itself very low.

As a result, from a pricing point of view, gas prices become a traffic driver which brings customers into the store. But they are low enough that they do not result in much profit.

Instead, it is the less visible prices of incidental products which people buy out of convenience (because they are already stopped at the gas station) which provide the station with most of their profits.

This leads to one of the hints provided by my colleague who had worked in gas pricing: If you want the best prices for gas, seek out the chains that provide the best amenities, such as Sheetz which offers a full fast food drive through. These stations have higher sales of non-gas items, and they often use that edge to take their gas prices a few cents lower than local competition in order to attract even more customers.

After all, for them, gas is not the primary source of profit. It’s a magnet to get people to come buy their food.

By comparison, a station which has only a minimal store attached to it is having to make its money from the gas itself, and so often its gas prices will be a little higher.

This also explains why supermarkets and club stores such as Costco, BJs, and Sams Club often add on gas stations, and when they do typically offer very attractive gas prices. Those retailers already have a working profit model with their main store, and by adding on a gas station they are trying to also capture incidental purchases which might otherwise go to a convenience store. Plus, if your desire to fill up your tank gets you to Costco, you’re likely to go ahead and make a shopping run while you’re there.

Aside from providing insights into how a business we interact with frequently works, it’s useful to think about other businesses in which a highly visible product may not actually be the one which pays the bills, but rather something which brings people in the door.

With tariffs and other market changes going on, a lot of companies are trying to decide whether they need to take a price increase.

In this week’s episode, I dive into how you should evaluate whether you need to take a price increase, and — it you do need to take one — how to segment your product and customers rather than simply taking the same price increase on all products and customers.

I address:

Four questions you should ask yourself when deciding whether you need to increase prices.

Two fears that often prevent companies from taking a price increase.

And then I break down how to think about segmenting your products and your customers when determining how to take your price increase.

As always, if you enjoy the podcast, I’d appreciate it if you’d give it a rating and review on Apple Podcast or Spotify.

In this piece, I’m going to focus on why the tariffs are a major threat to profitability and even survival for many businesses and what businesses need to do in order to survive and thrive in this new environment.

Think for a bit about why we don’t have living dinosaurs today. 65 million years ago, a giant asteroid hit the earth, causing a whole series of environmental catastrophes, from short term ones like tidal waves and forest fires to longer term ones such as a sudden ice age caused by dust and soot particles in the atmosphere blocking sunlight.

This caused a major extinction event, with many of the species which had been present before the impact dying out, and today’s animal life being descendants of the survivors. The dinosaurs didn’t make it. (Or thought of another way: the only ones which did were those small, feathered ones whose descendants we today call birds.)

But think for a minute about why an environmental disaster like this causes animals to go extinct. Animals are adapted to a particular environment. If that environment changes, the animal population needs to find a way to a survive in the new circumstances or else it doesn’t survive at all.

Often you’ll hear about how “well adapted” some particular animal is, for instance because it has developed the ability to survive on one particular food source which is toxic to other creatures. That is certainly an example of being well adapted to that specific environment, but if the environment changes, that animal may not be well adapted to the new environment which follows.

Many species go extinct during a period of sudden and drastic environmental change because the adaptations which had suited them to the way things were before leave them unsuited to surviving amidst the new conditions.

So for instance, the koala bears which today are so well suited to eating only eucalyptus leaves (which are toxic to other animals) would not be well suited to an environment which was suddenly without eucalyptus. While, on the other hand, animals which are very flexible in their habits (say, racoons) can survive in a wider variety of environmental conditions.

I bring all this up because there’s a similarity to what many businesses are facing right now. The businesses that have been successful up until now were well adapted to the business environment which existed up until this point, a business environment which included low barriers to trade.

As a result, many companies became successful by sourcing different components for their products from different parts of world.

The sudden imposition of significant tariffs has upended that order. Business structures which were very well adapted to the prior environment are in some cases now very badly adapted to these new conditions.

So, for instance, consider a business that had been able to offer very competitive prices while also being profitable because it was very good at sourcing products from China. That adaptation which was very successful up until a couple months ago is now very un-successful.

On the other hand, a company which was struggling to explain to customers why they should pay more for their Made in America products may suddenly find itself a low-cost player.

To survive this rapidly changing environment, companies need to first make sure they are not destroyed by the change itself.

This means doing everything which can be done quickly and relatively affordably to minimize tariff impact by sourcing from different suppliers or doing your manufacturing work in different countries to minimize your tariff exposure. (I emphasize “quickly and relatively affordably” because the situation is changing quickly, and you don’t want to commit to a major investment such as building a new facility only to discover that the situation has changed again.)

What tariff costs companies are not able to avoid, they’ll need to pass on to their customers by taking a price increase or adding a surcharge which covers the cost of the tariff. There may be strategic circumstances in which companies choose to absorb some tariff costs in order to maintain current prices for their customers, but for some products and countries, the tariffs are sufficiently high that trying to absorb the impact will quickly bleed away a company’s cash.

However, these two tactics — minimizing impact and passing on the remaining cost through price — can at best keep your company from being too badly damaged by the tariffs themselves. The bigger question is: how can your company actually grow and thrive in the new environment?

This means looking at the changed environment in your particular industry and determining what new opportunities have been opened up by these changes.

There may be areas of the market where you could not compete before but where you are now suddenly competitive. Did you sell higher quality products made in the Americas or Europe, while imports from China dominated the lower end of the price and quality range in your industry? You may now have the higher quality and also the lower price.

Between tariffs and export restrictions, there may suddenly be opportunities in your industry which did not exist before.

So as soon as you have protected yourself from bleeding cash as a result of the new tariffs, the next thing you should be doing is identifying those new opportunities which may have been made available.

In a sudden environmental change like this, it’s the creatures which adapt quickly and expand which will dominate the new world.

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It’s been a week since I last posted, and I didn’t want to let it stretch to longer. That’s because things have been really busy, both at work (tariffs being a huge part of the issue there) and in life otherwise.

However, I didn’t want to leave things entirely empty here, so I sat down after a long weekend of running the annual mulch sale fundraiser for my sons’ Boy Scout troop to talk about “last mile pricing” and why mulch delivered to your door is a lot more expensive than mulch you pick up down at the local big box home center.\

This is a slightly more informal episode than most, but I hope it provide a few interesting insights into the world of mulch (who knew there was so much to know!) and the idea of delivered vs pick-up pricing.

Also, a quick link: You can hear the episode of the Kahnversations podcast on which I was a guest here, we talked about tariffs (of course) and other elements of the current political moment.

I’d been looking at a few different fun topics for this episode, but in the end, there’s one topic which is dominating price discussions at the moment, and I couldn’t ignore it. So, this week’s podcast is about tariffs.

In the first half of the episode, I look at the more general questions: How to tariffs work? How were these particular tariff rates calculated? Will these tariffs cause companies to bring manufacturing jobs back to the US?

In the process, I talk about the key role of uncertainty: Companies are hesitant to make major changes and investments in response to conditions which seem temporary. And these tariffs seem like they may be very termporary. The Canada and Mexico tariffs have been announced and delayed and modified several times, and this newest “Liberation Day” round of tariffs announced on April 2nd already appear to be the subject of further negotiations. This generally makes companies less likely to make major investments (such as moving factories) as a result.

Then, in the second half, I talk about the specific things that companies should consider doing from a pricing perspective as they deal with tariffs:

• Don’t panic, and don’t predict. It’s a rapidly changing situation so give yourself the time to see what is happening and respond to the things that have actually happened to you cost thus far. Don’t try to guess what may be happening next in a fluid situation.

• Base your prices on what your current cost to replace inventory is: the price to buy or build new product. Your current inventory was built up at older prices, but you’ll want to base your prices on what it will cost you to refill your inventory, not those old costs.

• Focus on communicating clearly to your customers. Good pricing requires good communication. This means that if you are changing prices due to tariff-driven costs, you need to communicate that clealry to your customers. And if you’ve decided it’s important for you to absorb some or all of those costs, communicate that decision to absorb the costs to your customers as well. If you stay silent, they won’t see the value your sacrifice is giving them.

• And as the tariffs disrupt your industry (which, after all, is what they are designed to do) be ready to talk to your own customers about lower cost substitute products you can help them trade down to if they are no longer willing to buy the same produce you’ve been selling them. And also, be ready to address possible opportunities as a result of previously lower-priced competitors suffering a bigger tariff impact than you have.

All together, this is the longest Pricing Evolution episode we’ve had yet, but it’s tackling an important issue and I hope you find it interesting and useful.

If you do, please share it with others who may also find it interesting. A recommendation from a friend is the best way for a podcast to find new listeners!

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The recent highs in egg prices are almost irresistible material for a pricer to write about, because they give such a clear example of the interaction of supply and demand. Due to avian flu, the supply of eggs hit a low of about 7% below normal levels in February, down from 5% below in January.

However, since people’s demand for eggs was not much reduced even in a constrained market, price tripled with wholesale prices topping $8/dozen in early March, although retailers often took a loss to keep consumer prices lower.

Why such a large price increase for such a small shortfall in supply?

If there are fewer eggs produced, that means that some people need to agree to go home without eggs, or with fewer eggs. But if the price of eggs doubles and everyone still buys the eggs, that means that either we face empty shelves or the price keeps going up until consumption finally goes down. (Looking at shelves over the last couple months, I think we’ve had a combination of both.)

In theory, the way pricing for scarcity it supposed to work is that eggs get allocated to the people who want or need them the most by increasing the price until enough people drop out of the market to make demand match supply. The advantage of this versus just letting eggs sell out is that if you take the keep-prices-the-same-but-sell-out approach, you aren’t so much allocating eggs on the basis of who needs them most, but more on who happens to show up right after another delivery of eggs gets put on the shelf.

Plus, if the retailers aren’t willing to adjust prices based on demand, you’ll end up with an after-market where people who scooped up extra eggs when they had the chance offer to sell them at high prices to people who faced empty shelves and are desperate for some eggs.

However, there’s also a longer-term story to the price of eggs which I discovered as I was researching egg prices, and it’s a fascinating window into some of the major forces shaping our modern economy.

Although prices have been high during the last six months due to avian flu, the overall price of eggs over the last forty years — averaging below $2/dozen in current dollars once adjusted for inflation — is actually significantly lower than during most of the 20th century.

During the 1910s and 1920s, egg prices were over $10/dozen in modern dollars. The reason for this is not unlike the reason that the price of a Thanksgiving turkey has actually dropped on an inflation-adjusted basis over the last century. There have been significant advances in agricultural technology, with modern breeds of birds (and modern types of feed given to birds) growing faster than in the past. But much more important in decreasing costs (and prices) has been the industrialization of farming.

Back in the early 1900s, egg farming was still a comparatively small-scale business. Family farms kept flocks of several hundred chickens and sold the eggs to distributors who shipped the eggs to buyers in towns and cities. Even more locally, many people raised small flocks of hens, and “egg money” was a small but independent source of household money.

All of this was comparatively labor and transportation intensive, and the result was the eggs were not cheap.

Picture a product as being made up of a bundle of costs. For an egg, those costs might be:

• A laying hen

• Feed and water

• Human time to care for hens, collect eggs, transport, clean, package, and sell them

• Fuel, electricity and materials for transporting, cleaning, packaging, and refrigerating the eggs

Feed, water, fuel, electricity, and packaging materials are all things which have become less expensive over time. What has become more expensive is human time. What automation and industrialization in farming has done is vastly reduce the amount of human time that goes into each egg before it reaches a customer.

If you’ve ever looked at one of the charts that show price changes over time (such as this one from HowMuch.net, a financial literacy website) you’ll notice that the categories which have become more expensive over time are generally those which involve a lot of direct human time which is hard to eliminate through automation, while the categories which have seen the most decrease in price are those where automation can easily reduce the amount of human time invested in production.

Categories such as health care and education often involve direct interaction with trained professionals in a way that can’t be scaled through technology.

Getting advice from an online medical resource, for instance, is scalable and thus cheap. Similarly, studying online using Kahn Academy or DuoLingo is inexpensive because the resources can be built once and then delivered to many students with very low additional cost.

But going to a medical office and sitting down with doctor or nurse directly is expensive because it always takes up that trained professional’s time. A doctor cannot use technology to diagnose 100 patients simultaneously. And although remote learning does to some extent allow a teacher to teach many classrooms of students simultaneously, successful teaching usually relies on actual interaction within the room between a teacher and a small number of students, not simply listening to a recorded lecture.

At the other end of the spectrum, while there are large early investments of human time in developing the technology and manufacturing methods for consumer electronics such as televisions, once the work has been done they can roll off the production line with very little human time per unit, and once the technology is sufficiently mature there’s increasingly less R&D time being put into new models as well.

Even things which you might think of as being based on human time can be subject to these efficiency savings. For instance, you if hire a bookkeeper to keep the accounts for your small business, you might be paying that bookkeeper by the hour. However, the number of hours it takes your bookkeeper to manage your books now should be less than it would have been 20 much less 40 years ago. Now it’s possible to download all your transactions from your bank in a spreadsheet or connect QuickBooks directly to your bank account.

You’re still paying your bookkeeper by the hour, but the number of hours it takes to record a given number of transactions and prepare a set of reports for you is much less now than it would have been several decades ago.

This higher efficiency in turn allows people to engage in higher value work. Modern data repositories and reporting tools allow today’s finance professionals to quickly provide insights to business leaders that would have taken far more hours to produce in the past.

By comparison, a business like a hair cutter or a makeup artist has not seen productivity gains in its core product in the last few decades, and so the prices of those products will naturally go up at the same rate as the incomes of the practitioners.

This means that if you do the sort of work which is subject to technology-driven productivity gains, you need to constantly be looking for ways to adapt and become more efficient. Your successful competitors will be adopting those technologies, and you will need to do so as well in order to keep up. If you can stay ahead of most of your competitors, this means that you can experience the margin benefit of productivity gains before market prices as a whole have adjusted to the new higher efficiency. So the most successful companies will often be the ones which are quickest to adopt new technology which drives efficiency.

If, on the other hand, you do work in which the human component is pretty constant (as with the haircutter or makeup artist examples) it’s important to take the price changes necessary over time to keep paying your key workers the level of wages that will retain them.

Because so many products decrease in inflation adjusted price over the long term, people are not used to the kind of prices which a human-intensive product or service requires. You will need to make your customers aware that they are paying for the valuable time of skilled workers, so that they see why these more labor-tied prices are worth paying.

Good pricing requires good communication, and if you are to convince customers that your prices need to go up each year even as prices for more technological products go down, you need to clearly convey the artisanal nature of your product.

Especially in the online world, you see a lot of companies that offer products for free. How do they make money doing that?

In this episode, we dive into the economics of free products and examine three different business models where companies make money while offering a product for free. We look a the following:

You Are The Product

For services such as Facebook, Google, or LinkedIn, the user is the product, and advertisers are the actual customers.

Freemium: Free Product with Paid Upgrades

From games to Candy Crush and FortNite to services like DropBox and software like Slack, Zoom, and GitHub, many companies by make money by offering a free version of their software and then offering additional features that you have to pay for.

Land and Expand: Free Entry to a Paid Ecosystem

Hubspot offers a fully featured free CRM system to its users, but if they want to expand into the other products which integrate with it (MarkingHub, ServiceHub, OperationsHub, etc.) the cost can increase rapidly.

It’s a lengthy investigation of the economics of free. And, as always, I hope that if you enjoy the episode you’ll share it with your friends. It’s the best way for us to find new users.

However, it’s important to remember that you seldom get credit for doing nothing — even if that “nothing” is not taking a price increase. While you may have difficulties with customers due to taking a price increase, they will seldom recognize your silent heroism on their behalf if you simply sit and absorb cost without passing it on. If you do choose not to take a price increase in a rising cost environment, it’s essential that you take credit for that. Make that inaction an action. I’ll cover this question at the end of today’s article, but first I’m going to address how to take a price increase.

How much to increase price

This very much deserves its own post, but since I’m talking about how to increase price, it seems logical to speak briefly about how much to increase price.

When you decide to take a price increase, you’re balancing between two factors: increasing your margins and not getting so far out of price position with your competitors that you lose significant sales.

If you’re taking a price increase because your costs have gone up, obviously any price increase will help to some extent. However, the risk is that you will often find yourself bargaining against yourself.

Increasing your prices can feel hard, and you naturally fear that your customers will be angry about it. As a result, you are often tempted to take a smaller increase than it would take to cover your cost increase, so that you’re “hurting” your customers as little as possible.

This is usually a bad instinct. If you’re taking your prices up at all, you’re exposing yourself to the possibility of a negative reaction. You should go ahead and take enough of a price increase to cover all of your cost increase, plus a little bit extra for safety.

That little bit extra is not greed. First of all, if costs have already gone up enough to force you to increase prices, it’s likely they may go up a bit more before they stop. This will give you some buffer before you need to increase prices again.

Additionally, you want to send both your customers and your competitors a clear signal as to how much costs have increased. If you take an increase which is not large enough to cover your cost increase, any competitors who are tracking your prices will conclude that “the market doesn’t allow us to cover all of this cost increase” and they may well follow your example in not increasing prices enough to cover the new costs. Pretty soon, your whole market segment has become less profitable to do business in.

Finally, it may be that you will have to give some customers a discount off the new, increased price. So by giving yourself a bit of extra room, you leave yourself some room to maneuver.

The easy price increase

If your product is something which people buy infrequently, and where your product has differentiation from your competitors, taking a modest price increase should be very easy for you. You really have very little excuse for not passing on your cost increases, and indeed for not increasing your margins gradually through pricing over time.

One mistake which we often make is to assume that customers know our products and their prices as well as we do. I’ve seen it take weeks for a brand team managing a consumer packaged good such as potting soil or insect killer to work up to the decision to increase price by 5% to 10%. The fact is that on a product which the customer only buys once every year or two, the customer has no recollection of what price the product was last time. If last year the price was $12.99 and this year it’s $13.99, the customer really will not know the difference.

If you have a close competitor which is not changing prices, this could be more of an issue. But if your brand was already the stronger and higher priced brand, you have some ability to lead the market and very few obstacles.

Even on a high ticket item like a piece of consumer electronics or a car, unless your price change is going to put you significantly out of position with competitors which your customers would consider as good as or better than you, taking an increase of a few percent should be doable. Again: you know what your price was last year, but your customer likely does not. They do not know that you took a price increase. They only know what your price is at the point in time when they go to look at your product. If your new price is not unreasonable in terms of value to the customer and price positions versus your competitors, you are not going to take heat for the change.

The medium price increase

A somewhat more difficult situation is when your product is something which the customer buys frequently, but which is nonetheless a small percentage of the customers total spending.

A famous recent example of this has been the price of eggs.

Eggs are not a major portion of a household’s total expenses, or even of a household’s total food expenses. However, they are something people buy frequently. So when avian flu sent egg prices up by over 100%, people noticed. And so it generated a lot of memes:

However, despite all the complaints, the increase in egg prices from around $2 per dozen to more than $5 per dozen didn’t actually put eggs financially out of people’s reach. Indeed, even with high egg prices, consumer demand did not drop as much as egg production had, and it was common to see empty shelves despite the high price tags on them.

Because eggs are a frequent purchase, people notice when the price goes up. They remember how much it cost the last time they bought. But while it’s frustrating to pay so much for a staple food item, in truth seeing your weekly grocery bill go up by $3 to $6 isn’t going to affect your family economy that much. Since people are attached to their eggs (it’s famously hard to make an omelet — or many kinds of baked goods — without breaking a few) they will tend to go ahead and buy them even at a price that makes them annoyed.

In this kind of situation, it’s essential that you provide communication about your price change and the reason for it, because customers will notice it. This applies not just to a consumption product like eggs, but also to any number of other regular expenses such as a monthly Spotify subscription.

If you are changing the price of a product which customers buy regularly (or subscribe to) you should make an effort to communicate why your prices are changing. It doesn’t need to be super detailed.

If you’re emailing your subscribers about the price of a service subscription going up, the explanation might be a paragraph or two talking about how you continue to value them and strive to provide the best service possible. If you’re raising the price of eggs, communication might be both news stories put out by egg producers and also signage put up by grocery stores.

In this kind of situation, where customers are very much going to notice any price increase, it’s tempting to either not take a price increase at all, or to argue yourself down and take a smaller increase than costs would indicate. Indeed, this is what many grocery stores did with eggs. The national average wholesale price for eggs exceeded $8 per dozen during February, yet many stores were still selling eggs in the $5 to $6 range.

If you make that kind of sacrifice, you should be shouting it from the rooftops. But more often, you should just take the necessary price increase. After all, while visible, the price increase is still a small percentage of the customer’s total spending. They can afford the change.

The hard price increase

That is what distinguishes the hardest type of price increase: the one in which the price is highly visible to the customer and your product is a major portion of your customer’s expenses.

How you navigate this is going to depend very much on the margin structure of your business and the customs of your industry.

If you have a highly commoditized business and your margins are low (picture a steel mill or an agricultural commodity) you will want to communicate your costs very clearly to your customers and indeed have cost-index-based agreements which define how your prices will change seamlessly as your costs change.

If you have a much more specialized business with higher margins, such as producing the machinery that goes into oil field production or high speed manufacturing lines, your customers rely on your products having very predictable pricing. In that kind of situation, you may need to provide significant warning to you customers before you can increase prices.

Either way, clear communication of why you are taking price changes is very important. You don’t need to tell your customers everything about how your business and your costs work. But you do need to provide a clear explanation of why your prices are changing and when.

Taking credit for not increasing prices

By now you’ve surely noticed that communication is a theme when it comes to pricing. Good pricing involves good communication.

This applies just as much if you are making a strategic decision not to increase prices despite an increase in cost.

Maybe you have been able to find other ways to increase efficiency and offset the cost increases. Or maybe you’ve decided that it’s important for you to accept lower margins rather than hitting your customer with a price increase.

Either way, the only way to get credit for this price increase is for customers to see it.

If all of your competitors have increased their prices, but you are choosing to keep your prices the same, it’s at least moderately obvious. Even so, you might want to emphasize the point.

For instance, I’m responsible for managing the annual Mulch Sale which my son’s boy scout troop does as a fund raiser. They buy bagged mulch at the lowest prices of the season and deliver it to people’s homes for $5/bag.

That’s a threshold price point, and also a pretty significant markup. So we’ve chosen not to increase the price even though we’re not sure we’ll be able to source the mulch quite as cheaply this year. But when I sent out the email to our past customers, I made sure to say, “With so many prices changing, the price of our Boy Scout Mulch is still the same as it’s been since 2018.”

People know that our delivered mulch is more expensive than it would be to pick it up at the store, but by emphasizing that we’re keeping prices the same as they’ve been since before COVID we can communicate a commitment to value even with those high prices.

If you find yourself holding your prices even as your costs go up (even if you’ve found a way to cover that through efficiency) make sure that you tell your customers you’re looking out for them by keeping those prices flat. They can’t value what you don’t tell them.

Spotify launched its premium plan in 2009 for $9.99/mo and thirteen years later in 2022 they had 205 million premium subscribers at that same price, but had never turned a profit.

Then, over the course of 18 months in 2023 and 2024 they took two price increases, taking their standard premium plan from $9.99 to $11.99. And in the process, they went from losing €500 million in 2023 to making €1.1 billion in 2024.

Not only did they not lose customers, but they continued to increase their number of premium customers despite the price increases.

In this episode, I look at Spotify’s pricing history, the way in which they went from following Apple’s pricing to being a pricing leader in their category, and I examine how much of their move to profitability came from price changes versus cost cutting.

More broadly, I look at the power of low dollar pricing, and the way that on a small ticket item it’s sometimes possible to take a large percentage increase which customers barely notice.

The airline industry was one of the first to invest heavily in complex computer-driven pricing models. The industry refers to these optimization models as Yield Management or Revenue Management, though the latter term is used across many industries to refer to optimizing pricing and profitability in a much more general sense.

The reason airlines invested so heavily in developing sophisticated pricing models springs from the nature of air travel itself. Think of how a commercial flight works. It has a specific number of seats, and it leaves as a specific time and follows a specific route. The cost of operating a flight is quite high. And the cost of flying a half full plane is only slightly less than flying a full one. So, it’s very important for an airline’s profitability that it fill as many seats as possible while getting the highest possible price for each seat filled.

Start out by thinking of the basic problem an airline has. For a given flight, say from my own Columbus, OH to Daytona Beach, FL for Spring Break, the airline has already made a decision about whether to have a flight and what size plane to use. Say they have a 737 with 170 seats on it.

They could fill all those seats immediately if they offered them at $100, but they would surely lose money at such a low price. If they priced them at $800 per seat, they would fly with a mostly empty plane. The airline is trying to figure out the right prices to offer at the right times to fill the plane without leaving money on the table by over discounting.

Airlines start out with a regional and seasonal demand model of how quickly flights between given points are likely to fill up at different times of the year. For instance, that Columbus to Daytona Beach flight would have been particularly expensive this week, because this is the week when Ohio State has its spring break. Tens of thousands of college students wanting to hit the beaches during the same week is predictably higher demand, and so airlines would have set prices higher from the beginning.

Part of that seasonal demand model is an expectation of how quickly a flight should fill up. The airlines’ computer systems will be constantly checking to see whether the flights are filling up as fast as they ought to be. If sales are slow, they will automatically offer more discounted tickets.

The market for airline tickets is what is called a highly transparent pricing market. This means that it is easy for customers to see the prices of different companies and compare them. When someone logs onto Travelocity or some other travel portal, they see the prices being offered by nearly all the airlines simultaneously. Airlines can also see each other’s prices in real time.

This means that it’s easy for airlines to see their price position versus other airlines, and if an airline lowers their price, it’s easy for a potential customer to see the value of that discounted fare.

Because the market for airline tickets is so transparent, even fairly small changes in price can have significant effects on the demand for tickets on a given flight. Customers might make buying decisions based on a difference of just a few dollars.

Just as airlines will discount if sales are behind on track for a full flight, similarly if demand for a specific flight increases, airlines will notice that the flights are filling up faster than they expected and they will increase the prices.

There’s not a significant advantage to an airline selling out too early, and there is a significant advantage to getting the maximum revenue for each flight, so if the data starts to tell airlines that lots of people are urgent to get to a particular place on a particular day, they will automatically increase their prices to take advantage of the demand.

I saw this happen in real time some years ago when the company I was working for scheduled a national sales conference in Palm Springs. This meant that in the hours after the company email went out telling everyone to book tickets, several thousand people from all over the country simultaneously started booking tickets into that one relatively small airport on the same day.

Over the next 48 hours, I watched the price of tickets to Palm Springs for that day more than double. The airlines didn’t have to know that a Fortune 500 company had scheduled a sales conference near a smaller regional airport. Their demand models told them that flights were filling up much faster than they normally would, and the automated pricing model then increased the price in order get as much revenue as possible in the situation. (After watching the tickets for the sales conference days go from the low $300s to over $800 over the course of a couple days, I went to my boss and pointed out it would save the company money if I few out to California a couple days early to visit my family first.)

There are a number of other types of sales which have somewhat similar dynamics. Hotels vary their prices based on demand to sell more rooms at low demand times and get the most for their rooms at high demand times. Tickets for sporting events and concerts vary to some extent based on demand, though the real extremes in those markets come from the secondary market.

If you were hosting an event of some sort, and you found that it was not filling up as fast as you had planned, you might discount the tickets for the event.

However, airlines have a uniquely challenging business model with their different routes, classes of ticket, and the high cost of each flight. And so airlines have invested in this kind of pricing technology to a unique degree.