On Price Elasticity and the Vanity Fee

A recent article caught our eye regarding company’s paying a “vanity fee” in Manhattan for fake addresses.

Say what?  That’s right – say you want a fancy address on Park Avenue, but happen to have a building on 79th Street.  (But you can see Park if you crane your neck…!)  Were you so inclined, you could pay the city an 11,000 “vanity fee” to be able to use a fake Park Avenue address. Voila! Fancy-pant’s address.

This got me thinking – there are a LOT of people in New York that are attached to thinks like fancy-pants addresses.  And most municipalities would love a little extra revenue.  So why not raise the price?

Price Elasticity

This is a concept that we often talk about with clients.  If you are in an industry that is highly fragmented without a lot of transparent pricing- or if you offer one heckuva unique Widget – why not raise pricing?

This touches on the concept of elasticity.  Harken back to your Econ 101 class: remember that Supply / Demand curve?

Supply-and-Demand-Graph

You’ll recall that the above chart suggests that as prices increase, demand will increase.  At some point those concepts coalesce to “perfect” pricing.

Price_Elasticity_of_Demand

But is this always the case?  What happens with raising the price does not impact demand?

infiniteped

This is whats going on in Manhattan.  The city keeps kicking out permits at a very reasonable (in the context of a skyscrapper, at least) price of $11k a pop.  If it were $111k…. would developers still pay?  I’d posit yes.

Raise Your Prices

I’d also suggest you monkey with your own pricing…. just how much higher can you push pricing without hurting demand?   Raising prices can have a huge impact on value.

Here’s a quick example: Let’s assume you own a company that generated $100 in Revenues at a 20% net margin.  We’ll also assume your business is worth 5x earnings.  (So $20 Earnings x 4 = $80).

What happens when you raise your prices 10%?  Value increases 10%.  (increase to $22 earnings = $88 valuation) net.   With basically no work.

So yes, pricing is super important – understand what the market will bear!

 

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