More expensive by the dozen

I do not know who might have invented the phrase “cheaper by the dozen” but I do know that throughout my professional career that person has already caused me more than just one headache due to that famous saying that is now part of our idiosyncrasy.

The assumption results pretty logical when we commercialize a product under the premise of abundance, in other words, when the offer largely overcomes the demand. However, there are several cases in which this is not the reality.

The key to understand these exceptions relies on the concept of displacement. This cost in which a client takes the place of another generates itself only when there is a high demand of the product. The larger the percentage of stock that is sold, the larger is the probability of selling the remaining products and in consequence the expected cost of displacement increases. Then, why should I sell 20 units of my product to a client at a lesser value than its unit price if I have a large probability of being able to sell these same units to individual clients at its unit price or even a higher one? You shouldn’t, obviously.

Promotions should be managed under the same premise: why sell at a discounted price products that I know I will be able to sell at a regular price? Sounds pretty logical but in practice there are multiple example of the opposite: pre-sales in high demand products, transversal discounts to all products, among others. These are all initiatives that derive in income leaks. Here the rule is simple: selling at promotion prices the stock that I will otherwise not be able to commercialize. The execution is a little harder: how do I know how much I will not be able to sell?

One of the key process of Revenue Management is forecast, also known as demand projection, by which it is possible to approximate the real closing sales by month or day based on historical information adjusted by the current tendencies. To the extent that this process is more reliable, then we can confidently reject the lowering of prices for wholesale business and avoid promotion sales in high demand days.

In many occasions is hard to convince people that it is justified to charge the same price or even more for the sale of many units of a service or product but I invite you to try it. 

About the author

With over 16 years of leadership experience driving strategic growth, pricing innovation, and transformational change across multiple industries, Daniela León is driven to contribute to the Community by sharing her experience through this blog. 

Her passion for data-driven insights and cross-functional collaboration, positions her to deliver valuable insights for business transformation.