ConversationA little restaurant: Narrator: Listen to part of a conversation between a student and his business professor. Student: Hi, Professor Brown, do you have a minute? Professor: Sure, what's up? Student: Okay. My family has a small business, a little restaurant. We've had it for like, since before I was born and we've had pretty much the same prices for the last few years. Professor: Okay. Student: And your lecture yesterday got me thinking that maybe we could increase our profits if we used some of the pricing strategies you've talked about. Professor: How's the business doing? Student: Good, but I'm thinking maybe we can do even better. The thing is the strategies we've talked about all require market research. And our family can't afford to hire a marketing research firm. Professor: Yes, a lot of smaller retailers just don't have the tools to make more sophisticated pricing decisions so they stick with a strategy called price rigidity, keeping the same prices over time. They might think like this, "Okay, if we meet our costs, have a line out the door everyday and make x amount of dollars a month without changing our prices, well, we'll just do that." And it might be the right decision for a business. Student: Okay. Professor: And tinkering with prices can be risky because it might not be as straightforward as you might think. For example, say you have a bicycle shop and you lower the price of all your bicycles. What impact would you expect that to have on demand? Student: There will be more demand, more people wanting to buy them. Professor: That's what you think and many times you'd be right. The customers could misinterpret the price tag as a reduction in the quality of the goods. Student: In which case you'd have a decrease in demand. Professor: Right. And say you own a bakery and use a lot of flour to make your bread and other baked goods and the price of flour increases. Student: Okay. Professor: You might want to consider not raising the price of your bread to forfeit some income on sale of bread and to not lose customers who are not only buying bread, but also other products while in your bakery. Now, I do know that this status might not allow you to achieve the highest possible profit margin, but it could help you to maintain a steady customer base. And some studies do show that businesses that keep steady prices keep their customer base over longer periods of time. Student: So maybe our restaurant should just leave well-enough alone. Professor: Well, if you look at these two pricing strategies, changing price versus price rigidity, I'd say in general, changing price is definitely a better model because it means a higher profit margin. You do need to do some forecasting before you use that strategy so you'll have a full understanding of how your prices impact demand. But that's something you can learn to do. In fact, that could be an excellent project for your final paper in this course. I'll be explaining the requirement for that next week.