don't think he wants to answer
Apologies if I have other things in my life than posting on here!.
I'm not an economist by training and any mistakes in the following are all my own work...
Yes, it's all supply and demand, but with subtleties. So, if I charged £100 per annum, then a number of customers in Southampton would pay for my services. Increase my prices and the demand would drop, Decrease my prices and demand would grow. All simple enough.
However, within all that there are some subtleties. Some people wouldn't use me at £100 because I was too expensive for them (let's say their limit was £80). However, if I drop my price to £80, I'm losing cash on every customer who would pay £100. They aren't going to say "Look, I'm prepared to pay £100." They are going to pay the £80 and be very happy.
So, one way of dealing with it is to put a hurdle in the way of a customer paying £80 a year. In my case, that's having your windows cleaned every 12 weeks rather than six. They get a bit grubbier, but you pay a lot less. The people who are happy with £100 will carry on paying it. The people whose limit is £80 will take the small hurdle and pay. But there are a bundle of people who won't pay more than £60. In their case, the hurdle is that they need to ask me if I can charge them less (as it's not on the price list) and they have to accept that their windows will get damned grubby in the 24 weeks between cleans.
So, charging differential prices allows me effectively to offer different prices to people with differing price sensitivities but
still keep the revenue from the price insensitive customers.
So, it's all supply and demand, but I'm now getting more money than I would if I just blanket cut my prices.
The Starbucks example is about the same thing. At price X they will sell Y cups of coffee, but they aren't getting the most out of their price insensitive customers, as they are doing that calculation based on the average customer. The question to ask yourself is, if there's a way to get X+spmething from 10% of their customers, should they do it? Yes, they should.
If you want a better explanation, I suggest the book "The Undercover Economist" by Tim Harford. It's the best idiot's guide to economics that I've ever come across.
And how do you know you`re following this theory? For example, you mention a £16 job, how do you know you couldn`t charge £18? Are you then leaving money on the table?
I don't know that I'm doing it perfectly, but I'm making an imperfect attempt to. £16 involves a great deal of guesswork, yes. And there are customers out there who would pay £18 for the same job. If I could find a cheap to offer service I could offer at a premium price, I might be able to root them out. Any ideas?
Also, I'm not taking anything as someone "having a go"; I'm uncertain about this - I'm trying to get better at it, and explaining it helps me to understand it as well.
Vin