This is an interesting guest post on Leica’s products pricing by J Shin:
Every time there is any kind of a product-related announcement here and elsewhere, there are a number of invariable comments complaining about and/or defending Leica’s price strategy. In making these comments, people make references to various economic and noneconomic reasons why Leicas are priced the way they are. This essay is an attempt to show that, basically, almost everybody is right, at least when it comes to Leica’s profit motives. Rather than nefarious greed, devious psychological warfare, and, as some often mention, Dr. Kaufmann’s ignorance of Leica fandom, Leica prices are basically a function of mathematical inevitability.
First, a disclaimer. I am not an economist or an accountant. I have worked in marketing, and I do have a PhD in political science, but, really, I know more about macroeconomics, the economics of whole nations, than microeconomics, the economics of individual corporations. Still, I think I have some handle on the concepts involved, and much of it is intuitive, at least to me, so here we are. Please feel free to post any objections you have, since I’m basically making it up as I go. Also, I am leaving a lot of little details out, and keeping things simple; if there is demand for it (har-har), I will supply further elaborations.
The Basics
Here is a diagram explaining the basics of how to set prices of a product.
Figure 1. Cost, revenue, and profit
Again, this is a simplified graph that does not truck with the finer points of “marginal cost” and “marginal revenue”, which is difficult to understand for most people. It is also an illustration, rather than empirically accurate. If you want to be more accurate, be my guest; you can probably do a better job than I can.
