Pricing, revenue, cost and profit

Lesson 16 · 50 min · 1 / 22

Pricing, revenue, cost and profit

Same cost, four prices

Purpose: open with a price puzzle, not a definition. Ask what they paid for the last app subscription and why they did not upgrade. Transition: if cost is constant, price is a choice.

Opening question · 2 / 22

One backpack, five prices

• Basic US$25, anti-theft US$35
• Pack plus cover US$29
• Presale US$19, produce after
• Peak season US$29
• The unit cost never moves

Purpose: expose the assumption that price follows cost. Take a vote on which price is best, then ask best for whom. Emphasise that all five are legitimate. Transition: the textbook's three goals.

Learning objectives · 3 / 22

By the end, you can...

• State the three goals and the profit identity.
• Distinguish freemium, versioning and bundling.
• Explain four dynamic mechanisms and the fairness issue.
• Separate presale from crowdfunding.

Purpose: map objectives to quiz items. O1 to Q1, O2 to Q2–Q4, O3 to the dynamic slides, O4 to Q5. Emphasise that O4 is a common exam trap. Transition: goals first.

Concept 1 · Goals · 4 / 22

Three goals that pull apart

• Biggest share, most revenue, biggest profit
• A cut buys share and may destroy profit
• Revenue = price x volume
• Profit = revenue - all costs

Purpose: make the goal explicit before any mechanism. Ask which goal a startup and a listed firm usually choose. Emphasise that the identities are not opinions. Common error: treating revenue as profit. Transition: cost-plus versus value.

Concept 1 · Two ways to set a price · 5 / 22

Cost-plus versus willingness to pay

Purpose: replace the markup reflex. Ask what a handmade item should cost if the maker's cost doubles but buyers will not pay more. Emphasise that cost still matters as a floor. Transition: elasticity.

Concept 1–4 · The menu · 6 / 22

Four mechanisms, four things bought

Purpose: give the menu before the detail. Ask which mechanism a hotel, a software firm and a theatre would pick. Emphasise that mechanisms can be combined. Common error: assuming one is always best. Transition: freemium first.

Concept 2 · Freemium · 7 / 22

The free tier is a bill

• Basic free, premium paid: cross-subsidy
• Skype: free in-network, paid to phones
• Condition 1: the premium must be felt
• Condition 2: conversion must cover free users

Purpose: make the free user visible as a cost. Ask who pays for a user who never upgrades. Emphasise both conditions. Common error: treating free as marketing with no bill. Transition: the conversion arithmetic.

Concept 2 · Conversion · 8 / 22

One point of conversion decides the model

• Model the free base as a cost line.
• Convert the premium into a monthly revenue line.
• Solve for the break-even conversion rate.

Purpose: give students a reusable calculation. Walk through the 2% and 1% cases. Emphasise that the figures are illustrative, not a benchmark. Common error: quoting a conversion rate as if it were universal. Transition: versioning.

Concept 3 · Versioning · 9 / 22

Same product, different configurations

• Multiple versions, segmented prices
• Reduced value: less convenient, complete, fast or supported
• New York Times: a few free articles, then subscription
• Design problem: cannibalisation

Purpose: show versioning as a design task, not a price list. Ask which feature should sit behind the paywall. Emphasise that the free version must be worse in the right dimension only. Common error: making the free tier too good. Transition: bundling.

Concept 3 · Bundling · 10 / 22

Ziegfeld's twofers

• A third of Friday seats empty
• Twofers: one full price, next free
• Marginal cost of another seat is near zero
• Buyers agree more on a bundle's value

Purpose: give the mechanism a story. Ask why the theatre did not simply cut the single price. Emphasise demand dispersion, not just marginal cost. Common error: calling any discount a bundle. Transition: the bundle arithmetic.

Concept 3 · Versioning versus bundling · 11 / 22

Configuration or combination?

Purpose: separate two mechanisms students merge. Ask which one the New York Times uses and which one the theatre uses. Emphasise that both discriminate on price. Transition: the bundle economics.

Concept 3 · The arithmetic · 12 / 22

A bundle can earn less per sale

• Pack 25 plus cover 8 = 33 separately
• Bundle 29: a 12.1% discount
• Costs 9 and 2: separate 22, bundle 18
• It pays only if take-up rises

Purpose: stop the reflex that bundling is free money. Work the two contribution numbers on the board. Ask how much take-up must rise to compensate. Common error: comparing the bundle price with the pack price only. Transition: dynamic pricing.

Concept 4 · Mechanisms · 13 / 22

Four ways to let the price move

Purpose: organise four mechanisms under one idea. Ask which fits a hotel room tonight and which fits a painting. Emphasise that each has a different information requirement. Transition: the fairness problem.

Concept 4 · Surge · 14 / 22

Surge pricing has two true stories

• Uber: two to ten times or more in storms
• It brings supply and shortens waits
• It transfers surplus in an emergency
• Rules and legitimacy bound the multiplier

Purpose: hold both sides without resolving them prematurely. Ask whether the same rule should apply to water and to taxi rides. Emphasise the textbook records the criticism. Common error: treating the debate as settled. Transition: the chain to profit.

Case · Teaching case · 15 / 22

Four prices for one backpack

• Cost 9, planned price 25
• A: 25 basic, 35 anti-theft
• B: bundle 29 (separately 33)
• C: presale 19, ten days
• D: peak 29

Purpose: apply four mechanisms to one product. State that the case is fictional. Ask for the mechanism behind each option before any numbers. Common error: calling D surge pricing. Transition: the contribution table.

Case analysis · 16 / 22

Contribution per unit by option

Purpose: compare options on one scale. Ask which bar is highest and why the highest is not automatically best. Emphasise that C is the cash option and D the trust risk. Note the figures are simulated. Transition: presale versus crowdfunding.

Concept 4 · Two ways to take money early · 17 / 22

Presale is not crowdfunding

Purpose: prevent a costly conflation. Ask which one the textbook calls small-scale crowdfunding, and why the label does not make them equal. Emphasise the delivery promise. Transition: the claims to retire.

Common misconceptions · 18 / 22

Four claims to retire

• Price = cost + fixed markup.
• Freemium means free forever.
• Presale = crowdfunding.
• A price cut always raises revenue.

Purpose: consolidate the boundaries. For each claim, ask which slide refutes it. Emphasise the elasticity point in the last one. Transition: practise with numbers.

Classroom activity · 19 / 22

Four prices on one page

Purpose: make the mechanisms operational. Circulate and check the mechanism labels first. Emphasise the condition in the final answer. Ask two groups to defend different options. Transition: summary.

Self-check · 20 / 22

Five questions

• Q1 goals · Q2 freemium
• Q3 versioning · Q4 bundling
• Q5 presale versus crowdfunding

Purpose: check the four objectives. Q5 is the trap most often missed. If Q5 fails, return to the comparison slide. Transition: summary.

Summary · 21 / 22

What you can now do

• Set a price against a stated goal.
• Choose among freemium, versioning, bundling and dynamic pricing.
• Explain the fairness limit of surge pricing.
• Separate presale from crowdfunding.

Purpose: close the loop with the opening puzzle. Ask which of the five prices they would now choose and for which goal. Emphasise that the answer depends on the constraint. Transition: B2B quotation.

Sources & next · 22 / 22

Sources and preparation

• Textbook §3.6 and §3.6.1–3.6.4 (SRC-003).
• Textbook §3.5.2 on crowdfunding and presale (SRC-003).
• All case figures are teaching simulations.

Purpose: fix the evidence base. Remind students that the textbook gives no conversion or price data. Emphasise that the case is not pricing advice. Transition: read §2.3 for the next lesson.