I was on a plane the other day and a fellow next to me began talking about how big oil companies control the world. All efforts to deflect my seat mate and bury my head in my book failed, so I had to hear him out. He kept repeating that there had to be a conspiracy going on if demand fell 20% recently but price of a barrel of oil dropped from $147 to $35. I patiently explained that prices are determined at the margin and that there is nothing sinister about it. It would have been better had I kept quiet. Sadly, my wife was not with me. She can shut me up and quickly.
Here is what I mean using an example that we can all understand these days--residential real estate pricing. Let us say that we all live in a suburb of Philadelphia, Pennsylvania where the average home price is around $300,000. How is the price determined? Reaching back to Economics 101 most of you would say Supply and Demand. Okay, but let's take this price analysis just a bit deeper. Last year, the average price was $300,000 but that was when you had a normal number of homes for sale (assume 4%). That is your supply. But what happened when 15% of homes in our town are for sale. Did you average price stay the same? We all know the answer to that. It fell sharply, probably to $220,000-235,000 with no rise in consumer demand.
What does this mean to our media world these days? Just about everything. Who are the people holding their own? It is the scrappy players like the local cable interconnects that bring dozens of new clients into TV on a zoned basis for the first time. Or, the broadcast TV sales teams, often with former radio salesman, who know how to find new clients. They bring them into small market TV with imaginative packaging, or these days, simply with low prices. The game is won at the margins with a few new clients providing the replacement revenue that they need to keep corporate happy and the team employed.
Pricing at the margin has always been something of a double-edged sword. The advantage is that a small number of advertisers can make a difference in monthly profit and loss figures for a TV or radio station. Remember the knife fights for share that went on when a large local car dealer decided to put this budget on one or two stations? Stations played ball because they needed that revenue at the margin. The other side of the sword is that a few players such as local car dealers can break you if they drift away.
Today, with many car dealers tettering and GM declaring bankruptcy and shutting down thousands of dealerships, the concept of pricing at the margin will be more prominent than ever. Even when the economy recovers (it will some day), there will be structural changes as the tried and true auto dealers and other local retailers will no longer be there to make your month. Those who survive and prosper will find the next generation of retailers or services. The challenge is daunting but many are up to it.
If you would like to contact Don Cole directly, you may reach him at firstname.lastname@example.org