I'd like to expand upon Tony's post on pricing by offering a metric one can use to help determine price. Price elasticity measures the % change in quantity divided by the % change in price. If one is able to produce a product that has a relatively inelastic demand, then customers will consume the product at the same rate despite an increase in price.
We should keep price elasticity in mind when analyzing the potential profits, consumption and sustainability of our ventures. If we produce a product that has lots of substitutes, then it will be more elastic. This could eventually lead to the downfall of one's venture. In this case, increasing the price will drive down consumption at a higher rate. Efficient markets dictate that competitors will decrease price in order to increase short-term quantity (for example, decrease price by 5% to increase quantity by 10%). This will then force one to respond by also lowering price, ultimately reducing industry-wide profits. This will destroy bottom-line profits for your specific product and reduce financial sustainability of the overall venture.
By promoting an inelastic product, consumers will be less price sensitive as they will be willing to consume the good regardless of a change in price. For instance, gasoline is an inelastic good as a spike in price would not reduce demand in the short-term. An inelastic venture conveys uniqueness, as consumers cannot seek a viable alternative as a replacement. When determining the financial feasibility and the overall pricing scheme of our ventures, it will be important to forecast the demand/price elasticity of our products.
Here is a somewhat older article that helps illustrate this point from an entrepreneurial standpoint:
Thanks for the insight Martin. The third paragraph in your post clearly highlights the advantage of an inelastic venture.
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