In conventional economic theory, the price you charge and quantity you sell are a function of both the aggregate supply of and demand for your product in the market. The rule is not supposed to be violated, and in our old economy this was the case much of the time.
For modern digital products and SAAS comapnies, however, this relationship breaks down in at least two places.
1) Perfectly Inelastic supply.
Even the smallest startup has access to infinitely scalable infrastructure. This means that the unique opportunity -- and challenge -- of selling a digital product is that you can theoretically produce infinite quantities. The term to describe this is "perfectly inelastic supply" (where the Elasticity = 0 and the supply curves looks like a line going straight up and down). I'm not sure a product with truly inelastic production capacity has ever existed before the internet.
2) Unknown or 0 demand.
The most successful companies find huge unsatisfied vaccums of demand and fill it. Now more than ever we can create products beyond the understanding of what is possible or what it is people may want. Thus, completely unknown future demand.
The point is, it used to be that supply and demand determined how you did business. But it seems now that the price you choose to charge and quantity you choose to satisfy will actually set the supply and demand in your market -- if that market in fact exists. The relationship, in other words, is completely opposite. The power is in the hands of the marketer, not the market. Here's the takeaway: you have way more control over your price and quantities than ever before. Now they are just numbers on your marketing materials rather than huge differences in operational capacity.
Quantities set prices and prices set market size. You can observe this relationship in action pretty easily. Facebook and Twitter are social networks for everyone. How much would you be willing to pay to use them? You are lying if said anything over $0. Salesforce and Basecamp, however, are not for everyone. They solve specific problems for particular kinds of businesses and directly charge good money for their products.
Luckily there is plenty of opportunity on both sides of the continuum. Your positioning on that scale is determined by marketing, not the market.
Want more? Let me know
price elasticity of supply on Wikipedia
image credit
1) Perfectly Inelastic supply.
Even the smallest startup has access to infinitely scalable infrastructure. This means that the unique opportunity -- and challenge -- of selling a digital product is that you can theoretically produce infinite quantities. The term to describe this is "perfectly inelastic supply" (where the Elasticity = 0 and the supply curves looks like a line going straight up and down). I'm not sure a product with truly inelastic production capacity has ever existed before the internet.
2) Unknown or 0 demand.
The most successful companies find huge unsatisfied vaccums of demand and fill it. Now more than ever we can create products beyond the understanding of what is possible or what it is people may want. Thus, completely unknown future demand.
The point is, it used to be that supply and demand determined how you did business. But it seems now that the price you choose to charge and quantity you choose to satisfy will actually set the supply and demand in your market -- if that market in fact exists. The relationship, in other words, is completely opposite. The power is in the hands of the marketer, not the market. Here's the takeaway: you have way more control over your price and quantities than ever before. Now they are just numbers on your marketing materials rather than huge differences in operational capacity.
Quantities set prices and prices set market size. You can observe this relationship in action pretty easily. Facebook and Twitter are social networks for everyone. How much would you be willing to pay to use them? You are lying if said anything over $0. Salesforce and Basecamp, however, are not for everyone. They solve specific problems for particular kinds of businesses and directly charge good money for their products.
Luckily there is plenty of opportunity on both sides of the continuum. Your positioning on that scale is determined by marketing, not the market.
Want more? Let me know
price elasticity of supply on Wikipedia
image credit
