The High Cost of Raising Prices

[Chuckanut]

Here's an interesting article in today's (7/31/017) WSJ.
It's probably behind a pay wall.

https://www.wsj.com/articles/the-high-cost-of-raising-prices-1501446630

The article concerns companies that are losing some combination of profit, market share and revenue and respond to the problem by raising prices to make up the loss.

It starts of with this amusing story:

Consider the life of a wealthy expat who asked a broker to show him the most expensive apartments in Rome. The first, at €20,000 a month, was a dump. So was the second, at €18,000. Yet the third apartment, at €16,000, was well-maintained, with gorgeous views of the Italian capital. Sensing confusion, the broker explained that the first two apartments had sat empty for months—and the owners kept raising prices to make up for the lost rent.

Yet the sports channel’s subscribers have dropped from 100 million in 2011 to 89 million today. So ESPN raised prices, from $4.69 per sub a month to $7.21 today, a fee five times as high as any other channel. This newspaper reported earlier this month that Disney is in talks with cable operator Altice USA to raise prices again by perhaps 6% a year and institute “minimum penetration guarantees” to make up the difference. We’ve seen this movie before: ESPN may be a few price increases away from losing another 11 million subscribers.

Increasing prices attracts others to attack your market. Amazon’s Jeff Bezos warns: “Your margin is my opportunity.” We’ll see devastation from rising prices in lots of places: ObamaCare premiums, personal tax rates in Illinois, cap-and-trade costs in California, wages in China.

I know that I have walked away from several purchases this year due to higher prices, or in the case of things like coffee, meals out, etc. I partake of them less often. There is a limit as to how much I will spend for glass of wine, even at happy hour prices.

 

[Walt34]

I can relate. I stopped buying any alcoholic drinks in restaurants over a decade ago because the high markup just irritated me. Don't these folks realize that "half a loaf is better than none"? So now instead of a $3.50 glass of wine I get a $1.50 tea or just the free water.

So when shopping for whatever and find it what I think is overpriced I just walk away.

I'm not cheap, I'm "value oriented".

 

[aja8888]

The same is going on in our growing community of The Woodlands, Texas, pop 100,000.

With restaurants opening at a feverish pace (46 new ones last year), the cost of "house wine" (aka, the cheapest rotgut) has gone from $4 - $5 per glass to $8 - $9 for the same glass. (and these are not big glasses)

Added to that, many spots have eliminated lunch specials and pushed up dinner prices to record levels (@ Pappasitos, a two fish taco dinner with rice and beans = $18.99). At Macaroni Grill, which is a low end Italian place, the house wine cost as much as some dinner entrees.

The wine increase is what's got everyone around here talking about.

 

[Midpack]

Raising prices in response to lower demand has been tried and failed many times. People have to learn about supply & demand again and again and again.

Even ESPN isn't immune, there are other sports viewing options these days that are eating away at their share. Good for consumers!

 

[gerntz]

There is a limit as to how much I will spend for glass of wine, even at happy hour prices.

I never buy a glass of wine. Bulk is much cheaper - and enjoyable. In fact, on 3rd glass now.

 

[Rustic23]

We went to a chicken place last week. Three strips, two wings, one coke, $13! We now buy chicken strips, wings and a coke from Wlamart. Cost $8 or less. Went to a restaurant in Austin, for lunch. Three people, $48 with tax, and this was a diner! Overall restaurant prices have gotten out of hand!

 

[Senator]

Interesting article. Decreasing prices increases demand, every-time.

Selling half as much, for double the cost, generally raises profits.

I just raised two of my rents when tenants moved out. One tenant was there only one year. Old rents were both 1150. New rents are $1250 and $1300. That's an extra $250 per month. Nice raise for me. Generally the same quality of tenant.

 

[RobbieB]

I hit the sushi bar and ate a $30 lunch. I love to pay high prices for good food.

 

[Texas Proud]

I can relate. I stopped buying any alcoholic drinks in restaurants over a decade ago because the high markup just irritated me. Don't these folks realize that "half a loaf is better than none"? So now instead of a $3.50 glass of wine I get a $1.50 tea or just the free water.

So when shopping for whatever and find it what I think is overpriced I just walk away.

I'm not cheap, I'm "value oriented".

I am shocked you can get a $3.50 glass of wine.. it cost $7 or more around here... which is a problem since DW wants one or TWO at every meal...


I have been a water guy for decades... I try not to ever buy a drink, but I have done so every once in awhile.... lately I have bought the $1.50 hot dog and drink at Sam's Club... but it is a big drink and I can refill just before leaving

 

[Texas Proud]

Raising prices in response to lower demand has been tried and failed many times. People have to learn about supply & demand again and again and again.

Even ESPN isn't immune, there are other sports viewing options these days that are eating away at their share. Good for consumers!

If only the skinny bundle would come out without it I would be there....

 

[Texas Proud]

Interesting article. Decreasing prices increases demand, every-time.

Selling half as much, for double the cost, generally raises profits.

I just raised two of my rents when tenants moved out. One tenant was there only one year. Old rents were both 1150. New rents are $1250 and $1300. That's an extra $250 per month. Nice raise for me. Generally the same quality of tenant.

That just means the market rate has gone up.... raise it up to $2000 and see if someone rents the place...

 

[Blue Collar Guy]

Raising prices in response to lower demand has been tried and failed many times. People have to learn about supply & demand again and again and again.

Even ESPN isn't immune, there are other sports viewing options these days that are eating away at their share. Good for consumers!

Except when there is a monopoly. The NYC water dept had all kinds of campaigns to tell every one to conserve water. We did,everybody did. Consumption fell so much that they Raised the prices 825 %. $1.06 per 748 gallons of water to $9.87, 825 % ish increase.

 

[Blue Collar Guy]

I hit the sushi bar and ate a $30 lunch. I love to pay high prices for good food.

 

[Chuckanut]

I am shocked you can get a $3.50 glass of wine.. it cost $7 or more around here... which is a problem since DW wants one or TWO at every meal...

$7 a glass?? Today, if one orders the cheapest glass of wine and gets the $3 off at happy hour, one might find a $7 glass in my area. It's to bad really, HH has become so expensive that I don't go as often. In my own way I am proving the author of the article correct.


Years ago a restaurant critic in LA (I think it was Elmer Dills) took a stand that marking up a bottle of medium priced wine 2x the retail price was about the maximum that a restaurant should do. Today the markup is more like 3x the retail price.

Mr. Dills must be rolling over in his grave when today's restaurant wine markups are discussed.

 

[Ready]

I can relate. I stopped buying any alcoholic drinks in restaurants over a decade ago because the high markup just irritated me. Don't these folks realize that "half a loaf is better than none"? So now instead of a $3.50 glass of wine I get a $1.50 tea or just the free water.

So when shopping for whatever and find it what I think is overpriced I just walk away.

I'm not cheap, I'm "value oriented".

Walt, $3.50 for a glass of wine is too much for you? Come on, loosen the purse strings.

In So Cal even happy hour won't see wine glasses priced that low.

 

[Blue Collar Guy]

$7 a glass?? Today, if one orders the cheapest glass of wine and gets the $3 off at happy hour, one might find a $7 glass in my area. It's to bad really, HH has become so expensive that I don't go as often. In my own way I am proving the author of the article correct.


Years ago a restaurant critic in LA (I think it was Elmer Dills) took a stand that marking up a bottle of medium priced wine 2x the retail price was about the maximum that a restaurant should do. Today the markup is more like 3x the retail price.

Mr. Dills must be rolling over in his grave when today's restaurant wine markups are discussed.

I agree, I used to get Champagne for special occasions at restaurants it was always 2 x the retail. Im not talking Dom P , in those days (and still mostly today) I ws a Moet guy. The last time I got slapped with a 3 x mark up, I paid. We ordered take out from them about 3 weeks later. The owner asked me if every one was ok at home, is that why we were ordering take out. I told him that the Bar bill for 3 was almost as much as my food bill.

 

[Senator]

That just means the market rate has gone up.... raise it up to $2000 and see if someone rents the place...

Good premise, but the end result is that you get sub-par tenants with prices too high.

Raising the rent above market would mean that only tenants that could not go anywhere else would want to rent at my places. I understand that, so I never try to be above market.

I can tell if I am $25 too high. The quality of tenants goes down, and good tenants that see the place walk away without filling out an application. If I am the best value there, the quality tenants take and application and I get it back the same day.

The above is a concept that many landlords do not understand, but is simply Econ 101.

 

[Walt34]

I am shocked you can get a $3.50 glass of wine..

Well, that's what it was the last time I bought one over ten years ago...

 

[John Galt III]

Hamburger, fries and coleslaw was $4.95 about 7 years ago around here, now it's $10.95 and the restaurants advertise it as some sort of great deal. Geez. I stopped buying beer at bars about 3 years ago. Just way too overpriced. But lots of people still buy those $10.95 hamburgers and those overpriced beers, so it must be supply and demand. Just won't be me demanding any of that high-priced supply.

 

[aja8888]

Well, that's what it was the last time I bought one over ten years ago...

Around here, and NOT in high priced places, $8 - 9 for essentially jug wine by the glass, a glass of Coke is $2.75 and coffee is $2.50 (or more).

 

[RetireAge50]

Sometimes I'll order the $2.50 coke and then add my own alcohol. Probably not couth but hey, I want to retire at age 50.

 

[Turboslacker]

Hardly ever order wine at a restaurant but recently did here in the Seattle area. Ordered a bottle which they offered at a discount from their regular price. Enjoyed the wine very much so I looked it up online to purchase for home and was shocked to see a 4X markup. Obscene.

 

[Blue Collar Guy]

Hamburger, fries and coleslaw was $4.95 about 7 years ago around here, now it's $10.95 and the restaurants advertise it as some sort of great deal. Geez. I stopped buying beer at bars about 3 years ago. Just way too overpriced. But lots of people still buy those $10.95 hamburgers and those overpriced beers, so it must be supply and demand. Just won't be me demanding any of that high-priced supply.

Hahahaha,
. I was never a big drinker. I was However a huge chain smoking cigar guy. When they OUTLAWED smoking in bars, I stopped going. That ban has saved me thousands of dollars. I stopped smoking cigars during lent 2006. So between no cigars and no more bar booze Im saving a ton.

 

[Blue Collar Guy]

Around here, and NOT in high priced places, $8 - 9 for essentially jug wine by the glass, a glass of Coke is $2.75 and coffee is $2.50 (or more).

I had an Irish coffee after a big meal maybe a year ago. They hammered me 12.95 plus tax and tip!

 

[Scuba]

Agree about high prices for wine and craft cocktails in So CA. Our favorite medium priced restaurants routinely charge $12-$15 for a cocktail and even more for higher end wines. Our bar bill is usually more than our food even with getting only 2 drinks each.

It will only get worse as minimum wage increases. Even the fast food joints here are paying at least $15/hour, about a 50% increase from just 2 or 3 years ago. Restaurant owners have to raise prices to cover costs. I haven't seen demand dropping. Everywhere we go, people are waiting for tables.