by Adam Juda on Tuesday, October 14, 2014
A lot of people think that pricing products is easy. Oh how wrong they are! Let's take the classic example of a library.
Here in America, we've been spoiled by libraries that provide borrowing privileges at no cost, but libraries used to work very differently. A few hundred years ago, libraries required paid memberships. Administrators would estimate their operating expenses and divide the costs amongst their members. The price charged to each patron was discovered via simple division.
So why are most libraries free? After all, libraries still cost money. Staff has to be hired. Buildings have to be built. Books have to be purchased. It turns out that there is a little-discussed economic principle in play: externality.
Basic economics deals with goods that are purchased by a party who derives benefit from its purpose. Externalities are the costs or benefits that are received by the folks who do not directly use the product.
Take, for example, the library. Patrons receive books which provide them with information, intellectual stimulation and creativity. They are not the only folks who benefit. Societies benefit too. As a populace becomes more literate and educated, the tax base grows. A more educated populace commits fewer crimes. A more educated populace creates more jobs. A more educated populace is desirable, and hence worth subsidizing.
Because the society as a whole receives significant benefit from libraries, it spends dollars to ensure that libraries continue to operate. These expenditures are not looked at as costs, but rather as investments.
Interested in learning more about pricing? Check out Charge Like a Rhino: The Software Pricing Handbook.
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