Pricing Glossary
Abundance mindset - A belief centered on the idea that opportunities are boundless. Individuals with such beliefs tend to engage in higher levels of risk-taking.
All things being equal - A frequent caveat employed by economists. It is used to indicate that any changes made to a system should not be assumed to have secondary effects.
See ceteris paribus
See ceteris paribus
All-pay auction - An auction in which all participants must pay (those who win as well as those who do not).
Alpha - The percentage by which a particular stock outperformed the overall market. An alpha of 10 means that the stock grew 10% faster than the market.
Anchor - Information that leads market participants to decrease or increase their estimates of a good's value.
Annual recurring revenue - The amount of income that a given account delivers to a vendor over the course of a year.
Appraisal - An estimation of an item's value, usually provided by a particularly knowledgeable party.
Arbitrage - Profit-making by taking advantage of inconsistent pricing of a given good.
Asset - An item that is owned and possesses value.
AUM - Assets under management
Autarky - Self-sufficiency. Often applied to economies that place little importance on trade with, or charity from, other nations.
Average margin per user - Revnue divided by cost per sale. Commonly used by cellphone companies.
Average selling price - The mean cost at which an item was purchased by buyers.
B2B - An acronym for business to business. It specifies a business strategy of selling to other businesses.
B2C - An acronym for business to consumer. It specifies a business strategy of selling directly to end users for personal use.
Bad - A product that decreases a person's utility. Examples often consist of non-useful items with high disposal costs such as radioactive waste.
Bait-and-switch - Advertising one product but pressuring (or only allowing) customers to purchase another (generally inferior or higher-markup) item.
Bankruptcy - The inability to pay off debts with existing assets.
Barrier to entry - Something that prevents new competition in a marketplace. Examples include: high fixed cost investments, red tape and switching costs.
Barrier to exit - Something that prevents a producer from exiting a marketplace.
BATNA - Acronym for 'best alternative to negotiated agreement.' It is the next-most desirable choice a potential customer has with respect to your offering. The more alluring the BATNA, the lower your pricing power becomes. Note that 'doing nothing' can be a BATNA.
Bear - An investor who believes that securities are set to decrease in price.
Begging - A request for payment, generally from a person with minimal pricing power and dubious value offered in return.
Bellwether - A leading indicator that suggests a change in a marketplace.
Beta - A measure of a particular investment's volatility compared to the overall market. A beta greater than one is more volatile, a beta less than one is less volatile.
Beveridge curve - A plot showing the relationship between job openings and the unemployment rate over time.
Big Mac Index - A report produced by The Economist that shows the relative cost of a McDonald's hamburger in different countries. It was intended as a measure of purchasing power parity.
See purchasing power parity
See purchasing power parity
Bitcoin - A cryptocurrency released by Satoshi Nakamoto in 2009.
Black market - The sale of goods and services in an unsanctioned manner. Note: Though the sale is illegal, this does not imply that the items for sale are illegal. Many items are sold on the black market to avoid government taxation.
Blue ocean strategy - A theory and book developed by W. Chan Kim and Renée Mauborgne. The authors suggest that moving into markets without competition (blue oceans) can be far more advantageous than entering proven, but competitive, markets (red oceans).
Bottom line - The profit reported on an income statement.
Breakeven - The point at which aggregate costs are equal to aggregate revenue. A firm that has reached a breakeven status may find itself with a much improved strategic position, such as one that has sold enough widgets to cover the cost of the factory that produced them.
Brown good - Consumer electronics. These goods are named for the wood paneling that was commonly used on such devices.
Bubble - The inflation of a good's selling price above the intrinsic value. Two famous examples are the Dutch tulip mania of the 1600s and the American dot com bubble around 2000.
Bull - An investor who believes that securities are set to increase in price.
Bull trap - Evidence that is sufficient to convince investors (bulls) that a given security will increase in price, when, in actuality, the security's price is set to decrease.
Bundle pricing - The selling of multiple products as a single collection for a single price (usually at a price below the sum of costs for each item).
Burn rate - The speed at which a business' expenses will deplete its capital. It is often expressed in dollars per month.
C-note - $100
Calor licitantis - Latin for "bidder's heat." It refers to the irrational tendency for the auction participants to bid more than the value of a good's price, simply out of an emotional desire to win the auction.
See irrational exuberance
See irrational exuberance
Cannibalize - The attraction of sales for an offering that would have gone to another offering available from the same firm. Cannibalization is often seen as undesirable.
Captive market - A business environment in which consumers choose from relatively few competing producers. The lack of choice generally strengthens the bargaining position of producers to the detriment of consumers.
Cargo culting - The often incorrect belief that emulating a successful party's superficial behaviors will inevitably lead to the same successes.
Cartel - An agreement between producers in the marketplace. They are typically created to increase market power of the members.
See collusion
See collusion
Cash cow - An offering with extremely high profit margins and very low costs to the producer.
Cash discount - A reduction in price in exchange for payment by a certain date.
Cash equivalent - A good with extremely high liquidity. For instance, the savings in a checking account would be a cash equivalent.
Cash flow - The movement of cash and cash equivalents into and out of a business
Caveat emptor - A Latin phrase that means "let the buyer beware." It is a warning to potential customers that no guarantee or warranty should be expected for a given purchase.
Ceteris paribus - Latin for "all other things being equal." A commonly used phrase in the field of economics to describe a situation in which one aspect changes, but all other aspects remain the same.
Channel stuffing - A method of increasing the appearance of manufacturer profits by forcing distributors to accept a larger quantity of products than can be reasonably sold. Certain automobile manufacturers are often accused of doing this.
Chargeback - The return of funds from vendor to buyer through forcible means by a third party in the financial realm. This may be in response to overt fraud, faulty provision of service or inability to match the value promised. The term is often, though not exclusively, used to refer to actions taken with credit cards companies.
Charging an arm and a leg - Setting a price that is excessively high.
Cheapskate - Someone who avoids paying for anything to the extent possible
Cheddar - A slang term for money
Churn - The speed at which a firm's existing repeat customers make a decision to shop elsewhere.
Collateralized debt obligation - A collection of debts that are sold to investors as a potential stream of income.
Collusion - Agreements between players in a market, often made to increase the market power of the agreeing parties. These agreements are often tacit and generally illegal.
Commodity good - An offering that is virtually indistinguishable from that of the competition. This lack of differentiation leads to a situation in which sellers have no pricing power and become price takers rather than price makers. Note that the idiom hot commodity uses the term in a way that is contradictory to the established meaning in modern economics.
Read more: Commodity good
Read more: Commodity good
Comp - A good given for free to a gambler by a casino. Comps are given to encourage gamblers to continue placing wagers.
Comparative advantage - A vendor's ability to produce a specific item of value at a lower opportunity cost than another vendor can. This does not imply anything about the absolute costs for each vendor.
Comparative disadvantage - A vendor's inability to produce a specific item of value at a lower opportunity cost than another vendor can. This does not imply anything about the absolute costs for each vendor.
Complementary good - An offering for which demand is directly proportional to another offering. For example, hamburger buns are complementary goods with respect to hamburger patties.
Consumable good - An item that gets "used up" and reduced in quantity in the normal course of events. Consumables are the opposite of durable goods.
Consumer surplus - The value received by a buyer after acquiring a good that is over and above its cost.
Corner the market - To acquire control of a significant portion of outstanding stock in order to raise its price
Cost of goods sold - The total cost of acquisition or production of a good. This cost explicitly excludes costs relating to the selling of this good to other parties.
Cost-plus pricing - A business strategy that entails charging customers a fixed percentage more than incurred costs.
Crapware - Software that is installed by laptop vendors that is not considered desirable by customers. Such software may be innocuous, or it may leak personal data, slows the system down and interfere with routine operations.
Cryptocurrency - A type of money that uses complex mathematical functions to ensure that only one party can claim ownership of a given unit of value at one time.
Cui bono - Latin for "good for whom." A person will typically only take part in a business agreement if he believes that he will benefit in some way.
Customer acquisition cost - The amount of money required to convince each customer to purchase a good. This cost includes costs that are directly spent upon the individual and fixed costs that are related to more general marketing activities.
Danegeld - Literally "Danish tribute." A payment made by British and French to Danish Vikings. It was intended to convince the Vikings not to attack their lands.
Debt - That which is owed from one party to another.
Decoy effect - Consumers' purchasing preferences can change when vendors introduce an additional option - even when no consumers purchase this item.
Deflation - A reduction in the price of goods.
Demsetz auction - A competition that awards the right to perform a service to the lowest bidder.
Discount - A reduction in price.
Discretionary income - Income minus taxes and existing obligations.
Diseconomy of scale - An increasing marginal cost of production.
Disinflation - A reduction in the rate of inflation. Note that this does not imply the existence of deflation.
Dismal science - Another name for economics
Disposable income - Income minus the cost of taxes
Disposal cost - The expense associated with the lifting of title to an asset. The associated costs may include expenses such as environmental cleanup, transportation and contractual fees.
DLC - Upsells that take place post-purchase and are used to add or unlock portions of a software system. The technique is most commonly used for video games.
Doorbuster - A product offered at an extreme discount in order to attract potential customers. This quantity of such items are typically limited to very small numbers.
Down payment - A sum of money delivered upfront as partial fulfillment of a loan's terms. This payment helps reduce the risk of loss that the lender may suffer, should the lendee default.
Drip pricing - A marketing scheme in which buyer interest is acquired via low advertised prices, but fees and surcharges are added in small increments as the purchasing process progresses.
Dumping - A pricing strategy that involves selling a product abroad below the rate of production or the prevailing rate in the producer's locale.
Duopoly - A market dominated by exactly two competing producers. For example, the airplane market is dominated by Boeing and Airbus.
Durable good - A product with a long useful lifespan. Major appliances and cars are two common examples of durable goods.
Dynamic pricing - A system that alters prices based upon changes in customer demand. Airline ticketing systems are often used as the classic example of this.
EBITA - A measure of company earnings that excludes interest, taxes, and amortization. EBITA is an acronym for "earnings before interest, taxes, and amortization."
Economic profit - The sum total of income minus all costs and opportunity costs from a given venture
Economy of scale - The reduction of costs that accrue as more copies of an item are produced. This is often achieved by utilizing higher fixed (and lower variable) costs and by distributing those fixed costs over larger quantities of items.
Economy of scope - The reduction of costs that accrue as a firm specializes upon a collection of related offerings. This is often achieved by investing in shared fixed costs across its offerings.
Efficient-market hypothesis - The belief that the price of any item reflects all available information.
Effort heuristic - The cognitive bias that leads people to assume that the value of a good is proportional to the effort required to create it.
Emolument - income from employment
End-user license agreement - The contract that grants the right for a customer to use a vendor's software system.
Endowment effect - People value belongings more highly than they otherwise would, had they not owned them.
Ersatz good - A good that is inferior to one that it has replaced.
Even pricing - A pricing method that uses round numbers (such as $10 rather than $9.99). This system tends to make offerings seem more expensive and is often used for premium products.
Excludable good - A product whose seller can prevent people who have not paid from deriving benefit from it.
Experience good - A product or service with a value that can not be ascertained until it is used.
Externality - An effect on a third party (who is neither buyer nor seller). Although externalities are almost always described as a negative effect on a third party (such as pollution), positive externalities can also exist (a job training program may, for example, reduce crime in a given neighborhood).
F2p - Short for "free-to-play." A business method most commonly used by online video games. Games published under this model provide the game for free, but offer paid upgrades to users' characters and equipment. The publisher of the games typically rely on a small number of users to spend large sums of money. Customer motivations for spending are generally to dominate other players and minimize time spent grinding.
Face value - The public price of a good or service. Items are generally sold at or below this price.
See manufacturer's suggested retail price
See manufacturer's suggested retail price
Fear of missing out - A need to ensure that one does not forgo an opportunity (often for profit). This can often be used to push buyers to make irrational decisions.
Fee - A quantity of money that is demanded in exchange for value.
Ferengi Rules of Aquisition - A set of 285 business guidelines used by the mercantile race of Ferengi in the Star Trek franchise.
Final good - A product intended to be consumed, rather than to be used in the creation of another good.
Fire sale - An extreme reduction in product pricing, often for the purpose of increasing financial liquidity.
See https://taprun.com/methods/#firesale
See https://taprun.com/methods/#firesale
First-mover advantage - The strategic benefit acquired from acting before any potential rival. The term is typically used when referring to the entrance into a new market or the offering of a new class of product.
Five-finger discount - A 100% reduction in the purchase price of an item. This is necessarily the result of shoplifting.
Fixed cost - A cost that remains constant no matter the quantity of items produced. Common examples of fixed costs include design work, tools and factories.
Fleece - To trick someone out of a lot of money.
Flip - The act of purchasing an item and then reselling it quickly for a sizeable profit. Although often applied to behavior witnessed in the housing market, this term can be applied to actions in other markets as well.
Forced bundling - A requirement that customers purchase multiple products in order to receive a desired item. For instance, many laptop manufacturers bundle copies of Microsoft Windows (even if customers do not want the operating system installed).
Fractional reserve lending - A system that allows banks to lend an amount in excess of its deposits. While a minority of economists consider this to be a form of fraud, it is the foundation of modern banking.
Fraud - The use of intentional deception to derive benefit from a transaction.
Free good - An offering that is available in unlimited quantity at no cost (for example: sunlight).
Free rider - A person who receives the benefits from a good or service without being required to pay.
Freeloader - A market participant who extracts value from a product without paying the vendor for the privilege.
Freemium - A pricing tier with zero cost to the user. Common goals for freemium models are to 1) increase the size of the user base 2) lower the barriers to entry for users. Many businesses utilize the strategy with the hope that freemium customers will convert into paying customers. Producers offering freemium products should be careful to provide significantly greater value at more expensive tiers, lest no user has reason to upgrade to a paid tier.
Friction - The costs associated with a transaction that are not included in the purchase price. Examples include: taxes, fees, research and switching costs.
FUD - An acronym for "fear, uncertainty and doubt." An effective, though ethically-questionable means of selling products. Rather than focusing on the benefits of a given product, sales materials focus on the negative emotions of the buyers.
Gacha - A Japanese word for a common monetization method in free-to-play video games. It allows players to spend money in order to receive a random item, power-up, or boost. In many cases these rewards are either difficult to acquire, or completely unavailable, for players who are unwilling to buy them.
Galapagos syndrome - A reference to Charles Darwin's On the Origin of Species. It refers to the independent development of functionality within isolated markets.
Gatekeeping - The prevention of use or purchase of a given good. Some vendors perform this behavior to increase an item's exclusivity or prevent association with parties who share undesirable characteristics.
Going rate - The typical price for a commodity good.
Goldbricking - Producing less value than one is capable, while simultaneously appearing as though one is working diligently.
Goodwill - The portion of the value that a firm possesses but is not attributable to a tangible good. Such measures are difficult to prove and are frequently used to inflate asset prices. Nevertheless, they can be a real, important, and overlooked source of business value.
Gossan's first law - Marginal utility trends lower as quantity increases.
Gossan's second law - Consumers will spend such that the marginal utility (relative to price) of each item purchased will be equal.
Gossan's third law - An item cannot have economic value unless it is scarce.
Grandfather - Permission for existing customers to continue paying for an offering according to their original price structure.
Greater fool theory - The pricing of an asset based upon what a future buyer will pay.
Gresham's law - A law that states that undervalued forms of money will not be used in the marketplace, but overvalued forms will.
Gross margin - A measure of profitability. It is calculated as (revenue - costs)/revenue.
Group buy - A purchase that delivers a discount to buyers who combine their orders with those of other buyers. This discount may be intentionally offered by the vendor or (as is often seen in SAAS sales) a result of multiple buyers illicitly sharing a single account.
Group rate - A discounted price offered to buyers who collectively place a single order.
Halo effect - A cognitive bias that causes observers to form a positive opinion of an item based upon a limited set of positive traits.
Hammer price - The winning bid at an auction. Note that this does not include other fees (such as the buyer's premium).
Hard sell - A forceful technique intended to strongly push a buyer into taking action. Such methods often involve limited time offers or incentives. Overly forceful pitches risk irritating the potential customer.
Hedonic treadmill - The human tendency to continuously adapt to a standard of living, such that increasing levels of wealth or comfort does not lead to permanent increases in happiness.
High-roller - A person who has the potential to spend a lot of money. Such an individual will typically expect (and be given) special treatment by a vendor. The term is often used in the context of gambling.
High-touch - A sales process that requires significant human interaction.
Holding costs - The penalty an entity experiences for maintaining ownership or control of as asset. For instance, many home owners are required to pay real estate taxes in order to maintain posession of their homes.
Hot commodity - An item for which there is extreme demand. The use of the word commodity in this context is the exact opposite of its normal use in economics.
House poor - The description of a person who spends (or has spent) a significant portion of his wealth on the purchase of his home. While the person may have a strong balance sheet, he generally few assets of value, other than his house.
Ikea effect - The tendency of consumers to place more value on items that required their own labor or ingenuity to create, assemble, or design.
Inbound marketing - A sales technique that encourages potential buyers to contact a firm directly with no explicit outreach.
An example of this is a blog.
Incentive - Motivation for another to perform a specified action
Inferior good - A product that will see decreased demand as income levels rise. Note that this does not necessarily imply that the good is defective or made poorly.
Inflation - An increase in the price of goods.
Information asymmetry - A situation in which parties to a transaction do not share equivalent information.
Insolvency - The inability to cover existing debts with assets or income.
Intermediate good - A product that has been refined and is used as an ingredient, input, or component of other products.
Invisible hand - An idiom first coined by Adam Smith. In modern usage, it refers to the tendency of decisions by individuals to maximize the aggregate benefit to society.
Irrational exuberance - A mindset that led to the extreme overvaluation of financial instruments, not based upon facts and data, but based upon emotion and excitement. The term was first coined by Federal Reserve chairman Alan Greenspan during the dot-com bubble.
Jack of all trades, master of none - A person, business, or other entity who has become a generalist. Due to a lack of specialization, a jack of all trades will usually find himself unable to match the efficiency, quality, and ability offered by a master.
Japanese auction - A bidding system in which price continually rises until only one bidder is willing to pay. He then pays the highest price that attracted at least one other bidder.
Jevons paradox - The result of research on coal usage by William Stanley Jevons. It states that increasing efficiency of the use of an item will cause more of that item to be used.
Juda Principle - People prefer to maximize the appearance of acquired skills and expended effort over the creation of actual value.
Read more: Juda Principle
Read more: Juda Principle
Junk silver - A silver item that has no value over and above the value of the metal itself.
Justification letter - A document intended to convince the recipient to act in a specific manner. The letter will generally focus on the benefits of a desired course of action.
Keeping up with the Joneses - The pressure to maintain the appearance of a socioeconomic parity with one's neighbor. It is often expressed as a push to spend significant sums of money as a display of wealth beyond any sensible level of comfort.
Kelley Blue Book - A publication listing estimated prices for automobiles and motorcycles.
Keynesian beauty contest - A thought experiment that questioned the workings of the stock market. It described a hypothetical situation in which judges who were tasked with selecting the most beautiful participants in a beauty contest would vote differently than judges who were tasked in predicting the votes of the other judges.
Kickback - A secretive payment in exchange for an action to the detriment of a third party.
See principal-agent problem
See principal-agent problem
Kill fee - A feature common to freelance writing contracts. It ensures that a partial payment will be made to authors whose work has been requested but is not ultimately used.
Lagging indicator - Evidence that can be used to support a conclusion but is only available after the fact.
Laissez-faire - A method of market governance characterized by limited government involvement.
Law of demand - As the price of a good rises, the demand for that good will fall. Note that there are exceptions to this law (such as Veblen goods).
Law of one price - A theory that a given item will sell at the same price in different markets. Transportation and many other costs are often assumed to be zero.
Law of supply - As the price of an offering increases, the quantity supplied will increase.
Leading indicator - Evidence that can be used to predict an occurence.
Liability - An obligation or debt that is owed to another party.
Liquidity - The ease and efficiency of converting a good into currency. A cashier's check is highly liquid. A rare piece of artwork is not.
Lock-in - The switching costs that customers experience when moving from an existing product to an alternative. The higher the switching costs, the more pricing power a vendor has over existing customers. Note that switching costs need not be monetary in nature.
Loot box - An item that provides players with something of value within a video game. The nature of the value provided is often unknown to the player and randomly selected by the game. Loot boxes are purchased with either real or in-game currency and are commonly found in free-to-play games.
Loss aversion - Most people would be upset with a loss far more than they would appreciate an equivalent gain
Loss leader - A good sold at a price below the current market cost. This pricing is often used to lure shoppers into a store so that they are more likely to buy the vendor's other products.
Low touch - A sales process that does not require significant human interaction.
Make it rain - Slang terminology to express an eagerness to spend significant sums of money. The idiom refers to the visual appearance of paper currency, when thrown into the air by a spendthrift individual.
Manufacturer's suggested retail price - A price suggested by the producer of a good. It can act as a pricing anchor as sellers will find it difficult to charge more than this price and will often be reluctant to charge less.
MAP - A price floor for vendors. There is often an implicit threat that manufacturers will cease supplying vendors who advertise prices below the specified floor.
Marginal cost - The additional cost of producing one more unit. This cost will approach the variable cost of production as the quantity produced increases.
Marginal product of labor - The increased output produced when one aditional person is hired. Note that this can be negative.
Marginal utility - The additional degree of enjoyment or value that a consumer derives from the usage of an additional unit of a good.
Market cap - An estimation of the value of a company. It is equal to the shares outstanding multiplied by the share price.
Market for lemons - The paper that earned economist George Akerlof a Nobel Prize. It predicted that all honest used car firms would be forced to leave the market if buyers (but not sellers) could not differentiate between good and bad used cars.
Market segmentation - The act of breaking a large group of buyers into smaller collections that share common traits.
Mass market - Intended for use by or sale to the undifferentiated majority.
Maximum retail price - A price ceiling applied to a vendor and set by a manufacturer.
Mere-exposure effect - Consumers will prefer offerings that are familiar over those that are unfamiliar.
Minsky moment - The point in time when the value of a speculative asset class massively
drops in value.
Money-back guarantee - A promise by a vendor to refund the purchase price of a good, should the customer be unsatisfied. This reduces risk, thus increasing the price that he can charge. Many companies attach significant limitations upon such guarantees in order to reduce their own risk exposure while presenting an image to the contrary.
Monopoly - A market dominated by a single producer. Contrary to common belief, a producer does not need to own the entire market to be considered a monopoly.
Monopsony - A market characterized by many vendors but only one buyer.
Moral hazard - An incentive that encourages one or more parties to act in bad faith.
MRR - An acronym for 'monthly recurring revenue.' It is literally the quantity of funds that are received by a firm on an ongoing monthly basis. One-time fees, non-routine income is excluded from this number.
Nagware - Software that routinely reminds users to pay money for it. The reminders are often in the form of popup messages.
Natural monopoly - An industry or sector characterized by relatively high fixed costs. The cost structure acts as a barrier to entry for new firms.
Negative gearing - A descriptive term for an income-producing investment that generates insufficient wealth to pay for the cost of the money that has been borrowed to purchase it. Investors sometimes use negative gearing when they expect the market price of the asset to rise significantly (as is common in financial manias).
Nepotism - Favoritism that rewards based upon friendship and association rather than merit.
Net present value - The worth of an item, adjusted over a time horizon. Typically, values are reduced (discounted) in order to compensate for inflation and other economic forces.
Network effect - An effect that causes some products to increase in value as others buy additional units. The classic example is a phone. The more people who own a phone, the more value each owner receives from his own (he can call and be called by more people).
Nickel and dime - To charge significant prices via a series of small, seemingly inconsequential, charges.
Nickle - A five-cent coin. Also slang for $500.
No true Scotsman - A commonly used argument intended to define the characteristics of a group in order to demonstrate that no member of that group would ever engage in a specified behavior.
No-bid contract - A contract awarded to a single vendor without any competitive process. It is generally used when there is an urgent need for timeliness or only a single vendor can be relied upon for a given need. Many observers see such contracts as a sign of potential ethical lapses, as they may be misused to funnel money to specific vendors with minimal oversight or transparency.
No-reserve auction - An auction with no minimum sales price.
Non-compete clause - A section of a contract that limits one or more signatories from engaging in activities that may harm one or more other signatories.
Non-excludable good - A product that can be used by people who have not paid for it.
Odd pricing - A pricing method that uses values below (but near) a round number. For instance, many firms select $19.95 rather than $20.00. Likewise, many in the housing market select prices like $199,000 instead of $200,000.
See psychological pricing
See psychological pricing
Oligopoly - A market dominated by a handful of producers.
Oligopsony - A market characterized by many sellers but only a handful of buyers.
Opportunity cost - The potential for economic profit that was lost because of a decision.
Order qualifier - An aspect of an offering that is necessary to compete in a marketplace.
Order winner - An aspect of an offering that allows a product to dominate a marketplace.
Osborne effect - Named after an infamous misstep by the Osborne Computer Corporation. The firm announced a revolutionary model of computer prior to actual availability. As a result, sales of existing models collapsed, and the company went bankrupt due to lack of revenue.
Out of pocket - Money that has been spent from the account of a given party.
Outbound marketing - A sales technique that involves active effort by vendors to contact potential buyers. An example of this is cold calling.
Pain point - A problem that customers wish to eliminate or reduce.
Par value - The face value of a security, stamp or other good.
Paradox of choice - The finding that additional choices made available for consumers tends to increase customer anxiety and decrease consumer happiness.
Paradox of value - The disconnect between utility and price in a marketplace. The classic example involves diamonds and water. Diamonds generally cost more than water, but water is much more important to consumers.
Pareto efficiency - A state in the market such that there is no other way to reallocate resources without making at least one party worse off. Note that this does not imply that a Pareto efficient market maximizes total efficiency or production.
Pay the price - To be subjected to a punishment as a consequence of a prior misdeed.
Pay what you want pricing - A misguided form of pricing. Instead of the producer setting a price, he asks the "buyer" to set his own price. In most cases this will result in significantly lower income and an influx of cheapskates.
See begging
See begging
Paywall - A barrier preventing access to information on an internet site. Websites implementing a paywall will generally require users to provide an email address, a payment, or both before information may be accessed.
PEG ratio - A method to value a share of stock that takes expected growth into account. It is calculated by dividing a company's P/E ratio by its annual earnings per share growth. The lower the result, the better for the buyer. A result of 1 is considered break-even.
Penetration pricing - The temporary use of exceedingly low prices in order to enter a new market with strong competition.
Read more: Penetration pricing
Read more: Penetration pricing
Penny auction - An auction that requires the payment of a fee for each bid a participant places.
Penny stock - A stock noted for its low price and often sold sold over-the-counter, rather than on an exchange. The current American threshold is $5 per share.
Perfect competition - A market in which all producers sell commodity goods and none have substantial pricing power. Thus each is forced to accept the market price.
Persona - A profile of a fictional individual whose traits characterize a group of real people (often customers or users). These profiles allow stakeholders to better understand the motivations and needs of their buyers/users.
Perverse incentive - Motivation for another to perform a specified action but unexpectedly leads to an undesirable result
Pigovian tax - A surcharge on activity that causes negative externalities.
Piracy - The unauthorized duplication of intellectual
property.
Planned obsolescence - A vendor's intentional design, engineering, and support decisions that reduce an offering's useful life span.
Plunge protection team - A controversial governmental working group that is focused on maintaining confidence in the financial markets. It was created by President Ronald Reagan and consists of the Secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the Security and Exchange Commission and the chairman of the Commodity Futures Trading Commission.
Poa - Priced on agreement
Positive economics - A study of what occurs in a marketplace.
Post-experience good - An offering whose value can not be determined prior to use or even during use. Its value can only be determined after use.
Potemkin village - The use of deliberately falsified evidence in order to convince a third party as to an item's greatness and desirability. Named after an eighteenth century attempt to convince Catherine II of the great wealth in Crimea via the use of fake, but impressive-looking, houses.
Preapproval letter - Documentation from a lending institution that provides a non-binding estimate of the total amount that a mortgage seeker can borrow.
Predatory pricing - A pricing strategy characterized by low prices intended to prevent competition from other suppliers.
Prestige pricing - The strategy of charging excessively high prices in order to improve a good's image and desirability. Not to be confused with price gouging.
Price - The cost of a good or service.
Price ceiling - The maximum price allowed. The lower the price, the greater the shortages that will be experienced by the market.
Price elasticity - A measure of the effect of price changes on consumer demand. The greater the effect, the more elastic the pricing.
Price fixing - A collusion between producers to maintain prices at a certain level. This business practice is illegal in the United States, but some foreign cartels such as OPEC utilize this strategy. Price fixing schemes often unravel because participants are incentivized to cheat by selling excess inventory at below-market rates.
Price floor - The minimum price allowed.
Price gouging - The practice of charging excessive prices for items after a sudden increase in demand.
Price increase letter - Written notification from vendor to customer used to soften the blow when the amount charged is set to go up
Read more: Price increase letter
Read more: Price increase letter
Price justification letter - Written information that can be used to help convince buyers that an offering is worth its cost
Read more: Price justification letter
Read more: Price justification letter
Price maker - A vendor that can set prices independent of the going rate.
Price skimming - A strategy that involves setting a high initial price in order to maximize the per-unit income from each sale. Over time the price is reduced in successive cuts so as to continually maximize the per-unit income from the remaining pool of potential buyers.
Read more: Price skimming
Read more: Price skimming
Price taker - A vendor of a commodity who is forced to sell its wares at the going rate.
Price-earnings ratio - The result of dividing a stock's share price by its earnings per share. Although younger companies will often enjoy higher ratios due to expectations of future growth, higher values can serve as a warning sign that a stock may be overvalued.
Pricing power - The ability of a firm to increase its prices without losing customers.
Principal-agent problem - A statement about misaligned incentives. The representative of an organization may optimize his decisions for his own benefit, not that of the organization that he represents.
Private good - A product that is excludable and rivalrous. In other words, an item that is owned by and benefits a single party.
Producer surplus - The value received by a vendor after selling a good that is over and above the minimum price that he would be willing to accept.
Production possibilities frontier - The set of outputs that maximize a party's output. Many examples depict a country's potential output of two items: guns and butter.
Productized service - A service that has been packaged as a product. The benefits of doing so include ease of marketing and specialization.
See /productize/
See /productize/
Profit - Accountants define profit as the difference between income and expense. Economists also subtract opportunity costs from income.
Psychological pricing - A method to reduce the perceived price of an item by reducing its least significant digits so that the total price falls below a traditional price threshold. For instance, psychological pricing may be used by a retailer to reduce the price of an item from $20 to $19.97. Although the price is essentially unchanged, consumers will subconsciously evaluate the item as being significantly cheaper.
Pull demand forward - To encourage sales to customers who would have bought at a later date. This usually requires additional expense and effort upon the part of the vendor. Short-term cash flow will increase (due to a higher number of sales). On the other hand, sales in subsequent periods will be reduced as those who would have placed orders in those time periods will have already made their purchases.
Pump and dump - A marketing technique for those with questionable morals. It consists of a push to artificially increase the perceived value of an item (pump), and then the sale of a massive quantity of that good quickly at an inflated price (dump) before anyone catches on. Often used in the context of financial stocks (especially penny stocks).
Purchasing power - A measure of the strength of a currency. The larger the measure, the more goods that can be bought by a unit of currency.
Quantity discount - A reduction in total price given in exchange for an agreement to purchase many items.
Quid pro quo - Latin for "something for something." It refers to the practice of trading something of value for another thing of value in business dealings.
Race to the bottom - A form of competition focused solely on attaining increasingly lower prices points. Levels of quality, features, and support will all be sacrificed by participants in order to reduce prices.
Rack rate - The full, publicly-listed price for a good or service. This is almost always the maximum price charged for the offering.
Rational actor - A person who acts in his own best interests.
Razoo - A fictitious coin without monetary value. This term is most commonly used in Australia.
Rebadge - To relabel or rebrand an item so as to obfuscate its history, producer or customer base
Recession - Two consecutive quarters of negative growth in an economy.
Reservation wage - The minimum income that a given worker will require before taking a specific job.
Reserve price - The minimum acceptable price for an item at auction. This number is not necessarily revealed to bidders.
Retained earnings - The net income that a firm has earned and kept within its possession.
Retainer agreement - A pact in which one party pledges prepayment for services that the other party will render in the future.
Return on investment - The income received from a transaction. Often displayed as a percentage, rather than in absolute terms. Note that the return need not be purely monetary. Many companies see other factors such as goodwill or entrance into new markets to be an excellent return on investment.
Revenue - The income from an endeavor.
Risk - The likelihood and severity of an event. Although risk usually applies to undesirable outcomes, some fields (such as project management) routinely utilize the term 'risk' to also apply to desirable outcomes as well.
Rival good - A product with characteristics such that two parties cannot extract value from it at the same time.
Sawbuck - Slang for a $10 currency note.
Say's law - A good's availability creates its own demand sufficient to clear the market
Scalper - A person who buys an item with the expectation that he will be able to sell it for a large profit in the near future. In many markets, such behavior is illegal.
Scarcity - A limit of a good's availability that is below the quantity desired. This limit may be either natural (I only have so many hours available for consultation) or artificial (the Hunt brothers attempted to corner the market for silver).
Scarcity mindset - A belief centered on the idea that opportunities are limited. Individuals with such beliefs tend to engage in lower levels of risk-taking.
Scrip - An alternative currency, often used for employees in remote locations.
Search cost - The calculated sum of the resources required in order to find and evaluate a potential purchase. The greater the search cost, the less likely a purchase will be made.
Search good - A product or service with a value that can be determined with confidence prior to purchase.
Security deposit - Money given by a party to reserve the right to purchase, lease or otherwise utilize a product or service. In some cases a security deposit is considered forfeit if further conditions are not met.
Sell someone a bill of goods - An idiom for convincing another party that a lie is the truth.
Shill bid - An offer to purchase made without intent to purchase. They are often used to incite willing buyers to make higher offers.
Short squeeze - In finance, some parties sell stocks prior to purchasing them (shorting the market). Others may attempt to "squeeze" the shorters by buying up many shares of the stocks that were shorted. This causes the price of that stock to rise and forces the shorters to increase the amount of money they must spend to cover their positions.
Shrinkflation - A method to hide price increases. Rather than changing the retail price of their wares, producers reduce the quantity of goods provided.
Signal - Evidence (real or faked) used to alter the recipient's opinion as to the quality, worthiness or appropriateness of a given product or service. For example, an endorsement from a celebrity is often used to increase the perception of quality of a good.
Skinflint - A person who will go to great lengths in order to avoid spending money.
Sliding scale fee - A price which is based not upon value provided, but upon the ability of the customer to pay. Depending upon situational specifics, this system may be intended as an act of charity or a means of increasing revenue.
Smart money - Investors who are more educated, knowledgeable or sophisticated with respect to the market. These people are often looked to as advanced indicators for future pricing changes in stocks and other other financial instruments.
Soft sell - A weak technique intended to push a buyer into considering action. Such methods are often long-term in nature and push for an eventual (rather than immediate) sale. Overly soft pitches risk losing potential sales.
Software as a service - A system of software sales. A vendor hosts a software package on his servers and allows customers to use it for a fee (typically requiring a monthly or yearly payment).
Speculator - An individual who takes part in a transaction with the intention of selling the result for a higher sum.
Spendthrift - A person who makes purchases far beyond his means of repayment. There is usually a negative connotation suggesting extravagance and pride. A person who spends vast sums of money for antibiotics for poor children, for instance, would not be characterized as such.
Spiff - a payment made to a salesman upon the sale of a specific product
Sticker shock - A negative reaction from a potential customer, after he learns of a product's unexpectedly high price.
Sticky - Something that is apt to remain constant or unlikely to change. Menu prices are often thought of as sticky as changes require an expensive reprinting process. Similarly, demand for a product or service can be sticky, if switching costs are high.
Straw purchase - A transaction in which one party acts to acquire an offering for a hidden third-party. This term is often used when discussing the purchase of firearms.
Subsidy - Money or resources given to a producer by a third party (often a government). Subsidies are often intended to increase production or decrease costs to consumers.
Substitute good - A good or service that fills the same needs as another good. The closer to being a perfect substitute, the more price will serve as the sole derterminant as to which product is purchased.
Sucker's rally - A rapid increase in stock prices due to hype rather than increases in underlying value. In this context, the 'suckers' are uninformed buyers.
Sunk cost - Money that has already been spent.
Sunk cost fallacy - The common, but mistaken, belief that one should take previous money spent into account when considering a decision. This is due to a human tendency toward loss aversion. Previous spending and commitments to spend will be realized whether or not a given decision is made.
Surge pricing - A strategy that increases prices as demand increases and decreases prices as demand shrinks. Energy companies often use this strategy, as the cost of electricity will vary over the course of a day.
Switching cost - The expense that a consumer will incur if he purchases a different good.
SWOT analysis - A method of characterizing an entity by its strengths, opportunities, weaknesses and threats. This methodology is taught in most business schools and is a useful tool to quickly characterize a firm's competitive advantages and disadvantages.
TapRun, LLC - The world's greatest software monetization and pricing consultancy.
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Read more: TapRun, LLC
Texas ratio - A metric used to determine the health of a bank. It is calculated by dividing the total value of non-performing assets by the bank's tangible common equity capital and loan loss reserves. A number greater than 100% correlates with an extreme risk of bank failure.
The 4Ps - Defined by E. Jerome McCarthy in the 1960s, they are the fundamental building blocks of any marketing effort. They are as follows: product, place, promotion and price.
Theory of price - The belief that the price of a good can be discovered through the relationship of supply and demand.
Tiered pricing - A pricing strategy used to increase revenue and customer count. It involves offering differing versions of a product or service at different price points. Ideally, customers with the highest ability and willingness to spend will purchase the versions with the highest costs, while those with lesser ability and willingness to pay will purchase less expensive versions.
Time and materials pricing - A pricing model that is based upon the amount of labor and materials used.
Time horizon - The period between the beginning and end of an investment. Typically, investors will demand higher returns for investments with longer time horizons.
Time-based pricing - A strategy that selects a price based upon the time of day. For instance, a restaurant will often charge less for the very same meal at lunch than at dinner.
Top line - The revenue reported on an income statement.
Top-up auction - An auction in which the winner pays his winning bid, but each other bidder must pay the difference between his bid and the next lower bid.
Trade-off - A change in one trait to improve another trait. For instance, an increase in production may lead to a decrease in quality.
See opportunity cost
See opportunity cost
Tragedy of the commons - An allegory made popular by Garrett Hardin. It suggests that individuals will act against the long term interests of society when resources can be extracted from common property.
Transaction cost - The sum of related expenses over and above the sticker price of a good. An example of a transaction cost might include the cost of training users to understand a software application.
Transferable good - An item for which ownership can be sold or given from one party to another.
Tripwire - A product sold primarily for the purpose of building a relationship with a new customer rather than increasing the bottom line.
Troy ounce - A measurement for gold, silver and other precious metals. It is slightly more than 31.1 grams.
Two and twenty - A common fee structure for hedge funds. Firms will often charge 2% of their funds' size each year plus 20% of any profits that are earned.
Undercapitalized - A firm that lacks sufficient resources to engage in normal operations.
Uniform commercial code - A set of recommended rules to cover business transactions. They have been adopted (either wholesale or in modified form) to varying degrees by state legislatures in the United States.
Unique bid auction - A type of auction in which the winner is the one with either the lowest or highest bid that is different from everyone else's bid. A fee is generally charged to each participant who offers a bid.
Unique selling proposition - The differentiation that a product's vendors can highlight at time of sale in order to increase customer interest.
Upsell - An attempt to increase a buyer's spending by offering upgrades, additions or modifications for an additional fee.
Utility - The perceived value of a good.
Value stream - The steps utilized to create a desirable good.
Value-based pricing - A pricing methodology that involves setting prices based upon perceived value (rather than cost to the producer). Although its use can lead to high revenues per sale, the analysis required may prove too burdensome expensive for low-value goods that are sold to multiple parties. Value-based pricing may require significant pricing power on the part of the seller, so it is infrequently used in markets for commodity goods.
Variable cost - A cost that increases as the quantity of an item is produced. Common examples include the costs of ingredients, shipping and packaging
Veblen good - A product for which a higher price stimulates increased customer demand. Such items are used to advance the status of the purchaser and provide value other than direct functionality. Common examples include art, wine and jewelry.
Venture capital - An financial organization that invests money into companies with high growth potential
Vigorish - The interest rate on a loan from a loan shark.
VRIO - A resource-based framework for understanding the strategic importance of various resources to an organization.
Read more: VRIO
Read more: VRIO
What the market will bear - The price which an undifferentiated set of potential buyers will support. Vendors (especially smaller ones) will be better off focusing on marketing to small segments, rather than the market as a whole.
Read more: What the market will bear
Read more: What the market will bear
White elephant - An item that incurs maintenance costs far above its value, yet cannot be sold or disposed.
White good - Large household appliances so-named due to the common use of enamel-coating. Some authors use this term to refer to linens instead.
Wholesale - The bulk sale of goods to retailers who will themselves sell to end users.
Winner's curse - The winner of an auction is (by definition) willing to pay more than any other bidder for a given good. This suggests that winning bidders may have overvalued their purchases.
Work in process - The investment in items that have not yet been sold but are intended for sale. The larger the investment, the lower a firm's ability to make investments. As a result, most firms are cautioned to keep work in progress to a minimum.
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Read more: Work in process
Yellow good - Equipment used for construction and mining.