The Pricing Newsletter

October 2019 issue

Hello Pricers!

I just heard a riddle that goes something like this:

Q. Why does the price of balloons keep going up?

A. Inflation

Clearly, pricing is no laughing matter.

Pricing is serious business. It's important. And if you don't understand it, you'll be at a significant disadvantage in the business world - both as a buyer and as a seller.

Pricing Question from a Reader

Today's question comes from reader T. J.

I'm creating a startup, and my advisors keep telling me that I can't just be as good as the established players. In order to succeed, I have to deliver something that is fundamentally better. Is this true?

Most economists would say that the solution to all of your problems is specialization. A company that specializes doesn't have to make its products better at everything; it just has to make its products better in a handful of ways.

That said, there's another approach that few dare to mention: rather than producing a good that is better in some ways and worse in others, a company can choose to produce a product that is universally inferior to that which currently dominates the market.

Neither fraud nor deception is required. Firms really can earn significant sums of money selling inferior products.

Welcome to the world of ersatz goods

To understand the concept of ersatz, we'll need to look back to the early twentieth century.

Around the beginning of World War I, Germany found itself in a difficult position. Its leaders had bold strategic plans, yet lacked the troops to put them into action. Its highly-trained and experienced soldiers were being spread far too thin.

This shortage in manpower assured disaster after disaster. Germany's greatest minds came together to come up with a solution. How could the military bolster its troop count as quickly as possible?

The answer lay in what would be called the Ersatz Corps (literal translation: replacement corps). The corps' soldiers didn't meet the same standards as the rest of the military. They weren't as well-trained, or as effective as traditional soldiers, but they weren't intended to be. These new recruits could provide some value to a fighting force that was desperate for assistance.

The German government may not have looked upon its ersatz units with pride or satisfaction, but you had better believe that it was happy that the ersatz corps existed.

The concept of an ersatz product is occasionally discussed in economics. Ersatz goods are items that aren't quite as good as those which they are intended to replace, but, for one reason or another, are used by the market as product substitutes.

Benefits for vendors

The pursuit of an ersatz strategy provides vendors with many benefits:

Is every market ripe for an ersatz competitor?

All things being equal, buyers would rather possess a superior product than an ersatz one. For that reason, firms should think carefully before engaging in an ersatz strategy.

Here are a few characteristics of marketplaces that might be most welcoming to an ersatz good:

Risks of the ersatz approach

Of course, producing ersatz goods is not without risk. Here are but a few risks to watch out for:

Conclusion

Don't believe the legions of pundits and academics who extol the virtues of quality and excellence. Such thinking has its place. Sometimes, however, striving to produce a better mousetrap is not the right answer.

I have no doubt that you have what it takes to create a middling product or service that is somewhat OK, and unworthy of praise or admiration. All you need to do is believe in yourself a bit - but not too much.

Questions come from readers like you. If you'd like your questions answered, send them my way.

Pricing in the News

From the Blog Archives

Notable Pricing Quote

"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February." -- Mark Twain

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