Andy Kessler at the WSJ documents multiple instances of inappropriate use of break-even analysis.
- The USPS saw the volume of first class mail "fall from 103.7 billion letters in 2001 to 61.2 billion last year." More substitution with email and online bill pay makes demand more elastic implying margins should fall. Instead, the USPS raised prices 50% to make up for the shortfall.
- ESPN's subscribers have dropped from 100 million in 2011 to 89 million today. To 'make up the difference' it raised prices from $4.69 per sub a month to $7.21 today.
- Microsoft kept raising the price of its Windows operating system to computer manufacturers at the same time Android based computing came to dominate the market.
- Booksellers have raised effective prices on digital books "to offset the decline of physical copies."
The article documents many more examples. These examples share some commonalities. Firms had enjoyed substantial market power but now face unexpected competition. Managers feel pressure to meet investor expectations. And then they forget their marginal analysis. The lesson is:
Increasing prices attracts others to attack your market. Amazon's Jeff Bezos warns: "Your margin is my opportunity."
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