So now let's take some of that psychology that we just learned and
apply it to pricing.
As you might imagine, that psychology really does apply
to product line pricing and I want to go through how it's actually going to work.
So if you think about product pricing,
you can really decompose it into three questions.
What am I going to price my most expensive product?
What am I going to price my least expensive product?
And then, what am I going to do with all of those middle products,
those intermediate products?
So, here's the way we're going to tackle it.
We're going to start with the intermediate products.
Now, just hold onto the minimum product and the maximum product.
We're going to get there, but
right now we're going to go through the intermediate products, because those
are the products that most closely match the psychology that we were just learning.
So, here's how you do it.
First, you rank the products in ascending order of expected prices.
So that literally means if you've got six products
that you think are going to range from cheap to expensive,
you kind of put them in order where the first product is the cheapest.
The second is the next most expensive.
The third is the next most expensive and so forth.
Then you determine the low-end price and the high-end price.
Now, just take that as a given, for a moment.
We're absolutely going to talk about how to set those prices, but
for right now, just take it as something that's been decided.
And then we're going to use those prices, those pmin and
pmax, along with the number of products in your line,
to determine what those intermediate product prices should look like.
And here's how you do it.
We're going to calculate Pj.
That's the fundamental thing that we're going to be calculating.
Now, what is Pj?
Well, that just means either P1, P2, P3,
whatever product it happens to be along that quality spectrum where,
as the numbers go up, the quality goes up and the prices go up at the same time.
So this is what we call the jth ordered product.
And Pj is going to be equal to P min, whatever that lowest price is,
multiplied by K to the j minus 1.
Now this K ends up being key.
K is for key here, right?
This is the thing that we're multiplying the prices by to get the next price.
And where do we get that?
Well, it's kind of mechanical, but it's mechanical in a way that matches
the psychology and that's what makes it beautiful.
To get K, this is what you've gotta solve.
Log K equals 1/n-1.
And remember, n is just the number of products in your product line.
Multiplied by the log of (Pmax) minus the log of (Pmin) and
remember, for purposes of our discussion right now, you have Pmax and Pmin.