Tuesday, March 23, 2010

One Million Screwdrivers: The Experiment (Part 2 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

You choose to sell the screwdrivers without a clear plan in mind, but it all becomes a clearer plan after the first couple of years. You end up selling screwdrivers over seven years at seven different prices.

Year One. Initially, you have no idea what other screwdrivers should sell for and you can wait indefinitely until a sale happens so, on a lark, you price your screwdrivers at $1,000 each. What the hell, right? Let's see who bites. A whole year goes by... and nobody shows interest.

Year Two. You drop your price to $100 each. A whole year goes by and only one person shows interest. That one buyer pays $100 for a screwdriver just for the bragging rights—he seems rather affluent based on the Ferarri he drives up in, so perhaps $100 isn't really that much money to him anyway.

Year Three. Seeing that more buyers might buy if the unit price is lowered, you drop the price to $10. Over the next year, only 10 people show up to buy screwdrivers. It's not a lot of people, but it's a tenfold increase from the previous year. And your gross revenue is $100, the same amount you made in one year by selling one screwdriver for $100.

Year Four. You drop the unit price to $1... and 100 people come in to buy screwdrivers. Interesting. Same amount of money, more units sold.

Year Five. You drop the unit price to one dime. Now something really interesting happens. According to years past, you predict you'll sell 1,000 screwdrivers and earn another $100 ($0.10 X 1,000 = $100). However, the 1,000 people buying your screwdrivers see the great deal you're offering and buy two screwdrivers, or they tell their friends about your deal, or both. More units sold, more people come through your door. Instead of 1,000 screwdrivers being sold in 1 year, you've sold 10,000 screwdrivers in 1 month, netting $1,000—a tenfold increase in revenue in only a twelfth of the time. And you've accomplished this simply by offering your product for a fraction of what you'd previously sold it for. After a few phone calls, you soon realize the fair market price for a similar screwdriver is 50¢, five times your price. A-ha... that explains why so many people want your screwdrivers.

An unpleasant side effect to your boon: you're getting hate mail from all the other screwdriver manufacturers in town. They claim you're underpricing them, that your price comes across as "begging", that you're glutting the market and endangering their livelihood. If you keep doing what you're doing, they tell you, you'll end up training consumers to expect screwdrivers to cost no more than a dime. Eventually, you'll put us out of business for good.

Year Six. As another experiment, you drop the unit price to 1¢. Though some people think your screwdrivers must not be good enough if you're selling them for such a low price, you put up a big sign that says, "LIQUIDATION SALE", and this seems to put their mind at rest. Instead of grossing $1,000 in one month, you sell 150,000 screwdrivers in only two weeks, totaling $1,500. That's 50% more revenue than the previous year... in only half the time.

Year Seven. You still have over 600,000 screwdrivers in the warehouse. You've had these things for six years now and you really want them to be out of your sight. Sure, you could keep selling them for a penny (you're getting massive amounts of hate mail now)... but you have one final experiment to try: what if you let all your inventory go for free? How quickly could you get all those screwdrivers out of your warehouse? You post an ad on Craigslist: "FREE screwdrivers, brand new, never used, just need to get rid of them." A few people show in the first few hours, they take 10 each, then a deluge happens at lunch time, and by the evening, the warehouse is swamped. Amusingly, two of your screwdriver manufacturer competitors pull up with big trucks... one says he'll resell your screwdrivers for current retail prices, and the other—embittered by how your free screwdriver stunt has almost put him out of business—vows to dump your screwdrivers at the local dump. Even so, word gets around and in less than two days, the rest of screwdrivers are gone.

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:

  1. Introduction
  2. The Experiment
  3. Ripple Effects (Wednesday 3/24 9:00 AM PST)
  4. Lessons Learned (Thursday 3/25 9:00 AM PST)
  5. The Bassinet Story (Friday 3/26 9:00 AM PST)

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