Skip to content
Home » Blog » Business » Long-term pricing for products and services

Long-term pricing for products and services

This article describes how market prices could be used to set the right incentive to achieve long term growth (via long-term pricing). These days – in general – you need to have market power to be profitable. Market power means you need to a have a significant market share or monopolist position. In this position you are likely not the one to establish competition or innovation or value. Companies with market power usually use their strength to develop new products and services; but in general that is often linked to their company goals only and not to a societal goal.

Profit in the rest of the market is made in niches, competition ruins competitors, money as means of exchange limits developments and makes it possible that persons and companies may go bankrupt, even if they contribute to the good.

The Value of Money

So the truth is that the value of money – as it is defined nowadays – is limiting growth and is not setting the right incentives to enable real growth. Therefore a lot of institutions are trying to set rules and procedures to overcome the problem that our means of exchange – the money itself – is not enabling real wealth.  

Is money therefore to question? No not money itself, but how the value of products and services is being measured, because the current monetary system attaches the wrong values to the right things. We need a proper value-measurement to reflect long-term impact of a product or service in its price (e.g. in an E2E view, forward looking view and long-term pricing). A system is needed where the value of a product should not be based purely on supply and demand – but by the value of products or services for a society. So the value of goods shall be re-adjusted according to the value of a product or service for society, i.e. from a long-term perspective.

Long-term Pricing as Solution

If you would extend the pricing based on supply and demand with a correction factor for longterm or societal impact, you would overcome the current price-fixing purely on supply and demand with taxes impacting the behaviour.

The equation should be as follows:

Market Price for consumer +/- Correction Factor = Company Income

The consumer pays the market price, however the company delivering the product or service gets an adjusted income. The income for a company will be higher for incentivised products and lower for de-incentivised products. So there would be two pricings for a transaction: one for a consumer based on supply and demand and one for companies based on supply and demand times the correction factor (i.e. longterm impact via long-term pricing). The difference between market price and adjusted price (the correction factor) could be transferred between certain industries or companies.

Examples

Simple Change – but huge impact.

With this new pricing mechanism a company that sells a product with a negative impact would face the following: As the value for the society is negative – e.g. as the product is linked to high healthcare-costs in the future – the income that the company receives will be lower based on the correction factor– as the company would be de-incentivised (within certain limits). The de-incentivisation could be transferred to industries that are supported.

Another example: If a company builds houses for families, the benefit for communities is high, and the company should be incentivised with higher income (than based purely on market prices). The correction factor would be positive and would lead to an additional income for the company.

The Correction Factor

If you use a stock-exchange to set the market prices for the consumers and the adapted prices with correction factors – all parties (consumers and companies) would get real time pricing information. The prices should be directly linked to the shops of the retailers (which is not a problem with the right IT-Infrastructure) then the prices would reflect supply and demand for consumers and a second price for the income of a company (based on long term impact of a product) in real time.

The correction factor – reflecting long-term pricing – should be set by an independent authority based on the values that should be achieved in a region or state. The correction factor will lead to higher income to those companies contributing to the goals to be achieved in the region or market and a lower income for those companies that are not contributing to the targets set.

Conclusion

The benefit of this model is that economic growth is enabled and gives the possibility to incentivise the developments in a market and region, as the pricing is not purely on short-term supply and demand but on longterm growth. Contact us to set-up a model for your region or business.

Related Links:

nv-author-image

Georg Tichy

Georg Tichy is a management consultant in Europe, focusing on top-management consultancy, projectmanagement, corporate reporting and fundingsupport. Dr. Georg Tichy is also trainer, lecturer at university and advisor on current economic issues. Contact me or Book a Meeting