In Which of the Following Price Ranges Will the Firm Continue to Operate but at a​ Loss
"Price range" sounds intuitive, and most of us have an idea what it means in our daily lives. But outside restaurants, hotels, and used cars, the term comes up in business, where it takes on a more nuanced meaning.
In short, a price range is the spread of numbers between the lowest and the highest value of a product or service at a given time and in a given place. For example, the price range for 1kg of bananas in Atlanta, GA during the month of December 2020 was $1.50 – $2.00, but the price range for 1kg of bananas in Brazil during the same period was $0.85 – $0.95.
Price Range in Business
In business, price range means one of three concepts. Either (1) it's the price of a good or service in a free market, (2) it's the target price range for a product or service before launching, or (3) it's the desired price for selling or buying in a negotiation where the market data does does exist or is unreliable (i.e for a non-fungible good or company valuations).
Time as Key Variable in Price Ranges
In all three cases, time is a critical element. At any point in time, the price range for one product in the same location can vary significantly compared to another time.
The housing market is a perfect example. At one year in time, a house in central Michigan could be valued 10% higher or lower than the preceding year. Since houses don't move, time is the only variable creating fluctuations in price range.
Moreover, the time variable is NOT necessarily instantaneous. The analyst determines on what time frame to base his/her valuation on a case-by-case basis.
In the housing market, for example, the price range for a neighborhood during a period of one year could be dramatically different from a price range during a period of one month.
Case 1: Price Range on a Market
In a free market where a non-unique product is regularly bought and sold, such as with commodities, the approach to determining price range is straightforward. An analyst simply needs to look at the data for the given period and determine a maximum and a minimum value.
This technique is particularly evident in stocks. In most trading portals you will see metrics called "52-week high" and "52-week low." These numbers help the analyst understand how much a stock fluctuates, i.e its price range, during the last 52 weeks (1 year).
This is the standard use case for price ranges.
In a data scenario where the analyst has loads of transactional data such as stocks, the kind of price range represents a kind of "audit" of the market and is done on a recurring basis to identify opportunities and avoid pitfalls.
Case 2: Price Range for a Product or Service
Price range can also be the output of a breakeven analysis. A company attempting to launch a new product or service in a market will not only look at the highs and lows for competitor products, but also the range of prices it can support given a set of fixed costs.
This break even price range is the result of comparing the immediate profitability of the activity (aka gross margin) against the standard operating costs (i.e those that are only marginally associated with the activity). For example, staff costs and building rent are operating costs, but the value of selling a banana minus the cost of purchasing it is the immediate profitability.
The price range for a product or service is the estimated amount of profitability (banana sale value minus banana price) that's equal to expected operational costs. Any less profitability would result in losses.
For example, in the above picture we see that at a price of $0.95 per banana and a sale value of $1.50 per banana, we would need to sell 7273 bananas to be breakeven. We could set an expected range for staff costs and building rent. From there, we adjust either the price or the quantity.
Companies compare the breakeven price range with the market price range. If price is equal to competitors and the product is similar, it may be worth exploring. However, if price is higher than competitors with no justification, then you may run into difficulties selling.
If price is lower than others and the product is superior, you've hit the jackpot. For example, if the market rate for selling our bananas is $2.00, score — we're going to own the market. However, if the market price is $1.00, then we would need to sell a lot more bananas to remain profitable against our operating costs.
Price Range in Marketing
Price range in the context of products or services is what the marketing team handles in a company.
Before a launch, the marketing team works closely with finance to determine an optimal range of prices given the constraints of (1) the current competitor prices, (2) the quality of the product or service, and (3) the minimum activity margin that covers operational costs.
Case 3: Price Range in Negotiation
So far we've looked at price ranges in free markets, but what about when we're negotiating price for non-fungible items, or at least ones that are significantly different from the standard market? Selling used-cars, for example, is different from selling new cars.
Price ranges in these scenarios are difficult to ascertain because (1) there's often a lack of data on used-good markets, and (2) the drivers of value loss for goods that don't have a primary market are too numerous to collect. The value of a company, for example, is determined by so many quantitative and qualitative factors that a real price range for the market does not exist.
Instead, the price range in negotiation scenarios is a combination of buyer and seller expectations.
Let's imagine you want to buy a used car. You think it's worth between $10,000 and $15,000, and you're only willing to pay that amount. The seller, however, thinks it's worth between $12,000 and $17,000. The price range, therefore, is between $10k and $17k — the max and min of all values.
This may seem strange since we assume the seller won't go below $12k and the buyer won't go above $15k, but this assumption is beside the point. We're not attempting to identify the expected value of the sale. We simply want to identify the full range of possible values.
Imagine, for example, the buyer or seller is an excellent negotiator. S/he may eventually be able to convince the other — but only within the limits of the total price range.
Price Range Synonyms
By now you're probably might if these concepts are only called price ranges. The answer is no.Price range has many synonyms, of which the important ones are:
- Asking price range
- Cost range
- Charge range
- Price estimate
- Expense range
- Outlay range
- Rate range
- Valuation range
- Compensation range
- Premium range
Price Ranges in the Digital Age ($, $$, $$$, $$$$)
If you use Google, TripAdvisor, or any other recommendation platform, you've seen the $ symbol price ranges.
These represent groups of prices in the given market summarized as one $, two $$, three $$$, or four $$$$. These ranges do not come from users, so where do they come from?
In short, Google and TripAdvisor normalize the geographic market in which the product or service is located. Location is key — a "$" in Manhattan would probably qualify as a "$$" or higher in Rochester.
These price ranges do NOT, however, normalize prices for the user. Someone who makes $150k per year would not view a $15 burger as $$, but someone who makes $35k per year might even see it as $$$. Yet they will both see $$ for the burger at the same place and the same time.
Google Reviews
To give you a summary of what to expect behind the $ price ranges, I surveyed 24 single and small-chain burger restaurants in major US cities on Google reviews and found that the average for each category is as follows:
- $ = $6.07
- $$ = $10.49
- $$$ = $18.83
- $$$$ = $20.60
You can explore them on the map here:
Here's the underlying data:
| City | Price Range | Restaurant Name | Total |
|---|---|---|---|
| Dallas | $ | Flaming Burger | $ 5.77 |
| $$ | Liberty Burger | $ 7.00 | |
| $$$ | Honor Burger | $ 19.00 | |
| $$$$ | Town Hearth | $ 24.00 | |
| Denver | $ | Bob's Atomic Burgers | $ 5.75 |
| $$ | Hopdoddy Burger Bar | $ 8.75 | |
| $$$ | SALT | $ 16.00 | |
| $$$$ | STK Steakhouse | $ 9.99 | |
| Minneapolis | $ | Flame Burger | $ 7.95 |
| $$ | Burger Moe's | $ 9.95 | |
| $$$ | Borough | $ 15.99 | |
| $$$$ | Trax Burgers and Bar | $ 14.00 | |
| New York City | $ | Black Burger | $ 5.99 |
| $$ | Burger Club | $ 13.75 | |
| $$$ | Breslin Burger | $ 20.00 | |
| $$$$ | The Capital Grill | $ 22.00 | |
| Orlando | $ | Beth's Burger Bar | $ 3.99 |
| $$ | BurgerFi | $ 7.47 | |
| $$$ | Hillstone | $ 18.00 | |
| $$$$ | The Capital Grill | $ 21.00 | |
| San Francisco | $ | Hi-Way Burger and Fry | $ 6.95 |
| $$ | Burger Bar | $ 16.00 | |
| $$$ | NOPA | $ 24.00 | |
| $$$$ | Spruce | $ 22.00 |
TripAdvisor Reviews
To give you a summary of what to expect behind the $ price ranges on TripAdvisor, I surveyed the same 24 single and small-chain burger restaurants in the same major US cities on TripAdvisor and found that:
- $ = $7.85
- $$-$$$ = $13.16
- $$$$ = $18.25
The key difference between Google reviews and TripAdvisors is that TripAdvisors consolidates $$ and $$$ into a "Mid-range" category.
You can explore them on the map here:
Here's the underlying data:
| City | Price Range | Restaurant Name | Total |
|---|---|---|---|
| Dallas | $ | Maple and Motor | $ 6.65 |
| $$ – $$$ | Twisted Root Burger Co. | $ 7.99 | |
| $$$$ | Dragonfly | $ 17.00 | |
| Denver | $ | Sam's No. 3 | $ 11.99 |
| $$ – $$$ | 5280 Burger Bar | $ 10.99 | |
| $$$$ | Bistro Vendôme | $ 18.50 | |
| Minneapolis | $ | Matt's Bar | $ 4.00 |
| $$ – $$$ | Red Cow | $ 13.00 | |
| $$$$ | Murray's | $ 10.00 | |
| New York City | $ | Joy Burger Bar | $ 11.95 |
| $$ – $$$ | Marlow Bistro | $ 24.00 | |
| $$$$ | The Capital Grille | $ 22.00 | |
| Orlando | $ | Beth's Burger Bar | $ 3.99 |
| $$ – $$$ | The Cowfish Sushi Burger | $ 16.00 | |
| $$$$ | The Boathouse | $ 18.00 | |
| San Francisco | $ | Super Duper Burgers | $ 8.50 |
| $$ – $$$ | Pearl's Deluxe Burgers | $ 6.99 | |
| $$$$ | Taj Campton Place | $ 24.00 |
Conclusion
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Source: https://analystanswers.com/what-is-a-price-range-business-meaning-synonyms-examples/
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