Using the Rules of Contextual Pricing to your Advantage
What is contextual pricing?
Contextual pricing is a tricky concept that when used appropriately, it can significantly improve your income. In contextual pricing, the seller raises or lowers prices based on specific variables and sometimes even for specific consumers. Let me illustrate with some simple examples.
Example 1: An ice cream salesmen walks around the park selling ice-cream year round. During the winter time he dramatically reduces his prices. During the summer time when it’s nice and hot, he raises the prices because he knows that more consumers want ice cream when it’s hot outside. What if he had chosen the median price year round? Well, he didn’t maximize his potential profits in the summer, and his sales would become even worse during the winter because his prices were just too high for the current demand.
Example 2: Have you ever purchased beer for $7-$10 at a ball game and thought to yourself, “I could easily buy a six pack of this for less.” Why are the prices so high? The prices are high because you still bought it anyways. Beer increases in value because you specifically crave a beer at the ball game. That beer has become more significant to you because of the context in which you are drinking that beer. Beer that you have at home is far more common even if it’s the same product. Beer at a ball game is a much more rare and cherished experience, so you are willing to pay the higher price for it.
Contextual Pricing in Real Estate
Think about the contexts that affect the prices of real estate. In a previous article, we mentioned how retail lease prices are going up because consumers are buying more from retail stores. The prices went up because there is a greater demand for the lease from small business owners. This demand went up because there is more economic opportunity in surrounding consumers than before.
Now think about the context of who you are selling the lease to. Depending on the circumstances, you might be in possession of a property that is of high value to restaurant owners and lower value to other kinds. Maybe the property isn’t valuable to anyone. In that case, changes must be made to the property so that it is seen as being of greater value. Add in a bar, kitchen, and other amenities, and you might be able to make your property more valuable to a potential restaurant or bar owner. Brokers can be great advisors on how to make the best use of your property and to sell it to the right consumer for the best price.
In another article, we talked about how location can be of a high determination of the price of a property. Depending on the context of the surrounding demographics, traffic, parking, etc. can determine which property you will decide to buy and how much you are willing to pay for it.
Time of year affect the pricing of real estate as well. It’s generally easier to sell during the summer than during the winter because so many business owners and investors celebrate the holidays. Think about how much harder it is to move your business in the cold v.s. during periods of warmth. As a result of these contexts, real estate prices go down in the winter and up in the summer. Keeping this in mind, the smartest thing you can do is push through the cold and buy real estate during the winter and try to sell during the summer.
All of these things should be considered when setting a price for a property and for whom you will target to sell this property to.