Cost analysis and pricing
Mrs Nancy Morris owns Victorian Children's Costumes, Ltd, a small cottage industry located in a scenic Cotswold village (England). Her primary business is to rent original Victorian children's clothing to movie and television production studios. The clothing was acquired by her during the 1940s and 50s at various garage sales around the United Kingdom. In the mid 1990s, business was booming due to the popularity of period films such as "Sense and Sensibility" and "Jane Eyre."
During a cocktail party, a retiring BBC executive approached Mrs Morris and said, "really Nancy, you aren't charging enough for supplying your costumes. Your competitors charge more and the studios can afford to pay more; you really should revise your prices." Her competitors are limited to two other suppliers of original Victorian children's clothing in the world. There were three others, but one supplier recently died.
Mrs Morris's pricing policy is to charge a fixed amount, no matter how long a production studio keeps the costumes (anywhere from six weeks to six months). Her reasoning is that, as her major costs are washing, packing, and shipping to customers, it does not really matter how long her customers keep the costumes, and hence that should not influence her price. Furthermore, she prices below the other two competitors because, in her words, "they are more professional and provide nice boxes and packing material; we are, after all, a cottage industry." Furthermore, for personal reasons, she especially likes supplying the producers of low-budget films and is afraid that by raising her prices these producers will be squeezed out. Note that Mrs Morris has supplied costumes to 85% of the major period film productions in the United Kingdom in the period 1995-1997.
Exercise: Discuss how an economist would view Mrs Morris's costs. Develop a new pricing scheme for Mrs Morris that would increase her revenues.
[Written by Dr Kathryn Graddy of Exeter College (Oxford University). Used with permission. While Nancy Morris is a fictitious name, this exercise is based on a real-world case.]