A Simple Guide to Sticky Prices

Sticky pricing occurs when the price of a given product or service such as those offered by sterling tow truck remains rigid and resistant to change, despite shifts in demand ad broader economic circumstances, that make other price points seem more appropriate. Price stickiness also referred to as nominal rigidity, is a common phenomenon across different industries. A company decides to keep the price of a product at a static amount, regardless of inflation, changes in consumer demands as well as other factors that influence business.

The same concept can also be applied to wages, specifically when it comes to downward shifts. We all know that workers generally don’t like pay cuts and in those cases, wages will tend to stay rigid or increase than they go down. There are key reasons why companies decide to stick with their prices, and here are some of these reasons.

The cost of adjusting the price is not worth it

Prices may remain sticky if the cost of adjusting to new prices seems not worth it. In some cases, there might be a lot of roadblocks in terms of logistics, hassle, and the cost of shifting prices to meet demand, as all these might seem not to make any business sense. If a company finds itself in that position, then changing prices seems to incur something known as menu costs. It is a term that stems from additional costs restaurants assume when they have to print a new menu with different prices.

Long term contracts

Some businesses have long-term contracts to sell goods and services at a specific price, and may not have the freedom to adjust prices as they so wish. This is common practice with B2B businesses. Such businesses are locked in long contracts to sell their goods and services at agreed-upon prices. If demand for a certain product skyrocket and the vendor has more leverage to charge more for such a product, they would still have to keep the price sticky, with the company they signed the contract with.

Reluctance

Some firms might be reluctant to raise prices as doing so would anger their customers. It is no secret that customers get angered by any slight price difference that goes up or against their advantage. Customers get accustomed to paying a certain price for a given product or service over long periods, and that takes a mental hold on them. Once a customer gets entrenched in that position, it can be hard to shake them loose. That is the case such that raising prices comes at an expense of keeping their business. Even if the demand has shifted in a company’s favor, a hike in price might not be good enough to cover the losses incurred from price changes.

Many industries embrace sticky pricing policy. A good example is restaurants. If fast-food chains want to change their pricing, it would lead to altering their promotional and informational materials, that reflect that shift. Another industry is SaaS. Based on the significant drain in terms of time, efforts, energy, and resources, it makes it less worth changing pricing.

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