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The Price is What

Customers don’t pay for products or services. They pay for perceived value.

01 August 2007
Our neighbor is planning to have a garage sale, which we are really looking forward to. In fact, we’ve told her at least a few times to make sure she lets us know in advance, because we want to be the first ones there.
 
It’s not that we need more junk – we just had our own garage sale a few weeks ago in preparation for moving across the country. But the nature of this garage sale is a little unusual. The neighbor is Holly Roberts, and what she plans to clear out is some of her unsold art. Instead of paying $15,000+ for any one of her works (which I’ve been lusting after for years), we’ll probably be looking at somewhere in the neighborhood of $500-$1,500. For this garage sale, we’ll definitely wait in line.
 
What makes a price right? Venue obviously plays a part. When you put your belongings – even nice ones – in your driveway and guide people there with a $24 newspaper ad, everything is worth a lot less than if you sold it through Craig’s List. Presentation matters too. I sold some designer linen dresses suspended from the rungs of a patio umbrella during our garage sale, and the woman who bought them said she would have spent more than five times as much if she had purchased them at the local designer resale shop.
What does this have to do with business? Well, everything. Pricing is everything. And pricing is the thing that stumps most people most often. In general, business managers spend more time focused on every other aspect of management, leaving pricing as an afterthought. And when they do tackle pricing, they tackle it filled with opinions and fears, rather than strategy and a genuine understanding of merchandising and marketing.
 
Pricing is the cornerstone of marketing. Marketing is the outward expression of a business’s strategy. So pricing is a direct expression of business strategy. Unfortunately, much pricing is done as a defensive tactic or a lure. Small businesses selling services frequently approach pricing from a let’s-make-a-deal or a what-do-YOU-think-it’s-worth standpoint. And there is a whole world of artisans out there terrified to price at all, constantly watchful of customer reaction to determine whether or not they picked the best price.
 
You can’t set your prices if you don’t understand your value. You can’t understand your value unless you understand your business proposition. Business proposition and strategy are inextricably linked (but not exactly the same). In a nutshell, if your business strategy is to be the cheapest and fastest of all your competitors, then your prices clearly have to be the cheapest. Cheaper than whom? Cheaper than your competitors. And your competitors aren’t always who you think they are!  If your business strategy is to offer the cutting edge of products or services, always a step ahead of your competitors, then your prices should be higher than your competitors to represent the value of being the best. Again, you need to know who your competitors are. And if your business strategy is to offer the best customer experience and relationships, your prices should be higher than your competitors to represent the value of that business proposition. Assuming you know who your competitors are.
 
In theory, price competition should be taking place 1/3 of the time or less. Yet this is not the reality of current markets. Why? People don’t always grasp the importance of choosing a business proposition and aligning their entire organization behind it with discipline. When you organize for a business proposition, the operations, product development, supply chain, and sales and marketing are all in support of that business proposition, making it sustainable. This is where value from the customer’s perspective comes from. Different business propositions require different investments, talent, and activities, and your margins will have to be sufficient to pay for the requirements of the business proposition while still yielding an acceptable bottom line. If any one of the components of your business falls out of alignment, the balance required for the business to be profitable will not be present.
 
Customers don’t pay for products or services. They pay for perceived value. Perceived value is a concept that goes well beyond the tangible product, actual service, or price tag.
Now if Holly would just hurry up and have that garage sale.

(c) Andrea M. Hill, 2007

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