The Price of Value

How much can I charge for my product? How much is my service worth? Let’s be clear; price alone does not drive sales. However, the price has a substantial impact on how your business is perceived and this factor can affect sales. After all, If we increase our scope of knowledge we can better understand what questions to ask.

Business experts encourage you to understand your purpose before pricing your product/service. Whether your purpose is to resolve an issue, satisfy a need, attain financial freedom, or provide a higher quality solution, maximizing your profits should be the fuel to your business venture. When attempting to understand your market, to better adjust your price, you may be inclined to basic pricing principles presented in the early stages of your life. Such as the “Law of Supply & Demand”.


I do not remember when I first learned about the law of supply and demand in school, but over the years, it made much more sense. The law of supply and demand is a theory that explains the interaction between the sellers and the buyers of a resource. The theory defines what effect the relationship between the price of the product can have on the willingness of people to either buy or sell the product. The law of demand indicates all other factors being equal, larger quantities of the resource will be purchased when price decreases, similarly smaller quantities will be purchased when price increases. As a knowledge seeker, there is always more to consider than what is initially presented. So, what if the product brings no value to the person? No matter how cheap it may be, why would anyone be interested in buying? We can safely agree demand is not necessarily affected just by price. As you may have figured, The law of supply says that as the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale. But, what if you create an even bigger demand by putting less out there “for grabs”? For instance, antiques make up a very large part of the flea market industry and are connected to market history and how exclusive an item is. Most antique markets and swap meets even have set rules for selling antiques, such as they have to be a certain number of years old and how much of this item is out there. Also, in the luxury vehicle industry, you often hear statements such as “there are only 13 of this particular car in the world!” to emphasize how exclusive this particular car advertised is.

The law of supply and demand are supportive basic principles to determine the price of a product/service. However, you’d be doing yourself a disservice if you do not look further than this basic principle. There are numerous factors to consider for the price of a product/service you offer. The following factors presented to provide you a better grasp of pricing:

  1. Quality: Offering a high-quality product/service allows you to differentiate yourself from the competition, gives you the power of referrals, and amplifies word of mouth of what you offer. As your business matures, a positive public perception of your business entity can exponentially bring successful results. To be in the best position to offer quality to your customers, I highly recommend becoming as close as you can be to an expert in your field of business and attempt, to the best of your ability, to offer the best product/service to your potential customers. This can allow you to offer a much higher price than your competitors. It is crucial in quality development to have a grasp of the best prime resources, machinery, and manufacturing (if necessary) available for your product/service.

  2. Options: The taste of the consumer can affect the demand for a particular product or service. Providing your customers options to choose from allows you to dive into different markets of a particular product or service and offer numerous other benefits than just premium pricing. For instance, Apple Inc. is famous for providing its customers with options for the same product. For instance, different versions of a particular iPhone at different prices. Specifically, some people prefer what they call the “normal” size iPhone and others want a much bigger phone and get the “pro max”. The bigger the phone, the higher the price. If size was not enough, Apple mobile devices also come in different colors; Allowing for an even bigger palette of options. With the “options” pricing method, you allow the opportunity to maximize profits by setting a high base price and small increments on the other options. Another example of the effectiveness of the “options” pricing method, you may notice next time you buy a drink that the difference in the small size cup and medium cup may not be significant. Successively, the difference between the medium cup and the large one is close to none, so you get the large one to “get the most for your money”. This is a purposeful psychological strategy to take advantage of offering you options. You should offer the customer options at different profitable prices and let them make the purchase decisions. Legend says, there was an old gentleman selling watermelons at a local fresh food market. Every day, he would park his truck next to an old wooden stand and would fill it up until the watermelons were barely staying put. At the end of every day, all of his watermelons would sell out and he would joyfully get on his empty truck to go home before dawn. His secret? He had a huge sign that stretched from end to end of his stand with the following price list: “1 for $3 and 3 for $10”. Absurd right? One day, a frequent buyer stopped and bought 3 watermelons individually for $3 each. As the young man was walking away with his hands full, he turned around and kindly said to the old watermelon salesman “You are always so kind to me and your watermelons are delicious. But, do you realize I keep buying three watermelons individually for $9 instead of $10? Maybe you should redo your sign or understand how business works.” The old man smiled. The young man was stunned and could not believe the old man’s reaction so he immediately turned around, rolling his eyes, and walked away. The old man mumbled to himself “People are interesting creatures. Every time they stop by my stand they buy three watermelons instead of one, yet they keep trying to teach me how to do business..."

  3. Price of your competitor: Numerous businesses based their price on how their competitors charge for the same resource. This is not bad and should not be frowned upon. After all, your price is determined by the customer's willingness to pay for your resource. For instance, a good friend of mine became a professional hairstylist (or barber) and asked me to assist him with marketing and his service price offering. After designing his business cards, flyers, pamphlets, and advising him on marketing, he asked me “how much should I charge?”. I gave it some quick thought and responded “what does a typical barber charge around here?”. At the time, He just started in the field of hairstyling and he had no experience to market himself above others... Yet. As his customer base and quality of service grew, so did his pricing. He proceeded to begin charging his customers accordingly until he differentiated himself from the crowd of barbers/hairstylists to begin exclusive pricing. This may not apply to you. However, the point is, it’s not bad to consider the price of your competitors if it fits according to your cost.

  4. Outweigh Cost: When a business is run solely for profit, it can die. However, remember a business must always run at a profit, or else, it will die. Profit, by definition, is the difference between the amount earned and the amount spent in buying, operating, or producing an entity. Experts reiterate it is crucial in pricing to know your total cost to determine an adequate final price. I’ll say it again; it is crucial in pricing to know your total cost. I’ve come across numerous business owners and people who provide great service and/or product unaware of how much it truly costs to run their business entity or produce their product. Remember the cost of a product/service is often more than the immediate cost; it also includes overhead expenses. Overhead expenses may include fixed costs like rent, equipment consumption, and variable costs like advertising, shipping, sales commission, among other fees. Essentially, you must include these different types of costs in your calculations of the total cost of your product. Otherwise, running a business where at the end of the day you are losing money, is depleting the entity of its life as the days go by. Once you figure out your total cost, you have a decision to make. On the bright side, you can choose from numerous options what your profit will be.

Now that you have some more insight on pricing, you’re more prepared to make a decision. Finally, I recommend studying the results of your pricing and paying close attention to the feedback provided by customers. There are two main risks of business failure attached to pricing - underpricing and overpricing. In simple terms, pricing your products at a lower rate than your cost, as you know, is detrimental to your entity, and pricing it at an extremely high price can discourage potential customers. Be careful, seek more knowledge, keep moving forward, and let your curiosity guide your intuition.


Kind regards,

Ariel


Hello there!

I'm Ariel Rodriguez

I am an Engineer with a passion for reading.  I truly enjoy seeing others maximize their potential. I am thankful to the greatest teachers in my life: heartbreak, failure, and empty pockets. Their classrooms were not my favorite. But there, I learned the greatest lessons in life.

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