How much would you pay for a bottle of water?
Same question, but with some context…how much would you pay for a bottle of water after a five-mile hike on a 95-degree day?
When discussing price, context matters. Context is what allows us to convert price to value.
Allow me to further highlight.
Why is it that we can buy a bottle of water for 50 cents at the supermarket, but we’ll pay $5.00 at the airport? Answer, context.
Simply stated, we have plenty of choices when at the supermarket. And if we don’t like the choices or the pricing, we can go elsewhere. When traveling through an airport, we may have choices, but the pricing is predicated on the fact that you can’t get through security with a 50-cent bottle of water that you bought at the supermarket. They have you captive and can charge a much higher price for the same product. There are other factors at play here in terms of pricing, but you get my point…context matters.
For further reference, here’s a few definitions of some common terms around this topic:
· Context: the set of facts and circumstances that surround a particular situation or event.
· Price: the cost (i.e. money) requested in order to obtain exchange for something else.
· Value: relative worth or importance.
In my practice, clients and I often have discussions about price. This conversation can be triggered from either side of the equation: what prices to charge, as well as what prices to pay. And in either scenario, it comes down to value; it’s relative worth or importance.
When pricing your products and/or services, what factors do you take into consideration? Most of us start with supply and demand. Followed by a competitive analysis of pricing. Two great places to start. But I’ll encourage you to go deeper. Remember, ultimately the end result must lead to value in the minds of your customer.
So, what else can you take into account in order to best price your products and services competitively as well as profitably? Some considerations and idea joggers may include:
· Cost-of-goods
· Markets served
· Market conditions
· Comparative quality of your products and services (i.e. reliability)
· Level of customer service (i.e. availability)
· Reputation and brand awareness
· Organizational experience and expertise
· Organizational capacity
This all leads to another factor to consider in your pricing model; demand elasticity. Essentially, demand elasticity is a measure of change in consumption of a good or service in relation to its change in price.
With some products and services, price may have little effect on demand. As an example, an increase in gas prices does not tend to decrease demand in lockstep proportion. Whereas an increase in the price of chocolate bars, as an example, may just push consumers to another sweet indulgence, lowering the demand for chocolate bars.
In my opinion, and from a small business perspective, demand elasticity is a fancy economic term that highlights where price intersects with value. It’s a quest for balance between fair for you and fair for them, and is something to bear in mind.
Pricing is a key component to the health, viability and longevity of your business, and should be examined and evaluated with intention and a clear understanding that the price you request of your customer is ultimately evaluated in terms of value it brings to them. It’s a subtle balance of attracting your target market to become consumers without crossing over a tipping point that pushes too many away.
When reviewing your pricing model, be mindful of the many factors that can impact customer interest, and ultimately consumption of your goods and services. Converting price to value should take into account multiple considerations, including some on the list provided above, while at the same time acknowledging that context matters.
So, how much would you pay for a bottle of water?
Share your comments regarding some pricing considerations you bring into your own business. And if you’d like to discuss further, let’s grab a conversation over a fairly priced cup of coffee.
Continued success.
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