Pricing: 
The Perceived Value

Volume 132, No. 27  - Friday, January 4, 2008

During the web boom of the 1990s I was living near San Francisco. As a consultant, my advice was sought by a number of “start-ups” who were looking for a way to repackage existing modes of business into new, improved, web miracles, so they could “go public” and cash out.

It is easy for us to lift an eyebrow in hindsight, considering the multi-million dollar failures of that era. A lot of people with a lot of money were in the hunt back then, but few if any of those people had any experience in anything but computers.

I remember as if it was yesterday a conversation with a client over pricing. The client, their financial consultant, a wonderful man, whose name I regrettably forget, and who had been the VP of finance for Stokely Van Camps, and I sat in a little office in the old San Francisco Produce Mart. 

I had spent some minutes trying to get the client to understand that you can’t charge for food the way you do for computers, when the financial consultant said, in a soft, slow and measured voice “you don’t set your price, the customer does. You figure out a way to make your product and be able to stay in business. If you can’t, make another product.”

The Market is the ultimate reality test. Its feedback is direct, immediate, and can be horrifyingly clear. Success in the Market is driven by perception. To succeed you have to fill a real or imagined need, or have the money to create one. Changing perceptions is expensive.

The Market, that conglomeration of consumers and their buying habits, sets your price. So every pricing decision requires outward-in thinking: the ability to stand in your customers shoes and see through their eyes.

What is the perceived value of your cheese from your customers’ point of view? What it costs us to make it is our problem and should not weigh-in on the decision.

The Whole Magilla
Ask most people how much money them make selling their cheese and they will tell you something between 20 cents and a dollar a pound. But profit has little to do with what you charge a pound. 

The deceivingly obvious truth is that until you have made enough money to pay your bills, you aren’t making money! Paying your bills depends on moving enough volume at a price higher than what it costs you in raw materials and labor to have enough profit dollars left over to pay your remaining bills. That doesn’t even take into account capital investment. 

Sooner or later, it comes down to the following: the only way to really understand how to price is to realize that “pounds” are only parts of a whole, and it is the whole that matters. I call it Wholistic thinking, with apologies to new age therapists.

Pretend for a moment that every year you make just one huge piece of cheese. You cut it up in different shapes and sizes. Some of them you can get one price for, others of it another, some of it you may even have to sell for pennies on a dollar because you made too much of it. At the end of the year, the sum total of what you sold your huge piece of cheese for is your “sales-mix.”

If that “mix” represents enough dollars for a little profit after the bills are paid, and to make your investment worthwhile, your business is a success. (Remember, the long term average of the stock market since 1900 is around 10 percent and it is a lot less work.)

The smart operator thinks, breathes and eats “Sales Mix” and “Profit Dollars,” and spends their year knocking their brains about trying to get the best sales mix they can to maximize profit dollars.

We all see cheeses for sale in stores at 30 bucks a pound. Question is, how much did they sell? Did they have enough profit dollars left over at the end of the year after paying their bills to make their investment worthwhile and make some profit? 

You can’t eat prestige. If they sold the same cheese at a price that allowed for a retail of 15 or 20, what would happen to the amount of cheese they sold? Would that lower or increase their intake of profit dollars? 

Or did they underestimate the price they could get if they got a little snazzier package, or put some real flavor in their cheese? Are they targeted at the right consumer? Now these are questions worth asking!
If the goal is to sell enough cheese to make your investment worthwhile and maximize profit dollars, you have to have a pricing strategy. The following are classic pricing strategies.

Cost Plus Pricing
Calculate the cost of producing the product and add on a percentage (profit) to that price to give the selling price. 
Although simple, it has flaws; it makes no account for demand, and there is no guarantee customers will purchase the product at that price. Unfortunately, it is one of the most common forms of pricing.

Competition Based Pricing
Setting the price based upon prices of the similar competitor products. Problem is, does your competitor have any better idea than you do how to price their products?

Penetration Pricing
Setting a low price at the stage of deployment of the product to attract initial customers. The price is set to rise later as the product gains a market share. Problem is, raising prices is always risky and it is a fundamentally dishonest policy.

Predatory Pricing
Aggressive pricing designed to drive out competitors from a market. In the age of “Swimming with Sharks” and the “Art of War” this may have a Machiavellian appeal. 

Truth is, few reading this column have the wherewithal to make it work, nor would they be willing to kill all living relatives to wipe the family off the face of the earth, as is is also recommended by Machiavelli.

Price Discrimination
Setting a different price for the same product in different segments of the market. Be careful, there is a thing called The Robinson-Patman Act, a federal law, that requires you offer a level playing field to all customers. In other words what you offer to one customer you must offer to others all things being equal.

The good news is it gives you cover when particularly aggressive buyers try and squeeze you. Calculate in advance what you are going to offer in price breaks based on a solid reason. 

The law requires that you be able to justify your reasoning with hard numbers. Since you want to sell more product, reward the behavior you want.

BEST: Market Orientated Pricing
Setting a price based upon analysis and research compiled from the targeted market. Who would want your product? What would they be willing to pay for it? What is their “Break Point?”

Breakpoints are the retail prices beyond which volume is adversely affected. The aim being to get the right value/price relationship to be able to maximize both sales and dollar profits.

A last thought, learn to control the retail. Know what is added to your price at each leg of the journey from you to consumer, you can set your price to control the retail, keeping it under the break point, and drive sales. 
Maximizing your dollar profits. Keep the retail just below the break point, not one penny more, and not one penny less. Why leave money on the table? •


Dan Strongin is managing partner and owner of Edible Solutions, a consulting company focused on helping companies making great food make a profit. He will be writing a monthly column in Cheese Reporter. Strongin can be reached via phone at (510) 224-0493, or via e-mail at dan@danstrongin.com

 
Other Strongin Articles written for Cheese Reporter
Designing the Effective Sell Sheet
Common Sense
It All Begins in The Mouth
Of Cars...

The Gathering Storm
As Our Industry Evolves, So Should Our Terminology:
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Visit John Umhoefer
Visit Neville McNaughton

 

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