The Games Retailers Play: Price and Value

Value and price are very different. We have all had the experience of going for the cheaper version and realizing oops, we got what we paid for – that's the play between price and value. Price is the amount you want the customer to pay, while value is the the real or perceived worth of what they're paying for. The trick is to price goods and services in such a way that our customers feel they are purchasing a quality product while not turning them off by pricing so high that they go seek a less expensive alternative.

While there is a great deal of flexibility, there is no sure fire formula for pricing. It's a combination of art plus science with a pinch of finesse. Of course you went into business to make money so you need to mark up your services to ensure you make a profit. According to the U.S. Small Business Administration (SBA), the first thing to consider when pricing business items or services is your cost. These include material costs, labor costs, and overhead costs. Let's say you're a barber. Your material costs include shampoo, conditioner, hair dye, etc., while the labor cost is what you pay your barbers/hair dressers. As for overhead, that's anything that you pay for that isn't related to the first two such as taxes, rent, insurance, marketing, transportation.

There are different pricing modules you can look at and consider. For example, many retailers use keystone pricing (wholesale cost times two) to price but this doesn't work as well with a service. Your industry or sector may use a different convention for pricing. For example, lawyers charge varying hourly rates while construction firms tend to charge a project fee with one third up front, another third at the half-way point, and the remaining third upon completion. There are other pricing strategies, such as those suggested in Pricing for Profit by Rafi Mohammed, including the 0 and 9 effect, payments and bundling.

The next item to consider is your competitors' pricing. Take a look at what similar goods and services are going for. Look at competitors' web sites, talk to friends and associates that have used their products or services, etc. In other words, how much does the salon in the next neighborhood over charge for a cut and dry? A good tip from the SBA is not to compete with a large store's prices or compete only on price, rather set your business apart by focusing on what will create a loyal customer base. These include knowledgeable and friendly service, convenience, reliability, exclusive merchandise and satisfaction in handling customer complaints.

Finally, and here is where the artistry starts, consider the perceived value to the customer. Is your target customer searching for the best sale or trying to buy into luxury? It's not only about the end results but the customer's perception of the experience. So back to the barber. Dad may be drawn to a $7 cut at the shop with a traditional barber's pole, warmed shaving cream and straight razor as well as the friendly conversation about Sunday's game. Mom may be looking, and willing to pay $60 or more, for the fashion mags and plush couches, complimentary coffee or mineral water, gossip and the opportunity to brag about her daughter's engagement. The barber's shop and the salon may offer the same expert services and products (even at competitive prices) but how they deliver them to their target audience is what makes the difference in their customers' perceived value and what they are willing to pay. That's perceived value.           

A few more things to keep in mind according to Inc. If the competition has raised their prices it's a good signal that the market can and will support a price increase so consider doing the same. If you're customers are commenting on what a bargain your goods and services are, it might be a signal you're priced too low. But be careful and don't raise prices too much at one time and do it discreetly, not across the board.

Now that you've set the price tag, keep track of your financial statements monthly. Jerome Osteryoung, Prof. of Finance at Florida State University and Outreach Director of the Jim Moran Institute for Global Entrepreneurship, says, "If there is any mistake I see entrepreneurs make, it's that they don't spend enough time going over their financial statements." Knowledge is power so use the above and your financial statements to help keep an eye on the price tag and be sensitive to your customer base.