On Pricing Power
“But I make no profit” was the plea.
On my recent trip to Bali, Indonesia, I was with my daughter and she was wanting to purchase a dress from one of the street vendors. Aside from the fact that the dress was not something I would have chosen for her (I’m no fashion icon according to her), she had decided that was what she wanted. It then came down to haggling over the price.
I don’t want to go through the rather long and protracted discussion we had with the vendor (in the end, we reduced the pricing discussion to arguing over about A$0.20!) suffice to say, the process itself was rather fascinating.
Having determined that the dress was right for her, my daughter then handed discussions over to me. In the process, I asked the vendor “How much?” This led her to come back with “How much you want to pay?” Classic positioning questions. The only problem was, this was one vendor on an island with thousands of them all selling commoditised items – if I couldn’t agree on a price with one, I could easily go to another. Both of us knew that. The end result was that my daughter got what she wanted at a price that we were all (more or less) happy with.
Contrast that with the discussion we had the next day with some other Aussies sitting at the Pool Bar (as you do). They had only just arrived in Bali and had, in the excitement, gone straight out shopping. They hadn’t done their research (ie: asked other tourists) with regard to prices so the context in which they approached things was to compare prices being asked to the prices they paid at home. In other words, they had no idea as to context. The street vendors had a field day!
Sunglasses we were buying for A$2.50 – they paid A$25.00. Shorts we paid A$2.00 for – they paid A$15.00. Nothing different in the products at all (and in at least one case, the same street vendor).
Context and understanding the level of commoditisation are vital in the process of reaching a pricing and purchase decision. Where there is an absence of one, there will be a shift in the outcome in favour of either the vendor or the customer.
From a business owner’s perspective, this then leads to the issue of being able to separate your product from other offerings on the market. There are heaps of books available on this topic if you want to read further (contact me for a list of selected readings) and some excellent free podcasts that will help you understand this (again, contact me for a list of these). Where you can de-commoditise your product/service offering, you are able to command a price premium as the customer will know that they are unable to get what you offer anywhere else.
It is for this reason that many businesses and brands fiercely protect their IP. The premium inherent in the “brand” is the reason for the price points they are able to achieve.
In your business, are you able to differentiate what you do from others in your industry? If you can, get the message really clear and make it about the customer. If you can’t then your options to achieve premium pricing are still there, they just need to be approached somewhat differently.
Similarly, are your customers fully aware of the context in which they are buying, but, more importantly, are YOU aware of the context in which they are buying? If you are, fantastic as you can then ensure that what you are offering meets your customer’s needs (and what happens if it doesn’t???) If you aren’t aware of the context, then you really are at a loss and will need to adopt a “one price fits all” strategy. This can be dangerous as you will (not might) have different customers who will pay different prices for what you’re offering. Without sufficient information and context, you’re really only guessing.
If you end up having a discussion with your customers similar to the discussion we had with the street vendor, you’re in trouble. Your customer doesn’t care whether you make a profit or not.
In Bali, I told her that.