The pricing formula: Substitutes and Story

Tip: Here is a link to a short text about pricing, on Seth Godin’s blog. I subscribe to this blog and find his daily posts are always a source of stimulation. This particular blog post brings to life a topic that is very important, but potentially boring and rarely discussed in class. I have used the text several times – a lively discussion has always followed.

http://sethgodin.typepad.com/seths_blog/2012/01/the-pricing-formula-ss.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Fsethsmainblog+%28Seth%27s+Blog%29

Below is the same text, given for convenience. Copy, paste and print it for your students.

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The pricing formula (S&S)

Pricing your product is actually simple, as long as you consider it from the buyer’s point of view. How much it costs you to make something is irrelevant. They don’t care (of course, you can’t price something at a loss and hope to stay in business for long). The two keys to the analysis:

Substitutes: Every purchase is a choice, and that means the buyer can choose to do nothing or buy something else instead. If there are easy and obvious substitutes to what you sell, that has to be built into your pricing. If you make something rare and unique, you still might not be able to charge a lot–because people can always choose to buy nothing. A 42 carat diamond, for example, might be hard to replace, but it’s not worth $100 million unless someone actually chooses to buy it.

Part of the work of design and marketing is to help people understand that there are no good substitutes for what you have to offer, meaning, of course, that you can happily charge more.

Story: The other half of the pricing formula is the story the price itself tells. A Prius at $40,000 or a Prius at $10,000 is the same car, but the price becomes a dominant part of the story. You can tell a story of value/cheapness/affordability, or a story of luxury. If you price your product or service near the median, you’re telling no story at all with the price, giving you the chance to tell a story about some other element of what you sell.

If you’re not happy with your pricing options, focusing on your costs might not be the right path. Instead, focus on how the design or delivery change the availability of substitutes, and how the price becomes part of the story of your product.

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