Do you have fixed beliefs about what the price should be?
It’s likely that you’re bringing your own assumptions to the table.
Do these sound familiar?
- The price should just be a markup of the cost.
- I would never pay $X, therefore, no one else would either.
- Personally, I want the cheapest option. So the employee who’s buying it for their company will do the same.
Today’s essay is a reminder that there is no price. Price is a concept. It’s made up. It’s fictional. It’s subjective.
In fact, it’s so subjective that in order to make any sense of it, we compare it to other prices of similar products in the set of options (or consideration set as it’s called).
What makes a banana cheap or expensive is determined by how much other bananas cost. Or apples. Or oranges.
So the following two corollaries are important for you:
Do not allow yourself to be easily compared. If your product is exactly the same, you make comparisons on price easy.
The way I always explain it to my students is: “Don’t be fungible.”
If your usual brand of soap is sold out, then you’d just pick another one. But if your daughter went missing, you wouldn’t simply “make a new one.”
While marketing science shows that customers aren’t “monogamous” with respect to brands, you absolutely can do better than being a carbon copy of your competitors.
That’s my favorite choice architecture. Creating a consideration set that has the elements; a few options Youngling Research provides, or non-consumption.
If you want a more technical explanation behind this, read my essays on Nash equilibria, Fragility & Stability, and Pareto Efficiency.
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Price based on the value you deliver. As long as your price is lower than the value your product or service creates, you’re good.
This also opens up things like price discrimination.
“Now wait just one goddamn minute,” you say.
Okay… but tell me… does it make sense to price your logo the same if in one situation you sell it to a local mom&pop pizzeria vs. Dominoes?
Tattoo this on your forearm: It doesn’t matter what it cost you, only what the customer is getting out of it!