pricing basics 1

Pricing Basics For Makers:
What Is Price?

There's something missing from every price label.

Pricing seems simple but it isn’t.

This sandwich is $5. That sweater is $50. The number of monetary units you need to pay for a product or service is right there on the label. What could be more straightforward?

But hang on.

Do you know what you pay for 1 kilowatt hour of electricity? Or a ten second call from your landline to a mobile phone on a weekday morning?

When you get off a packed commuter train and everyone taps out with their different railcards and tickets, could you say decisively what that journey cost?

Prices for things like flights and hotel rooms change so rapidly there’s now a whole industry dedicated to finding the best possible rate.

Amazon offers free next day delivery – but only if you pay $99 a year for Prime membership. Items which are eligible for Prime are often more expensive that those which aren’t, so overall exactly how much are you paying per order? It can be incredibly hard to tell.

Even the pricing of your sandwich isn’t that simple. If you got a coffee at the same time, perhaps you qualified for a meal deal and got a discount.

If you bought your sweater along with a couple of t-shirts, maybe you got the cheapest item for free. In that case, what’s the definitive price of the sweater?

It’s enough to make you jump in a lake.

The words we use to talk about price are just as opaque.

The insurance industry prefers premium. In travel it’s fare and supplement. Corporate employees negotiate their compensation. When you reach for a stray Monster Munch and accidentally drive into a pot hole, the garage gives you an estimate for the repair. When you go to a fancy spa you don’t get a bill – you receive a breakdown of services.

Price is a flighty mistress who wears many disguises.

And if you’re thinking, “Well, none of that applies to my little business,” I’ve got news for you.

If you sell your work to shops, you have a wholesale price and a retail price. You’ve also got an RRP (recommended retail price) or a MSRP (manufacturer’s suggested retail price.)

If you’ve been smart about setting your terms and conditions, you’ll have a carriage paid level. That means if a retailer spends over a certain amount, you’ll pay for the shipping costs.

Do you offer starter packs or bundles in your wholesale catalogue? Do people who sign up to your mailing list get a discount on their first order?

Pricing is complicated in your world, too.

We may hang on to the idea that price is just a simple number that tells you how many pennies to hand over, but we do ourselves a disservice with that definition. Every day, as we decide whether an item is worth our money, or as we persuade other people to spend theirs, we show a nuanced understanding of price.

While you’re bobbing around out there in your lake, mull that over. If you’ve ever compared mobile phone tariffs, haggled over tomatoes in a market or run a quick calculation in your head about which size of popcorn to get at the movies, you have an intimate knowledge of the complexity of pricing.

So when you get right down to it, what is price?

I’ve tried to prepare you, but I still can’t be sure how you’re going to react to this next bit.

Despite all of its complexity, the ultimate definition of price is simple.

It’s the value a customer perceives in your work.

In other words, if a buyer looks at your product and sees a lot of value in it, his or her willingness to pay increases. If a buyer looks at your product and sees less value in it compared to similar items, his or her willingness to pay decreases.

Here’s the really mind-bending part: in isolation, products have no intrinsic value AT ALL.

Even if the finest artisans laboured for a hundred years to make a dazzling poem in diamond and gold, by itself that item still has no more inherent worth than a pebble from a river bed.

It’s only when we put the item in front of a potential buyer that value springs into being. The labour, skill and materials which have been invested into the product are only valuable if the buyer perceives them as valuable – and if he or she is willing to pay a price in return.

This is quite different from our usual understanding of price.

In our daily lives, we often feel that there’s an objectively “right” price for things. We’re constantly exposed to advertised prices in the media, and that makes us believe we have an infallible sense of what things are “supposed” to cost.

A carton of milk should be about this much, and a box of cat food should be about that much. Someone in head office at the supermarket has decided what those items are worth, so that’s what you hand over at the till.

The value you personally perceive in twelve packets of Poultry Feasts In Gravy is neither here nor there.

But that’s because every price label is missing something.

Something which shows that, actually, price relies entirely on perceived value.

You see, from a contractual point of view, the figure on price labels and stickers is what’s called “an invitation to treat.” In this case, treat means negotiate or trade.

So it isn’t binding or set in stone. It’s an invitation to make an offer for the item in question.

By putting a dollar figure on the sticker, the store is helpfully providing you with a guide. It’s a quick way of saying, “Look, if you bring this cardigan to the cash desk and offer us the amount we’ve printed here, you’ve got a deal.”

Technically, however, you don’t have to offer the price on the label, and the seller doesn’t have to accept whatever amount you offer. A contract is only formed between you when those details have been thrashed out and the store takes your payment. We may not choose to negotiate very often, but the opportunity to do so is built in to every purchase.

When you know this, it’s clear that every price label is missing one thing:

A question mark.

The prices we see every day aren’t unassailable statements of value, but an invitation to think about how much value you perceive.

So that box of cat food shouldn’t be marked $6, but $6?

The next time you’re out shopping, mentally add in a question mark to the prices you see and observe how it changes your experience. Trust me, it makes buying even rubber bands and toothpaste a lot more interesting.

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