What Is A Price?

If you think about running a pricing consulting company some day, it might help to have a book about pricing which you can talk about and give to people to show that you know a lot about pricing.

And if one of your interesting resume items is that you one managed pricing for Wendy's and can tell everyone all sorts of things about how fast food pricing works, you might just consider entitling your book Drive-Thru MBA: Everything You Need to Know About Pricing I Learned in Fast Food 

And if you were writing such a book, you might decide that between the introduction, where you talk about your pricing career and how you took the Junior Bacon Cheeseburger off the $0.99 menu, and the chapter where you dive into price consultant talk and explain why taking a 1% price increase will increase your profits more than getting a 1% increase in sales or a 1% reduction in cost, you should have a Chapter One where you say some interesting things about what a price is in an engaging way.

If I were in fact working on such a project, this might be the draft that I came up with.

What do you think, would you read this book?

Chapter One: What Is a Price?

The question at first seems so basic as to be nonsensical. We see prices all the time: On the shelves at the supermarket. On the windshields of cars at a dealership. On an Amazon page. On the drive thru menu board.

Prices tell us what it will cost to get the product or service on offer. For us as customers, we often think of this limited definition and go no further. But I would like to suggest that prices do so much more. When a business offers us a price, they offer us a chance to render judgment on their entire business model in a package so simple, so easy, that we often don’t think what a powerful tool is in front of us.

How so?

Say I arrive at a restaurant for lunch.

Do they have a comfortable dining room with padded seats and a decorative fireplace, or do they have a few basic tables with plastic chairs?

Do I pick up my food from a service window, or do they bring it to me?

Is my food made to order or is it prepared in advance and sitting under a warming light?

Perhaps we could imagine a truly choose-your-own-adventure world where customers made each of those decisions.

You’ve reached the door of the restaurant. Do you want the dining room to be cheap and utilitarian? Pay one dollar and enter the basic dining room. Do you want it to be comfortable and well decorated?  Pay three dollars and enter the nice dining room.

Do you want your food brought to your table by a pleasant server? Pay three more dollars for service. Happy to carry the food to your own table on a tray? Pay fifty cents for the self-serve option.

But of course this is not what we see.  Instead, the price of all these elements is bundled together in the price you pay for the product. When you get a chicken sandwich from McDonald’s or your funky local bistro, the price for the different levels of service and experience offered by those two establishments is bundled into the price you pay for the sandwich.

It’s entirely likely that the difference in the cost of the actual sandwich between McDonald’s and the local bistro is just a couple dollars. The reason you might pay $4.99 at McDonald’s and $12.99 at the bistro is that the bistro has other costs that it needs to cover. 

The $12.99 chicken sandwich doesn’t just pay for the sandwich, it also pays for the dining room, the staff, the plates and cutlery: all the things which might make you enjoy the experience of eating that sandwich enough to pay more than twice as much as the fast food alternative.

When you decide whether to pay the price for a product, you decide whether the value you would receive is enough to justify the price.  But that term “value” doesn’t just cover the product itself. It covers the entire experience of buying and using the product and even the way that you found out about it.

Value, in this case, is every factor you consider when you decide how much you are willing to pay for the product. When considering the value of a chicken sandwich, the factors may be different on different occasions.

If I am driving from one appointment to another, and I have only fifteen minutes to pick up some food that I can eat in the car along the way, I don’t assign any value to how nice the dining room is.  I want a place with a drive thru which is on my route. But confronted with a McDonald’s and a Chick-fil-A, I will pay the slightly higher prices at the latter (even knowing the piece of chicken is often slightly smaller on their sandwich) because I think the taste is better.

On the other hand, if I’m meeting a coworker for lunch, I would happily pay the $12.99 price at the local bistro. To some extent, that’s because the food is better. But it’s mostly because the bistro offers a nice dining room where we can have a conversation in good surroundings. If I had to choose between two bistros, one with better food but a dining room like a Chick-fil-A, and the other with acceptable food but a very nice dining room, I might well pick the nicer dining room for a lunch meeting. In that case, the dining room and service is a major part of the value I’m willing to pay for.

In yet a third case, if I’m picking up lunch to take back to the office and eat at my desk, all I care about is the best food. I might still happily pay bistro level prices, but I’d be willing to do it at a hole in the wall or food truck with better food over a bistro with a gracious dining room.

What these examples show is that different products and companies offer different value propositions to different customers in different circumstances.

To be successful, a business does not need to be the best value to all customers at all times. But it must be a good enough value at its current prices to enough customers that it can sustain itself.

The cheap and easy food of middling quality, the bistro with the congenial dining room, the hole in the wall with amazing food – all of them offer value in different ways, and for the right place should be able to sustain themselves. But the reason each restaurant survives is not simply the value of the sandwich they sell as a sandwich, it is the overall value of the experience they provide: sandwich, location, speed, dining room, service, etc.

If a business does not provide the right combination of things to offer enough value to enough customers at its current prices, it will not make enough money to survive.

So what is a price?

Price is the way we discover whether we are delivering enough value to the customer to sustain our business.

If that sounds important, it is.

If you aren’t providing value to your customers, that’s not a lot that pricing can do to help you. In the long run, a business can only be successful by providing customers something they want.

But if you are providing something that customers want, finding the right price to capture your share of that value can be the difference between a successful business and a failing one. 

How can you find the right price?  Stay with me and we’ll find out, one hamburger and chicken sandwich at a time.