One of the most difficult things in business is determining what price to sell your products or services for. In most cases, businesses base their prices on the cost of production, as they are unsure of the value they provide. For example, a jewelry maker may sell their jewelry at (x) times the price of silver. In another example, an accounting firm will figure out that they are paying a bookkeeper $25/hour, and thus bill out $75/hour as per the rule of thirds. If you aren’t familiar with the rule of thirds, it states that the revenues are made of three equal parts: cost of production, overhead and profit. No matter what multiple is used, businesses that do this are selling commodity instead of value.
Commodity businesses don’t take into account the value they provide to their customers, and therefore they will never be able to charge more than their competitors. The reason for this is because the business that sells their product and service as a commodity, cannot fully define what the true value of their product is. And if they don’t value their product or service properly, how is it possible for their customers to do so?
On my recent trip to Italy, I had a wonderful conversation with a jewelry maker from Tuscany. He was selling his beautifully crafted jewelry at the current price of silver. Every time he was asked for a price of a particular piece, he would literally put it on a scale and tell you the price based on the weight. It was no different than selling corn, potatoes or coal for that matter. The two of us were discussing some of the best Italian brands such as Prada, Versace and Dolce & Gabbana, and he shook his head and and said “I don’t understand how Dolce & Gabbana can sell plastic at the price of gold”, just as he was putting a beautiful bracelet on his scale to figure out the price.
The irony of the situation is very real for many of business owners who, just like my new Italian friend, don’t understand the power of a brand. You see, the brand is what makes us buy. A company’s brand is what attracts us to it and allows us to identify with the values they stand for. Even if you are buying a no name silver necklace, you are still attracted to what silver stands for and are willing to pay the current price of it. What Dolce & Gabbana has determined is that the value of their brand is equal to the value of gold, and that they can sell it as such. To some that may be unreasonable, but to their customers it seems like a great deal because Dolce & Gabbana makes them feel better than gold does. Essentially, they are buying the way it makes them feel.
If you are selling your product at a rate that is hardly keeping your business alive, you should ask yourself if you are selling it as a commodity. Find out what is the true value of your product, and price it accordingly.
Another thing you need to look at is your brand. You need to determine what you stand for and ask yourself if that resonates with your customers? Perhaps communicating these values through your branding can help your employees and customers realize the true value you are providing to them. Your unique brand will separate your business from the rest of the market, because you will mean something to your customers. For that value they will reward you with their loyalty and higher prices that they are willing to pay for your product.
Perhaps one day your business will be selling plastic at the price of gold.