You see that house on the hill? What’s the price of that house?
The owner thinks the price should hover around $550,000.
The real estate agent thinks she’ll get $575,000 or more if you go to auction.
The council sincerely believes the property is worth $495,000.
The bidding fails to rise about $528,000. But then along comes a buyer who wants the exact property, and buys it for $565,000.
So what’s the price of the house?
Is it the owner’s price? Or the buyer’s price? Or the council’s price? Or the ‘failed auction’ price? The answer is it’s none of the above. In fact, what the above example proves, is that there’s no such thing as price.
No such thing as price? How can that be possible?
Ok, quick. What’s the price of a 2 litre bottle of Coke?
Say it. It’s about $2, right?
So that means the price of Coke is logically and mathematically hovering around one cent per millilitre. Which means that if I offered you a 600ml of Coke (and you were still sitting in that math class), you’d say it was worth, how much? C’mon say it: 60 cents, right?
But a 600ml of Coke costs more than $2
If you head to that chilled Coke in the supermarket, you’re more than likely to pay as much as $2.65 or even $3, or more. And yes, you’ve just passed your math test, but gained a big fat F in your pricing class.
Because how can you justify one lawyer charging $200 per hour? And another charging $250? Or $300? Or $500? Or $800?
Surely, all products and services, must either depend on what the competition charges, or it must mathematically be priced according to the lowest possible size or quantity.
Which brings us to a horribly obvious conclusion
That pricing doesn’t exactly exist. That customers are drinking similar cappuccinos at $4, $3, $4.50, $5.50 and get exactly the same product or service. Or are they? Are they getting exactly the same?
Now that’s an interesting question
Because it’s blooming irrelevant what product or service you’re offering. Totally, completely irrelevant. And yes, value plays its part in so-called pricing. But what the customers are really buying is not even real value, but ‘perceived value’.
So when a customer gets a bonus pillow that’s worth $50, when they buy a bed, that’s perceived value. The pillow probably costs $20 at wholesale price. If you wandered through twenty dozen shops, you might get it at a $40 retail price. But right at that very moment, the customer can see a $50 price sticker on that pillow. And to the customer, that’s the price, the price, and nothing but the price.
Which brings us to an age-old issue
If customers are buying value, and all of that value is perceived value, then how do you create the perception, so that you can increase your price—without losing any customers?
It depends on what you’re selling, of course, but at the core root of value (or perceived value) is the factor of ‘what am I getting when I give you my money?
In other words, customers are saying: Give me value.
So how do you create value?
Value is created by bundling. Or un-bundling. Let’s look at the bundling part first, shall we? So let’s say you want to buy a sofa with certain specifications.
And let’s say you’re the owner of the sofa store. What exactly can you offer the client, so that value of the sofa dramatically increases? Can you throw in some bonuses, perhaps?
If you can, then automatically, you’re appealing to the core of human nature: To get more for less. So when offered a sofa with bonuses vs. a sofa without bonuses, your customer is going to make the most obvious choice: The sofa with bonuses.
But what if you don’t have bonuses?
Or what if you can’t have bonuses?
What if you can’t provide additional value by giving out bonuses?
Ahem, we head over to un-bundling city
Let’s look at zat sofa. Zat sofa comes with some stuff—a lot of stuff, that represents value, but which we fail to communicate to the customer. Let me illustrate zat value that you are failing to demonstrate to your customer.
– Colour/Decor Advice
– ScotchgardTM Protection
– Maintenance Advice
– Access to Related Discounted Services
When a customer buys the sofa from you, you may already be doling out the above services. And you may protest when you’re told to un-bundle, what you perceive to be ‘part of the package.’ But the customer doesn’t see the value of the services if they’re hidden.
So while you may spend a good half an hour to an hour, giving specific colour and décor advice, the customer has zero-value for the advice. Unless of course, that advice is un-bundled and valued at $200.
Aha, now the advice has instantly created value. The ScotchgardTM protection that’s…ahem..part of your package, suddenly has a $200 value. The maintenance advice booklet/website that enables the client to keep her sofas looking as good as new, is suddenly worth $55. And yes, the savings on the related discount services like lamps, side-tables, etc., is worth a chunky $500 or more.
Suddenly you’ve created (yes, created) a value of $1000 or thereabouts. The customer ain’t just rolling in, and rolling out with a sofa. Her perceived value is now a whopping $1000 (or thereabouts).
But what if you’re not in the products business?
What if you’re in the services business, and you offer a service like say, copywriting. Let’s look at how you can un-bundle again, shall we?
-30 Day Phone Support
You’re seeing how this un-bundling stuff works aren’t you? You’re also seeing that yes, putting a value on everything, suddenly makes price kinda redundant.
That if you want the customer to see value, you can’t depend on price. That value jumps in and takes the spotlight every single time. And that by un-bundling and bundling, you can indeed sell not just at a higher price than your competition, but also get a larger volume of customers.
And that if you avoid doing the mathematics, you’ll end up with an A+ in profits—as well as happy, smiley customers.
Great insights. Thanks for breaking it down. In the end it’s worth whatever someone is willing to pay for it, right? 🙂
Todd Plager says
Sean – what a practical and useful article! I currently manage an upscale wedding photography business and I am going to unbundle our packages and then describe in detail a bit about each item. I’ll then provide this along with the bundled package to give the prospective client an “insider’s view” of the product/service they are receiving and the value that it represents.
And I love the “blooming irrelevant” line above. You don’t hear “blooming” much in S. Florida. 😉
So, are you saying one has to first unbundle, fix a value for each item in the unbundled list and then present the price of the product/service as the sum total of the unbundled list?
A bit confused there.