Earlier this year, my wife and I moved to Florida. With year-round nice weather, palm trees and white sandy beaches, it seems like Paradise. Last week Hurricane Irma came through and reminded us of the true price of paradise. It also reminded me that buyers make trade-offs in every purchase decision, and your pricing strategies should understand and quantify the values of those trade-offs.
When we began looking for a home in Florida, we found it interesting that real estate prices were comparable to other similar-sized cities further north. However, there is a net migration of people into Florida every year. Much like my wife and me, the newcomers prefer warm, sunny climate to cold, sometimes-grey climate. You might expect that migration and desire for living near the beach to cause home prices to be higher. Although in dollar terms prices may not be higher, the non-monetary components make the price of paradise higher.
When it became clear that Hurricane Irma would threaten Florida, stores suddenly became jammed. Grocery stores sold out of water, hardware stores sold out of plywood and batteries. Gas station lines became long, and the stations sometimes ran out of gas. We drove for 10 hours in stop and go traffic to evacuate. Fortunately, we had water and found a station with gas, but not everyone could say that. Each of these things represents a trade-off, a non-monetary price for living in coastal Florida.
As I write this post, nearly 750,000 homes and businesses still do not have power. The priority for restoring power goes to hospitals, schools and other critical-need areas, so homes and businesses near those areas tend to have their power restored quickly. Conversely, purely residential areas further away tend to be lower priorities. That is another non-monetary price of living in an uncongested area.
The maxim “Location, location, location” says that home prices are dictated by where the home is located. Prices of homes on main roads or near hospitals and police departments are lower than those on more private streets. And there are non-monetary prices of longer drives to get to shopping, longer times to receive emergency services, and maybe longer times to get streets cleared and power restored.
Everyone can probably relate to these residential examples, but let’s think about them in the context of selling products or services. The value of your product or service is determined by how it benefits your customers or prospects compared to their next best alternative. That alternative is rarely a perfect substitute for yours, so to estimate your value it is critical that you identify all the trade-offs customers might have to make. For example, prices for coffee might be lower in Costco than in your store, but to get those low prices, customers must buy much larger quantities. They also must have enough space to store the coffee, they most likely have to drive further to shop at Costco, and they have to pay for it all at once instead of payments being spread out as the coffee is needed. Each of those factors is a trade-off which buyers must make.
Another example could be in the breadth of your offering. In the B2B world, there are hundreds if not thousands of firms that can offer goods and services for certain parts of your customers’ businesses. With low overhead, they often keep their prices low. Contrast that with your ability to offer customers a wide array of services from a single company. You should consider charging more for that wide array of services, rather than less. It is costly for your customers to order from multiple vendors, receive and process multiple invoices, and make multiple payments. Your customers may not always consider those factors, so your job includes reminding them of those trade-offs. They are additional, albeit hidden, components of price.Those are just a few, simple examples, but trade-offs exist in every purchase decision. It is easy for customers and sales people to simply focus on the quoted price, but it is an incomplete way of thinking about the buying decision. Your firm will be much better off if your pricing strategies explicitly identify and quantify those trade-offs before setting prices. You will also be much more profitable if your sales team is trained to discuss those differences in value with customers and prospects. Your prices are your mechanism for capturing value. Make sure you identify all the sources of value.