Would you pay $50,000 for a brand new Ferrari?

Goals.

  The summer after I graduated from High-School I began working for Vector Marketing, a direct sales company that sells Cutco knives. We basically were taught how to sell really expensive knives to our friends and family. During my training, someone said to the head sales rep, Nathan, "I don't know anyone who would pay $1,000 for a set of knives."  Nathan stood there for a second, then posed a question. "Who here has access to $10,000 right now." None of us raised our hands. "How about if I said I would sell you a brand new Ferrari for $50,000 if you could come up with the money in the next day. Who here would be able to do it?" We all raised our hands and laughed. Nathan's lesson to us that day was that when someone tells you something is too expensive or that they don't have the money, it really isn't about the money at all. You just have not created enough value for them in the product to justify the cost. If they want it bad enough, customers will find a way.

  Pricing is a strategically subjective art that is affected by a myriad of factors. Supply/demand, cost of goods, competitive landscape, there's more to it than just doing what everyone else is. How you price your product/service can say a lot about your company, so it is important to put some thought into your decision of where you fall between low-cost and premium. In this post I am going to go over pricing strategy and how to justify having a higher price than your competitors. More specifically, I am going to explain the relationship of value and price.

Cost of Goods

  Before we talk on pricing, we need to talk about costs. You would be surprised how many times I stump aspiring entrepreneurs with a simple question like,"well, what does it cost you to make it?" It is imperative that you understand what it costs you to produce and sell a unit of your product in order have a model that financially makes sense. Think of it this way: how can you expect to tell your customer what your product is going to cost them if you don't know what it costs you? Step 1 is to establish what your Costs of Goods are. These include your raw materials, labor costs to produce the product, essentially whatever is directly involved with producing the product. Here's an example:

B-Unlimited is a custom screen printing t-shirt company. Costs of goods include the t-shirts they purchase from a manufacturer, the labor involved in creating the design and printing of the t-shirt, then the costs of materials like the ink they used. Cost to distribute those shirts or the sales rep's commission would not be factored in because they are indirect costs.

  The goal of effectively managing your COGS is to reduce it as much as possible while accomplishing the same value proposition. There is nothing wrong with having a higher COGS--and as a result, a higher price point--as long as you are providing more value to the customer.

 Value Proposition

  The reason why we were so quick to say yes to the Ferrari is because of the value proposition. If Ferrari came to you and told you about the history of the company, the performance specs of the car, had you test drive it so you could see all the head turns, then end with asking you how much would you pay for the car, what would you say? I bet that number is higher than $50,000. By establishing a value of a product, you are essentially setting a price you would be willing to pay for for that product. Here's a rule to live by in business:

 Customers will happily be willing to pay for a product when they perceive the value of the product to exceed the price point. 

Customers will do just about anything for a product when enough value has been built--like spending all day scraping up $50,000 for a car or standing at line at 5AM for a new burger joint. You should always take your costs and competitors' prices into consideration when deciding your price point; just know that there is nothing wrong with being more expensive than everyone else. The only that matters is that you are adding the most value. I've generalized value-adding opportunities into five categories: quality, performance, aesthetics, service, and social responsibility.

Quality and Performance

  If your customers are asking for quality over quantity, this is the way to go. Fast casual restaurants like Chipotle and Five Guys Burgers blew up because of the higher quality ingredients they used for their menu items. As a result of using premium ingredients their prices were significantly higher than a traditional fast food restaurant--and customers happily paid for it. See, quality and performance usually go hand-in-hand. Make a higher quality product, it usually performs its function better. There is nothing wrong with using raw materials that yield a higher COGS if your customer is willing to pay for that added value and then some. 

Aesthetics

Customers not only want a higher quality product that performs better; they want a product that looks great and makes them feel great. Design, packaging, presentation, and sensory details all play a factor in aesthetics. In the example of the Ferrari, the quality and performance is great, but it's the sex appeal of that fire red beauty that attracts us. The paint job, the leather on the interior; the purring sound of the engine when you press the push start; and the way the car turns heads and commands people to take pictures--that's where most of the value is built. Ferrari understands their customers want luxury, so they make sure everything about the car gives them that. And I guarantee you that if you ever get to a point where you can afford to buy a brand new Ferrari, even the keychain they give you the keys on will be bad ass. 

  One company I'm always very impressed with when it comes to packaging is Burberry. Their packaging is just phenomenal. The texture of their boxes feel like they're woven in fabric with a beautiful gold emboss of their logo. Around the box is a champagne-colored ribbon that is tied into the most perfect bow; opening it makes you feel like you just received a Christmas gift from the Queen herself. Inside is a thank-you-sized envelope  (of course with the gold emboss) that has a thank-you note as well as your receipt. I'm telling you, if you ever order something from Burberry and are skeptic about spending that much on a clothing, wait until you open the box. 

Aesthetics are the details that appeal to an emotional side of your customer. Look good, feel good, good results. 

Service

In a world where reviews, opinions, and social media posts are only a click away, customer service could not be more important. Good quality service is flatout necessary nowadays, but going the extra mile for your customer can be an amazing source of value for your brand. Investing in your employee hiring and training are key to having a staff that can uphold company standards. Company policies, procedures, and culture are also very important to providing the best service; an environment and guided path to superior service will help your staff make good decisions and will show your customers that you care about them.

  I am a loyal Nike fan mainly because of their commitment to service. They offer a 30-day try it out period with all of their running shoes, provide free shipping for all Nike+ members (membership is free, all you have to do is sign up), and with all of their packages is a return shipping label that you can slap on the box to send anything back. The times I have needed to talk with someone over the phone I have had zero problems; I just schedule a call, they call me, and I'm greeted with an awesome team member. Let me tell you, if Nike is a part of the illuminati, I am 100% okay with them ruling the world. It would be awesome if every time I had to call the government about something I could just schedule a call. 

  When you go the extra mile for customer service, your customers can tell. Provide the best service you can, and when a customer is upset about something, never argue with them. Just acknowledge the fault, offer a remedy, and follow up with them. The cost of remedying a complaint is far less than the cost of losing a customer and them complaining to their circle.

Social Responsibility 

  As customers are becoming more socially-conscious of the world, so are businesses. People care that companies care. Businesses that build an ethos for certain values in their culture tend to see much higher retention rates with their staff as well as a strong following with customers whose values are aligned with the company. However, it is not enough to just say you care. The reason why customers support Whole Foods over Walmart is not because Whole Foods sells more organic product than Walmart--believe it or not, Walmart is actually the largest retailer of organic product in the world. People flock to Whole Foods because of their authenticity for values. From their website to their stores, you can see Whole Foods' core values and commitment to their efforts. My recommendation is only promote what you firmly believe in. Providing a meal for every meal that customer's purchase will not give you anymore added value if your company is not wholeheartedly aligned with that value. If there is one thing customers have a good eye for, it's authenticity. I'll write a post specifically on brand alignment soon. 

  When it comes to pricing, the best course of action is this:

Create a graph of your competitors and their prices. Interview as many customers as possible and ask what they like and don't like about their products. and determine what everyone is receiving the most value. Next, go through these categories and try to maximize value while minimizing COGS. And don't be afraid to be the most expensive competitor in the market; if you can be the Ferrari of your industry, people will not mind spending $50,000 on your product. 

I'd like to leave you with an example of a company that I came across that exemplifies all of these value-adding categories.

Buda Juice is a cold-pressed juice company based in Dallas, TX. They sell 16oz bottles of juice for $10! That is double the price of a Suja juice, a competitor that sells online and via Sam's Club. Let's evaluate Buda Juice's value proposition, though.

Buda Juice's product is

• USDA certified organic
• Juiced daily and locally
• Vegan
• They have videos of their juicing kitchens playing in all their locations to show the process.
• All juices are sold in a glass bottle as opposed to plastic
• Sales reps in each location explain the health benefits of each juice and can provide suggestions based on what your goals are
• They offer a recycle program: bring in one of their glass bottles to recycle and get $1 off
• Their bottles look pretty cool and are instagrammable
• Their store interiors are modern, there's fun upbeat music playing, and they have some cool holders for if you decide to buy a juice cleanse

  Quality, health benefits, customer service, authenticity, aesthetics, and a socially-responsible program is what you're paying $10 for, not just 16oz of juice. 

  Find what's valuable to your customers and provide that to them. Again, it does not matter what the price is so long as value exceeds that number in the eyes of the customer. If the only value you offer is a cheap price, you are going to enjoy a painful race to the bottom. 

  I'm going to go to Whole Foods now.