Thinking. About Business.
How to Price Higher
The empty box worth $200
By David Chopko
Have you ever wondered why two seemingly identical products might sell for drastically different prices? There are many
scenarios where one can easily rationalize why buyers of the same product being purchased at the same place and time
might pay different prices, with each feeling that the price paid was “fair”. Think of the buyer who waited for 2 days
outside the store for the Black Friday sale to get the deep discount or the buyer with a coupon who paid less at the grocery
store. In each case, one buyer did something extra to justify the lower price she received than other buyers unwilling to take
this extra step—whether it was waiting in line or clipping the coupon. The buyers paying the higher price weren’t happy
to pay more, but they could rationalize their higher price.
Now let’s slightly change the scenario. Pairs of customers walk into different stores, and each purchases what an objective
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third party would consider identical products. The purchases could be exotic jewelry, industrial tools, or mundane boxes
of cereal, but one customer pays 20 to 100 percent more. Each customer arrived at the same time, and no coupons were
exchanged. Finally, and this is the strange part, the higher-paying customer is satisfied with the purchase, felt that she paid
a “fair” price, and is likely aware that her seller’s gross margin was probably twice what the other seller’s margin was.
The typical consumers reading this ask themselves, Why did one customer pay more for the product? As a business
professional, you instinctively gravitate to the seller’s position and ask how one group of sellers was able to charge and
receive a large price premium versus their competitors for comparable products. In analyzing this pricing question, not
only do you need to understand what each customer believes she is buying, but also what subconsciously she values as
part of the purchase.
Pricing text books state that buyers are willing to pay extra for the valuable function/features one product might possess
that its closest competitor’s product doesn’t. Simply stated, if the vacuum cleaner you’re selling is essentially identical to
your closest competitor’s $120 vacuum cleaner, except that your cleaner has an extra spiral attachment valued at $20 by
your customers, then your vacuum cleaner is worth $140 and should be priced at or near this amount. Logically this makes
sense. However, besides paying for its physical functions, your customer is also buying a wide range of benefits. Each of
these has value to her and, when added together, seemingly justify, at least in her mind, the price difference between one
product and another. Let’s look at a list of attributes that might cause her to pay more for your products than for the nearly
identical products sold by your competitors.
• Your company—She might like, thus be willing to pay more, to deal with your company versus a competitive
company. This could be because she likes your store, your sales staff, and your service team, the fact that her
experiences with you have been positive, or maybe because she thinks you’ll be around in 5 years to help her if she
has a problem.
• Reliability—Most of us are willing to pay a bit more for a known chain store’s food than for the same food from an
unknown shop. We’re willing to do this because we’re virtually certain that the quality of food we’ll receive will at
least meet some expected minimum level and likely be essentially identical to meals we’ve received in another store
in the same chain. If your customers know that they are going to receive a consistently good product from you, this
assurance has value to them. In today’s business climate, reliability also may be offered as something as substantial as
a written long-term warranty or guarantee or something as simple as providing tracking information on a shipment.
• Convenience—Making it easy for your customers to deal with you (to purchase, service, or return a product) adds
value to your offering.
• Aesthetics—This category covers the range from looks to smell to feel to taste. It is hard to assign a dollar value to
any of these attributes, but depending on the product or service, each or several of these attributes may add some or
a lot of value to your product, which your customer’s product lacks. A subtle change in the look or the packaging of
the product may be as important as any other feature and thus the source of value.
• Social—How much are people willing to pay so that others can see that they are using or wearing the “latest greatest”
product? If you ask those selling Nike basketball shoes, the answer is “a lot”. How much of the cost of a Porsche or
Rolex is based on all of the other factors noted above and how much price premium is captured because purchasers
want others to see that they own and can afford high-priced brand products? Again, the answer is “a lot.”
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When reviewing your pricing, remember that besides the physical differences between your product and your competitors’
products, your customers either consciously or subconsciously consider many other factors. Each factor may add value
to, or in some cases subtract value, from the overall worth of your product to your target market. To maximize your longterm profitability and extract full value from your customers, you need to understand when your customers purchase
your goods or services and how much they think they are paying for (and value of) each part of your offering. Once you
understand this, you’ll understand why your customers are willing to pay $200 more for a box with a comparable watch
in it, if the box happens to have the Rolex emblem on it.
David Chopko ([email protected]) teaches pricing and market planning in the University of Delaware’s Lerner Graduate School of
Business and helps small businesses develop and implement pricing strategies.
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