Take a look at these different news stories from two ends of the pricing spectrum:
- IKEA’s breakfast, including eggs, bacon and potatoes that starts out at 99 cents
- How can no frills airlines offer such cheap tickets
- Crocodile skin handbags that sell for 30 times as much as cow hide handbags
- A pencil that is priced at $425
How do you think these prices are set?
You may be tempted to start with what you recently read about marginal cost – the cost to produce, store, sell and deliver one additional unit of your product. You are likely led astray by those renowned gurus making seemingly erudite arguments on how to set prices starting with the marginal cost.
It would serve you well to shake off those bad advice columns about understanding and starting with marginal cost and instead begin at the right point – what customers value and are willing to pay for that value.
That is the end price.
So says head of IKEA Food
“The menu is completely in line with the way we develop furniture,” Mr. La Cour says. “We begin with the end price.”
Several decades ago Henry Ford said almost the same thing about starting with price vs. cost to manufacture.
what earthly use is it to know the cost if it tells you you cannot manufacture at a price at which the article can be sold?
Whether setting prices for 99 cent breakfast of $425 pencil it begins with the end price. Then you find a way to make your marginal cost come at a level that delivers you profit.
Cost is always a computed number. You don’t start with this and make pricing decisions.
Begin with the end price! It doesn’t get any simpler than this.