As a consumer driving our economy, can you explain what does the price you pay for things mean to you?
As a business charging customers for products and services, can you explain what the customers are paying you for?
It more important for the second category to understand pricing than the first, otherwise there won’t be a viable business to talk about. But more often than not we see failure in not only answering the question but in general in how they set pricing. More businesses do pricing wrong than right. To compound the problem we see incomplete, incorrect and inapt pricing methods from news stories spread around as innovative and panacea.
Take for instance a story on food truck pricing from The Washington Post. It is about a food truck selling pizzas with a spin on pricing. You spin a wheel, if you land on 99 cents you pay just 99 cents, if not you pay $9.99. Pricing based on statistical modeling and probability? Let us not get ahead of ourselves.
Where do you start for answering the pricing question? You start with the customer segment and what job you want the customer to hire your product for. Let me let you in on a secret, pricing need not be innovative, it just needs to be a share of perceived customer value.
In the case of the food truck let me point out some clear problems:
- Food truck is a fragmented market with many options available to the customer
- Customer expectation of food truck is that it is gourmet – so to speak
- Customers who regularly eat out for lunch pay for food truck from lunch budget, customers who try food trucks occasionally pay for it from their entertainment budget. This matters.
The gimmick in pricing, with the thrill of scoring a pie for 99 cents may attract a few, for a while. But the initial excitement fades away quickly and it is not an unmet need. There are many options for customers seeking excitement.
The product as we read in the story is just ordinary, nothing gourmet about it. Even at 99 cents, the first bite into the ordinary pizza will be a buzz killer. Imagine the feeling of customer who paid $9.99.
The food truck owner was quoted saying he makes a profit on 2 pizzas (one sold at $.99 and the other for $9.99). Be that as it may, there is a complete failure of understanding of customer and in delivering a compelling product. Pricing is being used as a way to attract sales than as a share of value created.
How do you do your pricing?