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Your Price, Their Price and the Clearing Price

I was out in Hayes Valley with a friend last night and came across a store that specialized in comfy clothes. The store caught my attention because it’s window displays were sweatsuits. Hayes Valley is a pretty upscale neighborhood and this store didn’t seem to fit.

I went in and discovered that though the clothes seemed out of place, the prices fit right in: $80 tshirts, $100+ sweatsuits and caps that cost more than my shoes.

Seeing this boutique got me thinking about prices and how we determine them.

I learned as a freelancer that lowest price is not the key factor for a lot of services and products. People have expectations about how much something will cost and you need to know what the expectation is for your target market. In my case, I started getting more meetings and business when I raised by prices.

Getting back to the sweatsuit boutique, I can’t imagine spending $85 on a tshirt or hundreds of dollars on sweats. But someone will. This store understands its market and prices for them. I was shocked by the price tags, but the people in that neighborhood and similar ones probably wouldn’t flinch.

Where Our Prices Come From

Most manufacturers I know use a cost plus pricing scheme. They take the cost of making the product and add either what they consider “fair” or the amount needed to get their desired margin. Consultants typically do something similar: we start with a base rate based on expenses, or a target revenue goal, then adjust to improve profitability or hour volume. The cost plus approach is really a best guess about what the market will bear.

On the other side, you’ve got companies doing pricing strategy using customer history, focus groups, competitor prices, demographic modeling, and other data sources. Even with data and tools at your disposal, you’re still not necessarily going to get it right. There is a reason that shops do clearance sales and always have a few items that are heavily discounted — they set a price that customer demand couldn’t support and now they have excess supply (inventory) to get rid of.

What Would Be Better

At best, we are all trying to find a pricing sweet spot. But that spot is neither fixed nor immutable. For example, I’ll pay a lot more for a snowblower in December than I will in April, even though I know — in April — how valuable the snowblower will be when the blizzards come next winter.

Find the Clearing Price

In stock trading, there is something called the clearing price. It’s the highest price the buyer is willing to pay and the lowest the seller is willing to take. This is what you should be trying to get to with your product or service. The only caveat being that you make sure you’re selling to the right people.

I don’t know if there is a way to get the clearing price right without going to market. So, you’ve got to be attentive to the price the customers are willing to accept & flexible enough to shift before your product becomes unappealing or gets replaced.

The key thing is recognizing that your price is not their (the customer’s) price. Sometimes you’ll hit it right on the head, and you can try things like dynamic pricing to adjust quickly, but often you’ll need to keep adjusting to hit that clearing price.

Featured image from ET online. Bob Barker is the only true host of The Price is Right.

Published in Marketing Ideas Working Blog

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