Value Based Pricing
Part 1
Brad Simon
Do you remember the song How Much Is that Doggie in the Window that we sang way back in our childhood?
How much is that doggie in the window?
The one with the waggley tail.
How much is that doggie in the window?
Oh I do hope that doggie for sale.
Ever since retail began people have wondered how to price their products and services. Pricing decisions are perhaps the single largest determining factor as to whether a company makes a profit or not and how much of a profit it will make. If you set your prices too low, you will end up with a loss. If you set your prices too high, customers will go elsewhere to purchase the product.
Services, such as jewelry repair, can be even more difficult to price than products. Services are non-tangible; you cannot touch or hold them. You can see, hold, and feel a ring but you cannot see, hold, or feel a ring sizing. This creates pricing difficulties, as you do not have tangible things like stones or metal to base a price on. Rather than being able to see advantages such as the number or size of stones customers have to depend on such ambiguous characteristics as reputation or image of the person providing the service.
Services are also non-transferable. A ring sizing cannot be returned. You cannot transfer a ring sizing to another ring, nor give it away or hand it down to another person. Services are also non-storable. You cannot stock up on ring sizings during the slower summer months and have them available for the rush during the Christmas season.
In addition, with the services you perform you do not have a manufacturer’s cost or suggested retail price to work with, as you do with the jewelry and watch products in our stores. This all leads to problems when we try to set prices for our jewelry repair services.
In the jewelry industry, there are two myths that flourish among retailers as to setting prices for jewelry repairs. This further complicates the already difficult process of setting repair prices. The first myth is that you should set your prices based on what others charge.
There is a story of a man who worked in a factory. He lived on the opposite side of town from the factory, and every day he would walk through town on his way to work. Each morning as he past though the downtown shopping area he would stop in front of the finest jewelry store and stare in the front window. He would gaze through the window for a moment, look at his watch, and then continue to work.
The storeowner grew so perplexed by this mans behavior that one day he went outside to meet him. He said that everyday he saw him staring though his window and he was curious as to what he was looking at. The man told the storeowner that it was his job to blow the noon whistle everyday at the factory, and he took his job very seriously. So everyday he would stop in front of the store because it was the finest jewelry store in town. He would look through the window at the stores clock and check his watch to make certain his watch was correct. This way he was assured that he would blow the noon whistle precisely at 12 o clock.
The storeowner told the man he admired his dedication to his job. In fact, the storeowner said, you are so accurate in performing your job, that for years we have set the clock in our store by his noon whistle.
After years of carrying out this ritual, is there any way that either of them had a clue as to what the correct time really was?
For years, jewelry store owners have set their prices for jewelry repairs by calling other stores in town and then set their prices, based on what the other stores charge. If you use this method to set prices, you are setting your prices based on stores who have most likely called you sometime in the past to see what you charge and then set their prices based on what you charge. After years of carrying out this ritual, is there any way that any jeweler has a clue as to what the correct price should be for jewelry repairs?
You cannot set your prices correctly in your store just by calling the other stores in town and setting your prices accordingly.
The second myth to setting jewelry repair prices is to set your prices based solely on your cost.
A real problem develops when we set our prices based solely on our cost. At the end of the year we evaluate our jeweler’s performance and based on the shops income we determine if we can afford to give our jewelers a raise. Now, if we set our prices based on what we pay our jewelers, and pay our jewelers based on what we collect from the prices we set, is there any way either can be correct?
In addition, isn’t it obvious that if our income (the prices we charge) is based on what we pay our jeweler there will never be extra money to give our jewelers a raise. Commissions do not solve this problem either. If you set your price, and the commission the jeweler receives, based on how long it should take the jeweler to perform the work then the only way for them to make more money is to do the work faster than they should be doing it.
Unless we set our prices based on the value of the services we provide we will never have the money to pay the kind of wages that reflect the value of our jeweler’s labor. When we as an industry start charging prices based on the value of the service we provide, not only will the store profits increase, but we will finally be able to provide the wages to our jewelers comparable with the wages paid in other skilled professions.
When you determine the value of your services you will then know how much to price that doggie in the window.
In the next article, we will look at methods to help you determine what your customers believe the value of your repair services to be.