Value Based Pricing
Part 2
Brad Simon
In the last article we looked at two myths to setting prices on your jewelry repairs. This month we will look at a preferable method to determining what to charge.
Imagine for a moment, that there is no money. You cannot buy anything; you must barter. For example; if you need the oil changed in your car and your mechanic needs a ring sized, you could size his ring in exchange for the oil change in your car. Everybody would be happy – until you drove 3,000 miles and needed another oil change. You return to your mechanic only to find he does not have another ring that needs to be sized. So, you find a window washer who needs a ring sized, and you size his ring. In exchange, he washes your mechanic windows, who in exchange, changes the oil in your car. Once again, everybody is happy, until…
As an alternative to this trading system, man devised money to simplify his life. (I bet you never thought of money as simplifying your life, did you?). You size your window washer ring and in exchange, he pays you an amount of money equivalent to the value of the service you provide. You then go to your mechanic for your oil change and pay him an amount of money equivalent to the value of the service he provides. Your mechanic then goes to your window washer and he has his windows washed and pays him an amount of money equivalent to the value of the service he provides. Once again, everybody is happy. That is of course, as long as everybody has set their prices correctly.
You see the ONLY reason to set a price is to establish the value for the product or service being rendered. Then a fair exchange of your service for their money can be made. And there is only one person who decides what the value of your services are – and it is not you - it is your customer. Your customer decides the value of your services and whether or not it is worth parting with their hard-earned cash in exchange for it.
Pubilius Syrus, a first century Roman writer stated: A thing is worth whatever the buyer will pay for it. Old Pubilius was my kind of guy. He was able to boil down the essence of pricing to 11 words. The Internal Revenue Service and Treasury Regulations is a little wordier. Here is an excerpt from Revenue Procedures 66-49. Fair market value is the price at which the property or service would change hands between a willing buyer and a willing seller, if neither one is under any compulsion to buy or sell… Sadly, over the years we have forgotten Pubilius Syrus advice when we set our prices. All we think about is the second part of the Treasury Regulations – the willing seller. How much am I willing to sell my services for? How much does it cost me? How little can I sell it for? Instead we should be asking: How much is MY customer willing to pay for my services?
You see, the ONLY reason a doctor or lawyer can receive more money for their services than most other people, is because their clientele believes their time is more valuable. In order to set your prices correctly you need to find out how much your clientele perceives your time is worth. When you find this out, then you will be able to price your shop services properly. There are a number of methods you can use to find this information including:
ASK
We all have a group of people we feel comfortable discussing business with. Ask them to review your prices. See what they feel is the maximum they would be willing to pay for your services.
SURVEYS
Compile a short survey asking various questions concerning marketing and advertising. Then include questions about prices. For example; What is the maximum you would pay for ___? Add in various repair services such as: sizing a ring, repairing a chain, retipping a prong, and replacing a post on an earring.
LABOR RATE COMPARISON
Many times a customer will come into your store paying you what you charge for a repair. Then, they leave and spend two to three times that per hour to have their electronic equipment, or cars repaired. An excellent method to determine what your customers will spend for your services is to consider what they are spending for labor on similar work to be performed. What is the going labor rate in your area? This is not what the laborers are being paid but what the stores are charging for labor. Some industries to consider include; Accounting, Appliance Repair, Auto Mechanic, Carpentry, Cleaning Services, Commercial Artists, Computer Repair, Electricians, Electronic Repair, Graphic Artists, Plumbing, Lawn Services, and Shoe Repairing.
SERVICE COMPARISON
Another excellent method to use is to compare what your customers willingly pay for other similar services and then price your services correspondingly. Consider such items as: a doctor office visit, an oil change in a car, painting a room in a house, having a book re-bound, filing tax returns, tune-up of a lawnmower, and repairing a toaster. For example, an oil change for your car takes about the same time as sizing a ring. The cost of the oil and filter is about the same as the gold needed for sizing. However, the skill level of the high school kid changing your oil is lower than your goldsmith. Therefore, the oil change has a slightly lower value than the ring sizing, and you can reasonably price your sizing slightly higher than what your customers pay to have their oil changed.
TEST PRICING
To do this, raise the prices on all repairs for a period of time. At the end of the period, raise them again. Gradually raise the price on each item until you receive significant price resistance. When you receive price resistance on an item do not raise that price anymore, but continue to raise prices on the other items. When significant price resistance is received on each item, you have reached the peak market price for your store.
What method you use is not nearly as important as that you find out the information from your customers. The clientele in each store perceives the value of those services differently. Therefore, management in each store must make their own pricing decisions based on their clienteles perceived value of the services they provide from their shop. When you know what value YOUR clientele places on the services you provided, and therefore what prices they would be willing to pay for them, then you will know how much to price that doggie in the window.