Captain’s log, stardate 20180913
Sent by Jonathan Stark on September 14th, 2018
The following question came my way recently on YouTube:
If a well-fed businessman nonchalantly goes into a nice restaurant and orders a steak, let’s say they give it to him for $200. But if I go in and I say: “please, I am homeless and so hungry, I haven’t eaten in a long time. I really need this meal.” They give me the steak for $2,000. Is that an ethically pure act for them to mark up the price for me 10x just because I am more desperate for the steak than the businessman?
When I first read this question, I thought the asker had the value pricing concept backwards. Normally, a value pricer would charge the well-fed business man more, and the hungry homeless person less. And then it clicked. The asker was focused solely on the hunger level and ignoring the fact that the homeless person didn’t have the buying power to meet the $2000 asking price for the steak.
Here’s what I wrote back:
You bring up a great point: i.e., the hungry broke person “values” the steak more than the not hungry rich person. There are a few geeky economics concepts at play here that I’ll grossly oversimplify by saying this... What something is worth to you is a function of three things: * your desire for the thing, * your buying power, and * the availability of acceptable alternatives. In the case of the steak for the homeless person, the restaurant can price it at $2000 but if the homeless person doesn’t have the buying power to pay $2000, then there is no sale. By the same token, if there is a burrito place next store that will fill the homeless person’s stomach for $2, the expensive steak is probably not going to sell at $2000 even if the homeless person had $2k.
Asking price is different from selling price.
You can ask whatever crazy high prices you want. But if you want to stay in business, you will strive to set asking prices that are in-line with the desire and the buying power of ideal buyers who see you as the only acceptable alternative.
Once you get good at this, you’ll close high value deals almost every time you send a project proposal.
P.S. Are you interested in learning how to value price? The Pricing Seminar might be for you. Doors just opened this week so it’s not too late for you to join over 100 peers from all types of professions who are tired of not being paid what they’re worth. Registration closes Monday Sept 17 at midnight ET. Learn more »