In one Tokyo store, patrons spend as much as $27,000 for a single muskmelon. They willingly pay as much as they would for a new automobile to present a very special gift to a business associate, a boss, a doctor, or even a teacher.
The $27,000 muskmelon represents the high end of an entire class of Japanese fruit gifts, which include pears (at $19 each), apples (at $25 each), and grapes (ranging from $12 per dozen to a whopping $11,000 per bunch).
By all accounts, the fruit thus sold is very high quality, grown under special conditions. However, the price this fancy fruit commands is geometrically greater than what it costs to grow, ship, and display it. The profit margins for these gift fruits must be astronomical.
Why do people pay so much money for something that costs so little to produce? Well, in Japanese society, such gifts provide prestige to both giver and receiver. In other words, the price reflects the value rather than the cost.
The $27,000 muskmelon is a perfect illustration of how you should be pricing your own products and services.
Foolishly, most business people believe that the best value is "the highest quality for the lowest price." Based on this definition, they try to compete in their market by dropping their prices while simultaneously trying to reduce their cost of goods.
This is a recipe for price wars and low margins.
The $27,000 muskmelon illustrates that, in some cases, the best value can mean "the highest quality for the highest price" or even just "the highest price."
The same is true for most luxury goods. The difference in manufacturing cost between, say, a Louis Vuitton handbag and a knockoff is minimal. The high price of the original item is part of the value of the product to the buyer. If you didn't pay too much, you're not getting the full value.
If you think that luxury goods are a special case, you're missing the point. The best pricing strategy is always to base price on the value that a product or service has to the customer rather than what it costs you to provide that product or service.
For example, if you possess knowledge others do not possess, and that knowledge is of value to your clients, you can ask a high price that's completely disconnected from your cost of goods.
To illustrate this, let me tell you a quick story:
An automated factory suddenly stops working. The owner calls in an expert troubleshooter to get it running again.
The expert walks in, looks around for a moment, takes out a screwdriver, turns one screw 90 degrees. The factory starts up again.
The expert hands the owner a bill for $50,000. The owner goes nuts: "That's way too expensive. I want an itemized bill!"
So the expert adds the following to the bill:
- Item 1. Turning a screw: $.50
- Item 2. Knowing which screw to turn: $49,999.50
The moral of the story: If your product or service can make your client a lot of money or save your client a lot of money, price it on the basis of how much money your client will make or save rather than on the amount of effort involved to provide the product or service.
For example, it usually only takes me a few minutes to write a sales email for a client. If one new customer is worth $100,000 to my client and my email can win my client 10 new customers, then it's perfectly reasonable for me to charge $10,000 to write that email.
(BTW, I am still critiquing sales emails for free for subscribers to my free weekly newsletter. I'm not sure how long I'm going to offer this service, so if you're not a subscriber, you might want to sign up.)
Anyway, I'm telling you about my pricing not to impress you but rather to impress upon you that you're crazy to base the prices for your products and services on what it costs you to provide them.
Instead, figure out why and how your offerings are truly valuable to your customers and then price them accordingly.