Pricing See the discussion. Part 1 & 2 Send e replies both Part 1 The replies should be at least 200 wordsPart 2 The replies should be at least 200 words
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Part 1
Question
Why does price matter? If you sell 200 hamburgers for $1 each or call them gourmet and
charge $10 each and only sell 20, what difference is there? What happens over time? What
does pricing say about your business? Who is the customer and what effect does pricing
have on them?
Answer
Price is defined as cost or, from the customer’s perspective, what the customer is willing to give
up. What the customer is willing to give up depends on their perception of value. Value is the
degree of importance that a customer gives something. As value increases, the customer’s
perceived benefits increases (or their perceived costs decreases.) Examples of perceived benefits
are: status, convenience, a deal, brand, choice, and quality. These benefits can also overlap.
Customers will be more willing to pay higher prices if the perceived benefits are high. For
example, if someone lives 30 minutes away from a Walmart Grocery store and only 5 minutes
away from a Harris Teeter grocery store, and they perceive convenience and quality to be
beneficial and valuable, they would be more willing to pay the higher Harris Teeters prices vs
Walmart’s lower prices. On the other hand, lowering costs (depending on the product or service)
can cause the perceived benefits (like brand perception and status) to decrease for the customer.
For example, if Louis Vuitton lowered their prices to that of Coach, the brand perception would
change and the status would decrease. Over time, that could mean the demise of the Louis
Vuitton brand. In the example of the hamburgers, price only matters based on the customer’s
perceived value of the burger. If the customer prefers quality ingredients, great customer service,
and a great customer experience, they might be more willing to pay $10 for a burger vs $1 for a
burger with less quality.
Part 2
Question
Why does price matter? If you sell 200 hamburgers for $1 each or call them gourmet and
charge $10 each and only sell 20, what difference is there? What happens over time? What
does pricing say about your business? Who is the customer and what effect does pricing
have on them?
Answer
Why does price matter?
Most people assume that price is what matters most in a financial transaction. When you are
raising money, you want to get the money at the highest price (least dilution). When you are
selling, you want to get the highest price for your company. But that is not always the case.
Price matters, but my experience says that it often does not matter the most. In many of the
venture deals we have done in the past few years, transactions valuation was not the highest price
offered to the entrepreneur. And if you are a public company, that effectively means the highest
price. Let’s say you are one of two or three investors in a closely held startup company, and
between the investors and the founders, the group owns 90% of the company, and there are two
purchasers. One is willing to pay $250 million in transactions and the Board thinks they will be
good owners of the business, will do everything possible to keep the team intact and the service
vibrant. The other is willing to pay $300 million in a complex transaction, but has a reputation
for blowing up teams, and has been known to mess up the services they acquire. That would be a
no brainer. The board should take the lower offer in a heartbeat, assuming they really want to sell
the business.
If you sell 200 hamburgers for $1 each or call them gourmet and charge $10 each and only
sell 20, what difference is there and overtime?
The difference is you will sell fewer products and receive less income. Customers will not want
to pay $10 for a hamburger that once was $1 i.e., fewer sales. Eventually, overtime, if you
continue to sell at those prices, you will be out of business. The demand for your hamburger will
reduce and if you continue to purchase a higher quality of beef, the supply for the beef you’re
your butcher will change, especially if you’re receiving a discount for purchasing more but now
you’re purchasing less. Also, purchasing higher quality of beef will cost you extra.
What does pricing say about your business?
Pricing shows the value and the worthiness of your business. Pricing shapes your customer’s
perception and expertise of what you have to offer. If you don’t value what you’re selling, no
one else will. If you price too low, you risk of coming across as cheap instead of valuable. If
you price too high, you may not get as many customers. If you price appropriately, you will get
a whole other caliber of customers. It’s the difference between Sears and Macy’s.
Who are the customer and what effect does pricing have on them?
The customer is whoever buys from your business. By setting prices right and keeping
customers happy can be hard. But get it right, and you’ll be able to see improved customer
satisfaction and increased revenue. To improve overall customer satisfaction, you need to be
pricing your products high enough to give you the resources to offer amazing customer
experiences.
…
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