A Mars bar and a pair of scissors: a valuable lesson in pricing
Originally sent exclusively to The Letter subscribers on June 3. Want to be the first to get my personal newsletter in your inbox every Monday at 7am? Subscribe for free here.
Hey gang,
Here’s a story about a Mars Bar and a pair of scissors - a story that holds immense power for entrepreneurs trying to establish profitable pricing in an increasingly competitive world.
Pricing is often a topic that business owners spend countless hours pondering, and I'm no exception.
Especially during economic downturns like the one we're experiencing now, I find myself constantly mulling over it.
Being involved in multiple industries has given me a wealth of experience on this subject, and I'm grateful for the diverse but interconnected portfolio of companies we have. It allows us to learn from each brand and build an ecosystem that integrates seamlessly into our existing empire.
I’m fortunate to have fingers in many pies! (Credit: Michael Chudley and Ben Shahrabi)
Entrepreneurs want to thrive, be profitable, and ultimately, stay in the game.
However, only a few manage to achieve this.
A business owner who aims to stay in the game long-term and genuinely enjoy what they do should never fall into the trap of merely "professionally moving money around".
Many people make this mistake, but we should strive for more than just creating cash flow.
Our goal should be to generate profits.
There are some exceptions to this rule, where it is acceptable to "professionally move money around". However, these exceptions are rare and require careful calculation.
One such exception is when pricing models are built around lifetime value.
For example, companies that sell computer game consoles at a loss or at cost are confident that future game sales will generate substantial profits.
Did you know that the video game market is even bigger than Hollywood?
Another example is electric toothbrushes and Gillette razors. These products are affordable to purchase, but the real profit lies in the sale of replacement toothbrush heads and razor blades.
These two examples are strategically planned. The businesses know that by offering exceptional value for money upfront, they can later sell higher-margin products to customers. They lure customers in with a great deal and then capitalize on the future revenue from additional purchases.
So far, we've learned about how the electric toothbrush market operates. I hope this information has been helpful, although I realise it may not directly relate to your specific situation.
When it comes to pricing architecture, your choices are limited:
raise prices
lower prices
keep prices the same and hope for increased volume
face a slow demise.
You have likely considered these options countless times.
WATCH my video on pricing architecture here:
As costs continue to rise, it becomes necessary to increase prices to maintain profitability. Alternatively, you may explore scaling your business to stay competitive. These decisions weigh heavily on your mind, particularly during inflationary periods like the present.
The next question that naturally arises is: “what if we raise our prices and our customers go elsewhere, causing us to lose them?”
Consultants and advisors may tell you to simply raise prices and trust that customers will still pay. While there is some truth to this, during times of economic uncertainty, you need to be much smarter in your approach.
Don't worry, I have some killer points that can help.
Firstly, consider these human behaviours:
People want value for money.
People love special offers.
People appreciate quality.
People hate feeling ripped off, regardless of their wealth.
People are less likely to shop around if they trust you offer good value for money. Amazon is no longer the cheapest option, but it is known for its competitive pricing.
People will find a way to afford something they truly love, want, and can justify as a necessity.
People understand the pricing of commoditised products.
That last point is the key takeaway from this message. But before I delve into it, let's play a game in which you can participate…
Question 1: How much does a Mars Bar cost?
I bet you can answer that pretty quickly. Let's say it's £1. A Mars Bar is a highly commoditised product; everyone knows its price.
Question 2: How much does a pair of scissors cost?
That, my friends, is a trickier question to answer.
You don't know the price off the top of your head. Is it £2.50 £5, £8, or £1?
You might have to turn to Google for the answer.
My point is this: if you want to make money, it's better to be in the business of selling scissors rather than Mars bars.
Until next week, to your continued success,
Originally sent exclusively to The Letter subscribers on June 3. Want to be the first to get my personal newsletter in your inbox every Monday at 7am? Subscribe for free here.