A guy I met a while back used to be a drug dealer in another country, a long time ago, back when he was a young man, (He as since gone into IT which makes a twisted sense).
We were talking about pricing strategies, and he told me that he had back in the day, the best way to know when his pricing is right where it should be and he knew that he was cutting the best deal when selling.
First off, we all agree that pricing is not an easy thing to do for most of us.
People have all kinds of theories about how to set pricing, and how they know when they have the right price to still sell yet make the most profit. Every system feels like guess work, and no one ever says they had it perfect, but this system made sense.
Some people just care to match what others are charging, basically match the market, but that is dangerous, because you don't have a system or a methodology, and what is the difference between you and the competitor? If he has better margins than you, your business is in trouble.
You need to know what the customer is willing pay, and to do that, you have to know and think like your customer.
Other businesses price just below others in the market, again, dangerous, as it just gets you those customers that care only about price, which means that you will lose them easily when someone else has a lower price.
This is not a long term strategy.
Works if your margins are better than everyone else's margins, but I wouldn't bank on it, as there is always someone out there who will compete. Any time your strategy is to be smarter than everyone else, you have a problem. There is always someone smarter than you out there.
Trust me, someone is always willing to give them a lower price. You just end up in a price war that no one wins.
There are theories of how to price, but the key to remember is that price is fluid, and that what you are selling on changes in value depending on who you sell to and their situation.
How your customer views the product and how he uses it, and your customer's individual situation determines that customer's price. The cookie cutter one price fits all model doesn't work, and it just leaves money on the table.
Which leads us back to the drug dealer.
My friend told me that he always asked questions about his customers, and he knows their history, their likes and dislikes, which considering what he was doing was illegal back then, was a smart play.
You only do business with other people you know well and trust, and he told me that when he discussed price, he asked them what was going on, what they were doing, and by that, got an idea where their mind was at, and then gave them a price, always slightly higher than what he felt was the market.
He would sell the convenience factor, remind them of the trust between them, as the customer didn't want to keep looking, and the customer sure didn't want to have to find a new source, which is a time consuming process, and in this case, also might possibly be something that could get you put in jail.
My friend said when he gave a price, if they took it right then, he knew he had priced too low.
He was really happy when they hesitate and then say they have to think about it, and then they hang up.
I ask him, you are happy you lost them?
He said, I didn't lose that, I am happy because that is what you want, to know that the price you quote to them is close enough to make them want to buy right then, but just over what they wanted to pay, so that they say they have to think about it.
Then they call up twenty minutes later and take the deal.
When that happens, you know you got the most money you could out of that transaction.
Another point of the story, there are business lessons everywhere, listen to everyone. I do.
Drop me a note, say hello.
“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.
— Charles T. Munger”
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