A recent blog entry of mine focused on how price impacts perception. Today’s topic is on how perception drives price. Many times, the cost of something is driven by what we paid in the past – even when the rules have changed.
Seth Godin recently wrote about how Apple will be charging $3 for online video rentals. This price is roughly what BlockBuster and others have charged in the past for their physical product. But with digital content, the rules have changed. Although productions costs are significantly less for downloadable videos (there are no manufacturing and distribution costs), the price remains the same.
What we paid in the past often drives what we are willing to pay in the future. Sadly, this not only robs consumers of better pricing, but it might also rob an industry of a game changing opportunity. If movie studios charged only $1 per rental, it might wipe out the piracy. I do like the new Netflix online streaming video model: unlimited viewing for one fixed price. Time will tell how this all shakes out.
The point is, price is often determined by what we paid in the past, not by value or even by production costs.
Oscar Wilde once said, “A cynic knows the cost of everything and the value of nothing.”
I did an experiment a few years back. I called it PW3 – “Pay What We’re Worth.”
In determining the fees paid to a professional speaker, traditionally the speaker sets the rate before the work is done.
With PW3, as an experiment, I turned this model upside down. Instead of quoting a standard rate, the client would determine my fee after the work was done.
The plan was to send the client a blank invoice after I gave a speech, and they would pay “what I was worth.”
The only stipulation was that we would have a conversation about value up front. I wanted to learn the value they got from previous speakers. How were the concepts reinforced after the presentation? How were ideas implemented? How was value measured?
What I discovered was that Oscar Wilde was right. Companies were happy to pay me what they paid their last speaker or what they had in their budget. Discussions of value were often painful and fruitless.
The result? Nearly all of my clients that year opted to pay my standard rate.
Only one client applied a subjective value system. They surveyed all of the attendees after my speech. If I received a 5 out of 5, I would receive 100% of my standard fee. A 4 out of 5 would yield 80% and so on. Of course this is not a measure of real value.
In your life, how do you determine what you are willing to pay for goods and services? Is it based on what you paid in the past? Is it determined by how much money you have in your bank account? Or is it determined by the “real” value you receive?
In your business, how do you determine what you will pay your employees or consultants? Is it based on market rates (which may or may not be a determinant of value)? Is it based on your budget? Is it based on what you paid your last consultant? Or is it based on the “real” value you receive?
Don’t be fooled. Value and cost are not related. Stop being a cynic. Determine the value of everything – and decide what you pay based on that.