There was a time when coffee was coffee. Ice cream was ice cream. A phone was a phone. Even a pair of shoes was, well, just a pair of shoes.
At one level, at the lowest price/profit level, there are still merchants stuck in this time warp, continuing to conduct business as if people still bought products.
Today, that cup of coffee comes with more options than a Lexus. Would you care to add vanilla or caramel syrup? A double shot? Foam? Cinnamon sprinkles? Thus the $5 price for the 50-cent cup of coffee. But even that is only half the story. Ordinary products morphing into complex arrays of choices, options, add-ons, brands and luxury brands is one way prices have been inflated and margins inflated even more. The profit margin of the double-shot of extra something or other far exceeds the profit margin of the cup of coffee itself. The designer name bag selling for $11,000 doesn't cost 100-times more to make than the similar appearing bag sold at Target for $110. This is a path to profit--and to greater acceptance by affluent consumers. But, as I said, it is only half the story.
Starbucks does not define itself as a coffee shop or even more elegantly as a coffee house. They describe themselves as being in the 'third place business'--home, office, Starbucks in between. They are not merchants just of jazzed up coffee drinks. They are merchants of place, of feelings, of status, and maybe most of all, of experience. Their inspirations are more Disney than Denny's. One of the many students of the Starbucks phenomenon, Ken Herbst, assistant professor of marketing at Wake Forest University's Babcock Graduate School of Management makes the obvious point: "If you walked up to someone about to buy a pound of coffee at the grocery store (at about $4 a pound) and tried selling them just a cup for $5, they would tell you that is too expensive. But if you are at the coffeehouse, you are going to pay for the experience."
This means that price is not tied to product. As soon as you disconnect those two things in your own mind about your own products and services, you are liberated to make a great deal more money and to have much greater success appealing to affluent customers or clients. To be redundant, for emphasis, most business owners are severely handicapped by keeping price and product linked in their own minds. What I call "The Price-Product Link" is as restrictive and antiquated as "The Work-Money Link" that I take apart in my book, No B.S. Wealth Attraction For Entrepreneurs. These links are imaginary. They exist only in your mind, not in the marketplace, yet they are ties that bind as if real, physical, 1,000-pound chains.
The Price-Product Link becomes ingrained religious belief in most business owners beginning with textbook formulas for setting price. Retailers are taught the doctrine of "keystone" pricing, meaning double their own cost. If you buy it for $1, it should be priced at $2, then, at times, discounted from there. In my line of work, direct marketing--what was once called mail-order--we're also taught formulaic mark-up as doctrine, although ours is 8 times rather than 2 times. In businesses where raw materials are converted to finished products, like printing, there is a plethora of price calculating software to do the thinking for you, using standardized mark-up formulas. In every case, the price is chained to the product. There is the fundament that a particular product is worth only a certain multiple of its cost and not a penny more, period, end of story. Unfortunately, this widely and deeply held belief is completely and utterly stupid.
The two biggest "chain cutters" that de-link price from product are who is buying the product and the context in which the product is presented, priced and delivered.
Who you sell to you what matters. The simple act of selling whatever you sell to more affluent consumers may allow its price to rise, with no other modifications.
Price for the same product also varies by context. This is easy to see with commodity items like food, even though many restaurant owners still never grasp it. When is one-third pound of peanuts not one-third pound of peanuts? In a jar, on the shelf, that's all they are, unless dusted with Starbucks mocha latte powder and packaged in a fancy tin. But when served hot, from a vendor's cart in the park, scooped into the bag and sprinkled with cinnamon by a handlebar mustached man in red-white striped jacket and straw hat, with calliope music playing from the CD player in the cart--then they are not peanuts at all. They are an experience that evokes emotional feelings. Even as you read my words, your mind may have flashed to Mary Poppins in the park or a trip to the circus as a child. While it is not so easy for most to transfer this idea to other businesses, it does, in fact, transfer to any business. Context alters or liberates price. Move the exact same product from one context to another and its price can easily be altered.
Dan Kennedy has earned him the moniker "Millionaire Maker" through his network of consultants, which help more than a million business owners succeed every year. He is the author of the bestselling No B.S. Series and co-author of Uncensored Sales Strategies, available from Entrepreneur Press.
Dan S. Kennedy is a strategic advisor, consultant, business coach, and author of the popular No B.S. book series. He directly influences more than one million business owners annually.