The Price-Perception Paradox.
Explore the impact price has on our consumer behaviour and why higher prices can garner more demand.
Welcome back to Friday Thread. Apologies for not getting an article out last week. It was a busy week including travelling back from my semi-permanent home in Portugal back to London.
This week, Friday Thread is back and I am discussing a very polarising and hotly debated topic, price.
Topics
🏷️ What is product pricing?
📈 Pricing fundamentals
🕶️ Jacques Marie Mage - the story of a luxury eyewear brand
🧠 Psychology around higher pricing
🎽 How Satisfy Running changed the market through price
What is Product Pricing?
Simply put, product pricing is the quantitive value you put on your product. This is determined by a number of internal and external factors, but essentially, its the cornerstone of building a profitable business, and will impact cash flow, product demand, and profit margins.
How to Price your Product?
The Fundamentals
How to price your product isn’t something that I can answer. However, there are certain fundamentals that you must have in place in order to run a profitable business. There may be some exceptions to this rule, for example, operating at a loss to gain market share with the intention to cut costs and be profitable in the long run - but we’re going to look at this from a small business perspective.
In apparel, you first have to look at your COGS (cost of goods sold). These include elements such as raw material costs, labour, and the overhead costs to make that product. There are also a number of variable costs that go into selling that product that need to be considered (shipping, freight, packaging, promotions). Below is a simple breakdown of the ‘bundle’ of costs that are directly related to selling a product.
Once you have a clear idea of your COGS, you can then start to build a pricing strategy for your products. There are a number of pricing strategies that you can explore. I’m not going to go into too much detail, but below are a few of the common ones.
Cost-plus Pricing
Cost-plus pricing is also known as markup pricing. It's a pricing method where a fixed percentage is added on top of the cost it takes to produce one unit of a product (unit cost). The resulting number is the selling price of the product.
This is very common in retail. For example, a retailer like Selfridges will want a minimum 2.5x mark-up on the wholesale cost. Therefore, if you sell one unit to them at £30, they will sell it at £75 (£30 x 2.5). Although there are a number of factors that go into it, from my experience, you want to try and aim for a 5x mark-up from your unit cost to your retail price.
Therefore, if we work backwards from the above retail price of £75, we’d look to have a unit price for that product of £15 (£75/5). Of course, there are many factors that go into this (customer acquisition cost, volume, customer demand, etc). This, however, gives you a strong foundation to distribute at both wholesale and direct-to-consumer.
Competitor Pricing
Another approach is to analyse your competitors pricing and meet them head on. The problem with this is that it assumes your products, image, brand position, and cost structure are the same as your competition. As a small brand, I’d personally never look to compete on price with similar brands in your space. You firstly don’t have a fundamental understanding of their costs, and secondly, it removes the ability to differentiate by price - something i’ll explore later.
Customer Focused Pricing
The third approach, which is more difficult than the two previously discussed, is customer focused pricing. This requires brands and marketers to asses carefully the value customers put on your products. This is more difficult because it looks at the intrinsic value that customers put on a product, rather than following a simple formula like cost-plus pricing or matching competitor pricing.
This, however, will be the main strategy i’ll look to explore in this article.
In my personal shopping behaviour, and what I find fascinating in apparel and accessories (and other industries for that matter), is that the value that someone puts on a product is completely different to another person.
This is why I’m always bemused when I read someone say ‘Is product X worth it?’ In truth, no one can really answer that but you. Whilst there are certain non-negotiable we simply must have in life (think food, water and shelter), most other purchases come not from necessity, but want.
A Japanese chef knife is going to provide much more value to someone that cooks everyday than someone who eats out 5 times a week. However, what about if two people cook everyday, do they both want a Japanese chef knife, not neccessarily.
Whilst one of these people might find enjoyment from using this beautifully crafted knife, the other person may find just as much value from a European knife. Value comes from having a certain connection or emotion towards something. Do you resonate with that product? Why is it important to you? How does buying and using this product make you feel? These are all fundamental questions that go into understanding the relationship between value and cost.
The Tale of a Luxury Eyewear Brand
Jacques Marie Mage
You may or may not of heard about Jacques Marie Mage. The Los Angeles based eyewear company founded by Jerome Mage in 2015 has sped up the ranks of the eyewear industry, becoming favourites among A-list celebrities, Hollywood films, and those that value pure quality.
The eyewear industry is simply one of the most competitive in the world, but Jacques Marie Mage has carved out its own niche, and it’s a pure lesson on price and how it corresponds to value.
With the sunglasses ranging from £500 to £2160, through my research, it’s the most expensive eyewear brand in the world. Yes, it’s popularity and double-digit revenue growth this year may be largely due to seeing them on Brad Pitt and Jeff Goldblum in Babylon and Jurassic Park respectively (among countless others), but in truth, at this price, I believe there is less celebrity influence, and more to do with aspiration.
The frames are notoriously thick, sturdy and heavy (which is in fact part of the beauty and charm of them).
“It creates a certain physicality when you touch the frame, you connect with the luxury of it,” Jerome says of his iconic frames
Each frame is cut from a block of acetate, like a sculptor carving a block of marble. Each pair of glasses undergoes a 300 step process enriched by expertise of nearly 100 artisans. Much like the Rimowa case study I wrote about at last week, JMM has an unwavering commitment to quality and craft.
Handcrafted in Japan, a region known for it’s incredible quality and dedication to detail, the JMM story lives truly in the minds of those that purchase. Whilst many people may be shocked by the price, others find value - whether it’s from exclusivity (JMM does limited runs of approximately 300), the feel of Japanese acetate in their hands, or solely, how a pair of Jacques Marie Mage sunglasses makes them feel about themselves.
JMM is an aspirational brand that has focused on the highest quality components, employed the highest quality craftsman, and made design decisions that are intended to ensure they last 30+ years.
The value that someone puts on a set of frames simply comes down to the individual. A customer’s decision to purchase a product is an exceedingly complex process involving perceptions and not merely hard and fast realities. Price is only a part of this process.
Whilst from a purely functional standpoint JMM doesn’t offer anything greater than a traditional pair of sunglasses, from a brand, marketing and emotional viewpoint, it does to enough customers to make it highly desirable.
Finding your Price
First and foremost, your business has to make money. You need to make sure that the profit margin you make from selling your product covers your fixed and variable costs, such as salary, rent, marketing and sales and so on. Once you have figured out that number, you need to determine how much your customer is willing to pay for your product.
This, comes down to brand building as much as product in my experience. Aesop built a successful brand through beautiful packaging, art direction, store interiors, colour palette, customer service and marketing campaigns. There range of skincare isn’t necessarily better than other brands on the market, but it certainly one of the strongest brands in the skincare market. In apparel, finding your price needs to be backed up by product of course, but the story-telling and narrative around it plays. a significant role.
Psychology around Higher Pricing
When I started Torsa many years ago, I had a mentor talk to me about price. I was currently at the stage of building the product and discussed how I wanted to price my product similar to the current market competitors. He told me how the last thing I should do is compete on price. He shared how a higher price could in fact lead to higher demand through the notion of perceived value.
If you’re selling a product with many competitors, pricing your product differently could provide a competitive edge. It’s important to note, when a person first buys your product, that product becomes their anchor - this means that this product becomes the core product the customer compares to. This is why, when you create premium or luxury goods, you can’t just have one outstanding product in terms of quality, they all need to live up to the anchor so to speak.
Case Study: Satisfy Running
I have spoken countless times about Satisfy Running - a brand, which I believe, genuinely has had a long lasting impact on the running apparel market. The most divisive element of Satisfy is their pricing. Known for blending founder Brice Partouche’s love of punk and skate culture, Satisfy’s design direction is unique and certainly subverted the typical running aesthetic.
Satisfy’s prices are notably higher than any other brand in the market. If you follow the running apparel market however, you’ll know it’s the most talked about brand outside of the mainstream ‘big boys’ so to speak.
There is no doubt that their pricing is a talking point, but I would argue that their pricing is somewhat the foundation to their success. This goes back to perceived value. Whilst their Merino SS T-shirt is priced at £230, of course customers can go elsewhere and find a similar T-shirt for cheaper. However, their distinct design direction, unique ‘tearaway’ care label, paired with the notion of scarcity and exclusivity, means that customers are willing to pay top dollar to be part of something bigger.
Final Thread
As humans, we’re irrational. And if you haven’t read Dan Ariely’s book ‘Predictably Irrational,’ I highly recommend it. Nonetheless, the idea that we make decisions purely based on logic has of course been debunked. We act on emotion as well. How a brand makes us feel is integral to the purchasing decisions we make.
The value we put on products and brand is incredibly complex, but just as the examples of Jacques Marie Mage, Rimowa and Satisfy show, charging higher prices should not be feared. If anything, higher prices make a brand unique and more aspirational. The only thing I’d say is make sure your product quality lives up to your price.