Unique Value/Substitute Awareness Effects
One of the problems with using your costs to determine your price (as in the cost plus model) is that customers don’t care about your costs. All that matters is how they value the product – specifically whether they value it more than the price you are asking.
One of the things that determines that valuation is the availability of acceptable substitutes, in the form of competition. That helps customers form an opinion of what your product is worth.
If you sell gasoline on a busy street you’re kinda stuck. People will see acceptable substitutes every few blocks, and that really puts a cap on what you can charge. Sure – if it’s raining and your pumps are covered you might be able to charge a little more. Or if they can pick up some milk, a snack, etc… these things might let you charge a little bit more, but just a little.
Now lets look at Tiffany and diamonds. When my friends all started getting engaged I was the one that found the diamond broker, and we were all thrilled because we were saving so much money, or getting so much more for our money, and we all made the trek down to see him.
Now there was one guy who wouldn’t do it. When he first mentioned getting engaged I said “great! When you’re ready to go see the diamond guy let me know and I’ll set it up”.
“No” he said. “I can’t. I have to go to Tiffany.”
I was stunned. I know this guy, I know what he has to spend, and I know he’s barely going to be able to get anything there, and I told him that.
“It doesn’t matter” he said. “It has to be in the blue box. She said it has to be in the blue box.”
OK. The blue box is going to make that one moment more special. But, for the rest of her life (hopefully) she’s going to be looking down at a ring that is fraction of what she could have had. But none of that matters – it had to be the blue box.
That’s the unique benefit effect. There was only one place to get the blue Tiffany box, with no acceptable alternatives, so they can charge pretty much anything they want.
Then I offered to get him a blue box on eBay. He thought about that one for a second. "What do you think that would cost?” he said. I said “well, I’m not sure what it’s gonna cost me, but it’s gonna cost you a grand.”
Value based pricing – I knew the box was worth thousands to him, so I was going to charge accordingly.
Back to your flower shop. You want to be closer to Tiffany than the gas station.
So take your website. If it looks the same as every other website, and has the same photos, the same product names, the same product descriptions…. you’re now the gas station among many other gas stations. And people will go a little down the road to save a few cents.
If you have a commodity product the only differentiator is price. You’re making that the primary consideration. If all other things are equal a few cents starts to matter. Avoid becoming that commodity product.