The menu at the Barcelona airport read: café, 95€ (0,95 euro cents), with milk 1,15€. At the laundromat later that week in Madrid, washers and dryers carried the expected charge, but detergent was free. The connection of these things? They illustrate two common approaches to pricing.
How much to charge for goods and services is an issue for every business. Whether the product is food, books, software, or accounting services, owners face the need to decide on appropriate pricing. The issue here is not simply the basic charging enough to cover costs of goods sold so that gross profit covers SG&A and leaves an adequate return on the bottom line. The topic here is pricing as a sales tool in the psychological interplay between buyer and seller, and its relationship cost allocation.
How much should a seller give away in order to entice new business? Who should pay for the costs that must be covered? Should milk for coffee be free and all customers pay for it? Or should only the coffee drinkers carry that minor burden, as in Barcelona? Should ketchup at a fast-food restaurant be given away? Or should it be 0,25€ per packet, as it was at the MacDonald’s restaurant at the Frankfurt airport?
My 12-year-old daughter was quick to volunteer one strategy, "Give away the soap, and raise the price for the washers and dryers to cover the cost of the soap." That strategy is commonly used, but only goes so far before customers feel tricked. There’s a fine line between incentive and sham.
Pricing needs to rest on businesses’ objectives, beyond the basic issue of having enough revenue to cover costs. Are you leaving too much on the table? Or should you give away some things in order to grow the business? Can you create a perception in the buyer’s mind that they are getting extra value through freebies? Maybe there’s a specific object. It’s tempting to believe that charging for ketchup helps to control the spread of McTrash. Maybe incentives will appeal to a particular audience.
As in so many things, the answers get back to the business plan, not some fancy MBA-inspired document, but a concept, perhaps not even written down, about what the business’ goals are and how it reaches them. Pricing also needs to make sense to the buyer, who may understand how one business’ approach differs from another, and who knows whether there is value. So the next time you ask someone, "Would you like the ketchup?" you don't want them to reply,"Sorry, I can't afford it."
