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Business Basics 101

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by Ellen Rohr

Have you ever done this: called up one of your competitors, assumed a fake voice and asked, "How much do you charge?" Go ahead. Admit it. We all do that kind of nonsense.

But here's the really silly part. Have you ever adjusted your selling price to match or beat his price?

If you took Economics 101 in high school or college, you learned that selling prices for goods and services are determined by "what the market will bear."

That means that consumers the market decide what a product is worth and will give so much money, but no more, for that product.

After doing a fake-voice phone survey of a few companies and setting your prices somewhere in their range, you might say you are charging "what the market will bear."

This beats going to the trouble of figuring out what your company's break-even point is.

"We can't charge more than 'what the market will bear!'" is delivered as a logical reason for maintaining below-cost selling prices.

But here's the rub. The "what the market will bear" rule applies to commodities. Commodities are products that don't differ much from vendor to vendor. Gold, for instance, is a commodity. Gold is gold is gold.

Gold will follow the economic rule of "what the market will bear" pretty nicely. It will be directly affected by the law of "supply and demand." Economics 101 works well when you are talking about commodities.

But it doesn't count for much as far as your products and services go.

Here's the real rule, the "street" rule, the rule they don't teach you in Economics 101: The market doesn't set the selling price. The marketers do.

Why does Coca-Cola sell for three times the price of Best Choice cola?

How come Rolex sells watches for $50,000 when you can get a very nice watch for $100?

Why would anyone pay $15,000 to cross the Atlantic on the Concord when a jet plane will get you there for about $500?

The marketers in this world differentiate their products and make them something more than a commodity. Marketers create and communicate features that benefit consumers. Benefits add value to the product.

Coke is the real thing. A Rolex is a symbol of wealth and power. And the Concord goes really fast. (Speed is always a cool product feature). Higher value commands a higher price.

If value = price, then there is no sale.

V = P = No Sale

Cash in pocket will only be exchanged for something that has a higher perceived value. So, if a product is worth exactly what you are charging for it, no one will buy it. What usually happens is that you will drop your price until the value of your product becomes bigger than the price.

V > P; then, Sale

However, the marketer increases the value until the price looks insignificant.

V > P ; then, Profitable Sale

You see, there is a huge problem with basing your prices on what your competition is charging, on "what the market will bear."

I bet your competition is even more ignorant than you are when it comes to knowing his break-even and his true costs of doing business. He got his selling price by calling other companies, companies that are now out of business. Don't assume that your competition knows what he is doing!

Lots of folks get confused when they set their selling prices. They look at what everyone else is charging, then they hope and pray that they can make money at those prices. So, don't beat yourself up.

Just do it the right way. Decide how much money you want to make. Offer a terrific product. Figure out all your costs of doing business. Come up with a selling price that makes your dreams come true. Adopt a marketer's mindset. Create so much value for your product that your customers beg to buy it.

And forget what the "market will bear."

(Ellen Rohr's mission is to help folks make a living doing what they love. Her new book is called "Where Did the Money Go? a Beginner's Guide to Basic Business Scorekeeping." Despite the topic, this easy-to-understand book is completely entertaining! To order the book or visit with Ellen, call 753.3998. Or e-mail her at

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