Is water always a commodity?
Water is one of the most essential and important elements on earth but have you thought about how differently water can be priced? Why does a 1 liter bottle of water cost € 1 in one store while ½ a liter costs € 2 in another?
Perhaps the difference represents the customer value or is it just the difference in cost to serve that is reflected? Water comes through the tap at home, we can buy it in stores but it also comes in totally different forms, e.g. as perfume.
Now, you might argue that perfume is not water and that you cannot drink it and you are certainly right about that, but when we analyze the content of the perfume, it is nothing else than scented water. When we look at water in the form of a perfume we find that the difference in price between 1 liter and ½ liter of water in two different stores, being 4 times higher per cl for the latter, is so small that it is almost negligible. Perfume can cost more than € 2 000 per liter and you can ask if the reason is the difference in cost between pure water and the scent that is added to the water to make it smell so good? The answer is of course no.
When you price water you can do it in several ways
The state/municipality makes sure that everyone can access water for a lot of different purposes and provides it for a price that reflects the cost to serve.
Branded water sold in a supermarket is typically priced using market pricing. One supermarket does not dare to deviate too much from another and that drives prices and margins downwards.
Different channels however, such as convenience stores, petrol stations and local shops may have very different prices, like in the example above. The water is now priced according to consumer needs, e.g. we buy to drink now (smaller cold bottle) or later (big bottle not chilled).
Value based Pricing
The only water I know (read almost water) that is priced according to true consumer value is perfume. Because we do not look at perfume as water but a scent that is an essential part of our identity, the price of perfume has nothing to do with the actual cost of the content in the bottle.
How innovation and pricing are related to your profits
When we look at the large number of projects we have done over all these years, we see a strong link between innovation and pricing. In each industry, there is a baseline, like a reference point for profitability. When you are more innovative than your industry’s reference you are able to generate more profit but if you combine that with better pricing, the results will improve significantly. If you are not any better than your industry, your only option short term is to develop your pricing.
How do you price your products and services?
Do you calculate your prices like the municipality or do you base your prices on the true customer value? How much more would you make if you managed to develop your pricing? Give us a call and we will help you determine your potential!
You can also read http://qz.com/537730/why-is-makeup-so-expensive/
By Per Högberg