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Carol L Schroeder

The Price of Everything

November 20, 2012

The Price of EverythingShopkeepers often take only two factors into account when setting prices: the wholesale cost of the item and the freight charges. Many independent retailers don't even even factor in their landing costs, preferring to take straight keystone markup (doubling the wholesale cost) because that is customary. Despite studies showing that it is hard to make a profit with all items at keystone, store owners are afraid that their customers will not be willing to pay more than this traditional markup.

Author Eduardo Porter would argue that while there is a perfect price for every item in every market, it should be based the customer's desire for the product rather than any formula applied consistently across the board. "Every choice we make is shaped by the prices of the options laid out before us-what we assess to be their relative costs-measured up against their benefits," Porter states in The Price of Everything: Solving the Mystery of Why We Pay What We Do (Portfolio/Penguin, 2011).

Porter's book is a study of the decisions we make and how price impacts our choices -- ranging from "things" to health care, faith, culture, and the environment. In discussing retail purchases, he gives the obvious example a consumer deciding to buy a cup of coffee at Starbucks instead of making it at home. And while the consumer is willing to make a splurge like this without thinking twice, he or she will also drive across town -- using up valuable time and gas -- to save a dollar on a product. This conflicting behavior is part of the puzzle that Porter sets out to solve.

The Price of Everything also delves into price discrimination, the term that Porter uses to describe the fact that one price does not fit all. Consider how easily we have accepted this premise in regards to airline tickets. I think that if you checked every person on a plane holding 100 people, all being transported from point A to point B, you'd find that they'd paid 100 different prices.

Yet many retailers are reluctant to accept the fact that customers may be willing to pay slightly more for a product than keystone markup would indicate. There are differences in the way people value time and money, according to Porter. Your customers may be willing to pay more for the fact that you have sourced unique items for them, created a retail environment that makes shopping both enjoyable and efficient, and are willing to box and wrap their purchases gifts.

Although it is more work, I think that it is important to assess the value of each item to your customers before setting retail prices. We always mark these on a purchase order immediately after writing it so that we have that valuation still fresh in mind. Some items do still get marked at keystone, but not all.