---
title: "What Should Determine Product Pricing?"
description: "Product pricing should be determined by the value perceived by consumers, which includes functional value, experiential value, and personalized value. The more scarce the value provided, the higher the price can be."
author: "刘润"
publisher: "New Distribution"
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published: "2019-08-11"
language: "en"
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---

# What Should Determine Product Pricing?

> Product pricing should be determined by the value perceived by consumers, which includes functional value, experiential value, and personalized value. The more scarce the value provided, the higher the price can be.

My job is business consulting, so I have the opportunity to meet many entrepreneurs.
Some entrepreneurs, when introducing their products to me, ask for my advice.
After reviewing, I say, the products are good, but they feel a bit expensive. They say, our product strategy is mid-to-high-end, our products are meant to be sold to the middle class. Hearing this, I want to say: What did the middle class do to deserve being sold expensive things?
But they usually follow up, asking, so how should I price my product? From a business insight perspective, **product price is determined by the value that consumers can perceive.** What value can consumers perceive? — **Functional value, experiential value, and personalized value.**
**Functional Value**
What is functional value? A street vendor selling watermelons puts up an eye-catching sign ("So sweet, I can't bear to sell") and sells individual watermelons. The sign lets us know the watermelon is especially sweet, which is the functional value we perceive. Another example: I go hiking, get extremely tired, and after the climb, I'm starving. I find a restaurant, order three big steamed buns, and wolf them down before feeling full. The buns fill me up, which is the functional value I perceive from them.
Similarly, almost all food can theoretically satisfy the need to fill one's stomach. If it were only about satisfying hunger, then all food should be priced the same. In that case, which food do you think would be more popular? Of course, the cheaper one. If consumers only eat to be full, then whether they eat buns or seafood, the function is the same. So price is a very important competition.
But the word "price" isn't quite accurate; let's use a more precise term: cost-performance ratio. What is cost-performance? **Cost-performance means that with unchanged quality, the price is cheaper. Or with unchanged price, the quality is better.**
**Humans have two basic shopping needs: good quality at a low price, and low price with good quality.** What's the difference? Let me give an example. In Shanghai, there's a place called Qipu Road, translated into English as "Cheap Road." It means cheap. Also, in Xujiahui, there's a high-end shopping mall called Grand Gateway. When do people usually go to Qipu Road? Usually on weekends when they have free time, because many things there are cheap, so everyone goes to find good quality among low prices. When do they go to Grand Gateway? For example, if your friend is getting married next week and invites you to a grand wedding at a very upscale hotel, and everyone is required to wear formal attire. But you don't have formal wear, so you go to Grand Gateway, because the items there are of good quality but usually expensive. Then you browse around, trying to find something cheaper. That's called finding low prices among good quality. These two needs will never disappear. And whether it's low price or good quality, there's cost-performance behind it.
So, **if you make functional products, cost-performance can be your competitive advantage.** How do you achieve cost-performance? The most basic method is to reduce costs through economies of scale; the larger the scale, the cheaper the price. But lower costs bring more scale, and eventually it becomes a price war with little profit margin. Or use technological advantages to reduce costs, competing on efficiency. For example, originally you could produce 10 items per hour, but with technology, you can produce 50 items per hour. But competing on efficiency is increasingly difficult, and only a few companies can do it.
So what should most companies do? **Most companies should not compete on price for the same product, but rather provide consumers with a more scarce sense of value — experience.**
**Experiential Value**
What is experiential value?
Still selling watermelons, the vendor's sales of individual watermelons aren't good, so he introduces a new selling method: selling half a watermelon with a spoon. When everyone else is selling whole ones, his method stands out. This new method provides convenience, allowing you to eat watermelon anytime. You see, this differentiation brings experiential value to consumers.
But everyone knows that China's economy has a big problem: as soon as someone makes a product that makes money, peers or outsiders across the country rush to imitate, leading to counterfeit products everywhere. **Many people make cheap products, but few can provide experiential value.** Thus, "Copycat China" is as famous as "Made in China." Americans often accuse Chinese people of inadequate intellectual property protection. Germans also think Chinese products are imitations and of poor quality. But in fact, every country goes through a stage of following others.
Today, any product labeled "Made in Germany" immediately increases in price. Because German products are perceived as reliable in quality. But do you know how the name "Made in Germany" came about? In the 18th century, Sheffield companies in England produced famous scissors and knives of good quality, well-received in the market. Manufacturers in Solingen, Germany, imitated these products, making them very similar and close in quality, but selling them very cheaply. Because of this imitation and infringement on others' brands, British and French manufacturers hated Germany, and at that time, "Made in Germany" was notorious.
To solve the problem of product counterfeiting and protect British manufacturers' rights, the angry British took up legal weapons to combat German infringement. In 1887, the British Parliament passed an insulting act, the Merchandise Marks Act. One important clause required all products from Germany to be labeled "Made in Germany" to distinguish cheap, inferior German goods from high-quality British products.
From then on, Germans realized that all efforts and innovation must be concentrated on this label, as it was the standard by which others chose us. So Germany gradually improved and eventually shed its reputation for low-quality goods. Many countries have been imitation powers, including the United States and Japan. **But, but, more important than blind imitation is to establish differentiation and provide consumers with more scarce experiential value.** The core methodology for creating experiential value is to shift from a product perspective to a user perspective.
But do users stop there?
No, **there is an even more scarce sense of value than experiential value — personalization.**
**Personalized Value**
What is personalized value? On Qixi Festival (Chinese Valentine's Day), the watermelon vendor introduces a new selling method: "heart-shaped" watermelons. Actually, you just cut half a watermelon and rearrange it to form a heart shape.
But on that day, consumers see this and think of buying it to give to their girlfriend to express their feelings. **Personalization is the highest-level selling method in products, where everyone can have private customization.** A typical example is Red Collar Suit Company, which mainly does personalized clothing customization on the internet. Their customization process is like this: you measure your body and send the measurements to them, then they have professional designers make a dozen or so garments and mail them to you. Then they tell you a dozen matching methods, and you try them on. If you like any, you can keep them; if not, you can mail them back. Using this mail-order method, they can satisfy everyone's personalized value online, so you don't have to go to a mall for private customization. **Personalized demand is the highest-level and most expensive demand in this era.**
**Personalized products are the most scarce products that users can perceive.**
**Final Words**
We say that the most important factor in product pricing is the user. Product price is determined by the value that consumers can perceive. The value that consumers can perceive includes functionality, experience, and personalization.
For example, selling watermelons. You want the watermelon to be sweeter, so the vendor puts up a sign: "So sweet, I can't bear to sell," which satisfies functional value. You want to eat watermelon anytime, so the vendor cuts it in half and includes a spoon, which satisfies experiential value. You want to buy a watermelon for your girlfriend on Qixi Festival, so the vendor arranges it into a "heart" shape, which satisfies personalized value. **More scarce than functionality is experience. More scarce than experience is personalization.**
So, product pricing depends on what value you can provide to consumers. The more scarce the value, the higher the price.
Source: Liu Run (ID: runliu-pub)


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