Unlocking the secret of price and buying decisions

Thanks to Hulu - I've been hooked the last week or so on Shark Tank (ABC). One of the things that comes up repeatedly on the show (primarily from Kevin O'Leary - aka "Mr. Wonderful") is this question -

Who's gonna pay _____ for that?

The particular case that agitated me enough to write this post - O'Leary was browbeating two women for developing basically a nylon baby mat that cost 40 bucks (I guess thanks to Greiner and Cuban funding Monkey Mats and putting their hand in its management - the price came down to 20 bucks now).

I've heard this argument raised repeatedly by O'Leary and Herjavec, but all the sharks have raised it at various times; the real argument being made is that the pitching entrepreneur's business model is flawed because no one will ever pay X dollars for whatever product/service being offered.

Wrong. It's just absolutely the wrong question.

The question is not who is going to pay - we know that answer - the market.

The question is - how hard is it going to be to get those in that market to pay that price?

There's a difference. Unfortunately, lots of entrepreneurs that never make it to the Shark Tank go broke because they fail to honestly answer this question in evaluating their business value, the minimum viable audience, and the difficulty of market entry and market share protection. Since I believe that precious little is ever developed that doesn't already exist "under the sun," I don't generally rely on proprietary systems to protect me from market competition. What I rely on is brand, connection, and authority.

Supply and Demand aren't points - they're functions

In Economics, students learn that the demand curve is downward sloping - more is always purchased at a lower price; the supply curve is always upward sloping - more is always supplied at a higher price. Where supply and demand meet - you have a stable market. This is the minimum price at which transactions occur. In a perfectly competitive market - this is the price at which all the market transactions occur.

But in economics, perfectly competitive markets are a lot like the "airless frictionless world" of physics classrooms - they don't exist in reality.

The demand curve's slope represents how purchasers value the good in comparison to all the other thing they could buy. The demand for Gold (and the function of that demand curve) is different than the demand for Tic Tacs (which I'm munching on as I write this). The curves look different because of how society values these items - not because of any intrinsic activity or objective placement of value. The S&D curve is meant to model behavior and predict quantity and price. It is descriptive and prescriptive modeling.

What someone is willing to pay on the demand curve is determined by a simple concept - individual utility. The degree to which someone is willing to pay more is a function of the expected utility of consumption of the good or service. This is how experiments taking "two buck chuck" and convincing people it was $200 fine wines are able to work. How we perceive value is how we determine our utility, and by extension, how much we're willing to pay for a good or service (given our budgetary constraints). How we perceive utility can be influenced - it's not easy, but it is more than possible. It is done every day.

You can sell anything with the right approach on brand and with garnering enough authority.

How else can we explain Ron Popeil selling spray hair? Or George Foreman selling a toaster oven and an electric griddle? How else can we explain Dyson basically selling a super duper vacuum cleaner that costs about 5 times what a vacuum cleaner costs? How else can you explain Coca-Cola selling the most abundant substance on earth - water? I'm not talking Coca-Cola - that at least has sugar and flavor in it. I'm talking water. Plastic Bottle, squirt in water, cap it - done.

Brand and Authority-that's how. Ultimately every product and service has some degree of brand and authority. The real question to be asked is, how hard is it going to be to build enough brand, garner enough authority, to reap the long term profits that come from being a market leader. Is that exercise worth it?

That's a hard question to answer. Unfortunately, few entrepreneurs ever ask that question even subconsciously.

There are two things I know to be true:

1. There is no such thing as a commodity
2. If you don't control your price, you're not trying hard enough to tell a better story that leads to stronger connections and ultimately greater authority in your domain of the marketplace.

A Bleach by Any Other Name...

Here's the thing - bleach is bleach.

The main compound in chlorine bleach is “sodium hypochlorite (NaOCl)”. This compound becomes hypochlorous acid (HOCl) by hydrolysis (diluting it with water).The process of making bleach has been known for almost 200 years. In one sentence I explained how to make it. It's trivial, anyone with rudimentary chemistry knowledge can make it. If ever there was something that wasn't proprietary, if ever there was something one could define as a commodity, bleach would be a good example.

Quick - name a bleach brand.

I suspect almost all of you instantly had one word pop into your head - Clorox.

Quite frankly, chances are if you live anywhere in the developed world - your answer is Clorox (because their international reach). Clorox is an S&P 500 stock; it is internationally traded; it sold 5.5 billion (with a B) dollars of product last year; and it's total assets and equity is nearly 5 billions dollars.

Not bad for selling basically commodity products (they sell way more than bleach - but every product Clorox sells is composed of simple, non-proprietary, chemicals that any college level chemistry student could create).

So I had to go shopping at Target today. I went and looked. Clorox bleach - one gallon, 3.50. Generic Bleach - 2.09. That is a difference of $1.41 per gallon, or roughly, 67% more for exactly the same product.

And Clorox sells billions of dollars worth of bleach year after year.

If Mr. Wonderful were here - he'd tell me I could never take on beach because it's a commodity. He's right. I can't take on bleach and be profitable (most likely), especially in the liquid bleach consumer space, but not because it's commodity. I can't become the market dominator of consumer liquid bleach because Clorox has already appropriated all the profits in the marketplace for being the brand leader. They have spent so much time building a brand that is so difficult to displace in the minds of the market participants that it is cost prohibitive to both get new customers who haven't formed a preference as well as customers of Clorox's products.

The cost to appropriate that spot for myself, or even become the number two competitor, leaves little room for profit (if any). It is just too hard. To paraphrase Jimmy McMillian - the price is just too d*mn high. It's possible, I could do it, but I couldn't do it profitably. THAT is the reason why making a bleach is potentially a losing proposition - not because bleach can't be sold. It can - there is a huge market for it worth billions internationally. I might even be able to sell it for MORE than Clorox. But can I justify that price given the billions of dollars I would have to spend taste making, building authority, and wooing new customers? Probably not.

But... and it's a big but... but, if I'm P&G, if I'm SC Johnson & Co., I have the cash, the distribution, and the wherewithal to challenge Clorox. Although those that are astute know that P&G just sold the bleach units, they also know that "scrubbing bubbles" is essentially liquid spray bleach made by SC Johnson & Co. These products get considerably more than generics for exactly the same compounds packaged and sold in roughly the same big box stores.

Nothing is a commodity, if you have a brand that people identify with so strongly they are willing to pay for consuming it. The problem is most entrepreneurs over-estimate the attraction of their brand position.

Don't underestimate the power of existing brands

So when I worked for Booz Allen, I have no doubt that I was billed out at several hundred bucks an hour. That's the consultant agency's business - hire smart guys - sell them to the market for a gazillion dollars, pay the consultant guy like 3 bucks, put gazillion - three bucks in your pocket and call it a day.

Happens at Booz, Bain, BCG, etc., you name it. On average, the individual doing the work is billed to the client at anywhere from 1.5 to 10 times what they're paid. That's a fact.

Does that mean you can quit working for the consulting company, put out your own shingle, and start making 2 to 10 times what you used to?

Probably not.

Since all value is perceived, when you leave the big consulting firm framework - now it's just Bryan the consultant?

And who the heck knows Bryan the consultant? Moreover, who knows him well enough to stake their careers on his advice?

Not many people. (Well that's changed a bit since I left Booz in 2010 - but back then it would have been a tough sell.)

Now if the Sharks asked that question - why will people trust and respond to you - I wouldn't be so agitated and have written this post. To make something really "big" - a hidden challenge most entrepreneurs don't realize is that brand and authority are just as hard to scale and require strategies just as complex as reducing the COGS. This is further compounded by the reality that all too often little to no data exist to understand how an innovative product might translate as consumer preference, utility, and ultimately value, as it scales.

The real challenge for someone making something that's going to be "really big" - they have to be at that point on the demand curve where the market is stable. Where most people go "yeah I'll buy that".

Because going back to my chart - the intersection represents only the minimum price at which market clearing will occur. If someone walks into your store, and you normally sell the widget for 10 bucks, and someone says, "no I'd really like to pay twenty" - you go, ok - sell the widget - and pocket double your market price. The supplier will always sell for above the "ask" price (for those who know markets - the bid is the price the buyer wants to buy at, the "ask" is the price at which sellers want to sell at).

Entrepreneurs I've worked with often get excited because they've been selling a product for ten bucks or whatever they think the price is and so they're stoked. But often they don't know if that price is really the "lowest price point" on the demand curve, below the point (which by the way it often is in my experience), or above the price equilibrium. Knowing where you are on the demand curve is critical because it answers the simple question of - is this scalable while we maintain price discipline.

The simple answer in 99% of all cases is - it's not easy, it's not readily scalable, and hard work has to be done on brand value building. It's not impossible, but most businesses go through a process of selling below the equilibrium point before they get to it, or even beyond it. It is possible to move beyond an equilibrium price point - but to do so, you have to move the demand curve. That means you have to change EVERYBODY'S view of your product. This happens, but it is not a commonplace occurrence. Once good story about it, however, is Hush Puppies Shoes as profiled in the book "The Tipping Point".

How can you change perception? Authority. Ultimately as humans, we value information, expertise, and time. People who have authority make one simple promise to us - they know more than we do, and thus, their preferences create more value for us in guiding our choice than we would on our own.

Now, I was a good consultant at Booz, but I wasn't the most notoriously well known guy in the agency by any means. But let's say, for the moment, you were known as "the guy who _____" (you fixed something huge, everyone knew it was you, everyone knew you had the brain behind it, etc.) You were - "the guy" - you had authority.

Now, if you go and start your own consulting firm, it's a different proposition isn't it? You're "the guy who ___________". Put simply - you have one idea that is closely tied to brand. You're the guy. If someone needs that problem fixed - you're the guy.

Authority.

Clorox is a brand - but they're also the guys who are largely understood as the guys who invented bleach. So all the products Clorox makes on bleach - wipes, pads, scrubbers, etc., they've got instant authority on.

Apple has authority - authority in its ability to innovate. If Apple made washing machines - you'd go and take a look at them. Why? Because you're hoping they're the coolest music playing, movie watching, candy crushing, washing machine you ever saw.

Authority.

Booz Allen is a brand - but they're also the guys who basically invented business consulting. Is it true? Well - in some respects yes - Edwin Booz was indeed a pioneer. But whether or not it's true is irrelevant - lots of people believe it. When Booz Allen makes a recommendation - it's predicated on a 100 years of being in the business. People believe that their knowledge is "better" - in that it has greater value - than even the most seasoned leaders in government and private enterprise. That is why the firm makes billions of dollars.

When people asked me what I did for a living at Booz Allen, I said - wryly - that I got paid gobs of money to point out the obvious to business leaders who if they took a moment - could figure it out for themselves.

Glib, perhaps, but entirely accurate.

But when Booz Allen says - you have to close this plant... the client goes, "ooooh. Ok. Bob - close the plant, fire all the workers, Booz says we have to, and they're the guys who know."

If I say close the plant - they go, "Yeah - thanks. Who are you again? Get out."

Same advice. Heck I might be the guy who reached the conclusion in both situations. One is acted upon, one not. Why?

Authority.

How hard is it to make a brand and build authority?

The answer to this question - put simply - is it's hard. Moreover, there isn't a shortcut to it. Authority is earned, not bought. Brands are made in the minds of others. Brands are like reputation - they exist in the heads of other people, not objectively. You can take actions to build your brand, but ultimately, it gets built in people's heads.

There is no two ways about it - branding; using authenticity, authority, trust, beauty, value, are not easy. Clorox has been making bleach for over 100 years. Clorox has spent billions on advertising, marketing, and branding. P&G, SC Johnson, etc., are among the largest buyers of media, advertising services, and marketing services in the entire world. That's how hard it is to make a commodity something people love and are willing to pay extra. It is that fact that most investors look for proprietary systems. Reducing the ability of others to copy lowers brand competition and brand development costs.

But just because something is hard, doesn't mean you shouldn't do it, and it doesn't mean it won't be wildly profitable. The real question to ask is how hard is it going to be to brand (whatever you're making) in relationship to the price, the market size, and the relative entrepreneurial risks. If you're selling a commodity - it's going to be hard. If essentially you're selling something that is so unique or a craft (such as art) then you will have some advantages. It will still be hard.

To their credit - three sharks on Shark Tank seem to instinctively understand this difficultly and they seem to understand their ability (relatively) to overcome it - Lori Greiner, Barbara Corcoran, and Daymond John (and sometimes Mark Cuban). They seem to understand (probably because of what they do where they sell essentially commodities for a living) that brand, experience, and imputed value can be built. Tastemakers like Daymond John and Cuban can result in bringing people to the table. Savvy businesswomen like Greiner and Corcoran know a great deal about projecting value and getting buy in, and they leverage their own brand to reduce the cost of getting "buy in" for the businesses they invest in.

In the end, however, you still need to build authority - which means you have to know your stuff and deliver the value you claim you deliver. Presuming you make a decent product that works and creates value in the market - the real challenge is scaling that creation of value and capturing it.

If you can do that better than anyone - you can name your price.

You think I'm kidding? Who competes with Walt Disney on theme parks? Lots of them. Six Flags. Busch Gardens. Lots of circuses. Theme parks aren't new.

Who gets a hundred dollars a head to just walk around Magic Kingdom? I mean do you understand it's cheaper to park in New York City for the day than it is to lease walking around Disney World? Only Walt Disney. Disney didn't invent the theme park. What Disney does have is a story that is unlike anybody else. Their story is that the Disney parks are a magical place where kids, families, everyone, will have such a memorable time others around you will weep and consider their manhood cheap because they were unable to participate for he that is my brother in Disneyworld wears the gilded ears of Mickey Mouse.

... or something like that. But it is a very powerful story, that no one has been able to duplicate. But in the end - it's still an amusement park - not unlike about a thousand around the world - none of which get even close to what Disney makes.

I have seen numerous entrepreneurs come to me and try to woo me on price. Without being able to build brand, loyalty, and an audience, the product can be free and no one will buy it. Don't believe me? Wander through the app stores for Apple and Android. Thousands of free apps - no one downloads or uses them (or so few download it that the endeavor was completely a waste of time to develop it).

Sometimes without brand - you literally can't give it away. Without authority - you're entirely hopeless. For example, Cuban's product of "Cyber Dust" is interesting. He's built a brand that is getting places. If I were "Mr. Wonderful" my question might be - "Who's gona pay for that?"

Well CyberDust is free - still isn't catching on like wildfire.

It may still catch on - who knows, it's early. But the real question is - does Mark Cuban have authority on cyber security and do you trust the guy enough to trust your text message security to his companies and products?

Now, if I want to know how to roll like a rock star, own an NBA team, being an entrepreneur, and fostering VC activities - I'm very open to Mark Cuban's wit and thoughts. Love reading the rants on LinkedIn. Love reading the interviews on these topics from him. Cyber security?

Me personally - I'm out.

If Norton came out with that app - bazillion downloads. If Apple - bazillion bazillion downloads. If Google - 10 to the 10 to the 100 (googolplex) downloads in 2 seconds.

The cost of adopting innovation is directly proportional to your authority in the market space. High authority - lower cost of innovative adoption. Low authority - higher costs of innovative adoption.

The question is not price. The question is not "who's gonna pay" - the question is why are they gonna pay. In answering that why - you reveal the real cost associated with building brand and building authority. High trust, more likely to buy, more likely to buy in to the premise of why I should buy.

The real cost of building brand, and building authority, is going to determine your price as much as your cost to manufacture. If building brand and authority aren't as scalable as your production/COGS costs - then it really doesn't matter what your price is, the venture will fail. In the end - brand and authority determine what price you literally will get in the marketplace, and whether or not that price will be profitable.

Onward, to Victory!

Photo Credits: Albert Kok (under creative commons license); Pummax/Wikipedia (under creative commons License); Mark Cuban/Twitter (original URL)

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About the Author:

Bryan Del Monte is an advertising executive out to change advertising and become one of the thought leaders of the information age. Bryan focuses his time on helping people to "Make Their Presence Felt" in his leadership of Clickafy Media Group. To learn more about him, visit his personal website at www.whybryan.com.

At the heart of powerful communication is simple truth. It is this simple truth that is shared that builds communities, drives engagement, and creates a strong customer base. The simple truth gives people the reason why they “stick together”. In how I approach a communication strategy – I start with why. In “why” lies the simple message.

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