Prestige Pricing
The Effect of Price on Brand Value-In Japan, a hair cut costs $70 and includes a scalp massage, a shave with a straightedge razor, nose hair trimming, pre-cut wash and post-cut wash. In America, many barbershops offer cuts for $7 to $10. No scalp massage; no nose hair trimming; no straightedge razor shave. A wash with the cut is the height of customer service. A market exists for a customer service oriented barbershop. Yet, new barbershops are popping up to compete in the cheap hair cut market. Why?

The Myth-"Price Drives the Sale!" This is the myth that sends business after business into crowded, unprofitable low price markets. Price does not drive sales. It never has, it never will. Value - perceived value - drives sales. Hypothetical Situation-You have a headache. You go to the drugstore. The store has Excedrin, Tylenol and a generic pain reliever. Which will you buy? Excedrin and Tylenol continue to sell even with generic brand pain relievers priced as much as 75% lower. Go figure.

Building a Brand on Price-The same applies to many products we buy everyday-DVD players, soap, milk, printer paper, light bulbs, bottled water, gasoline, etc. As consumers, we don't have the time to research the products. We often base our judgment of value on the price of the product. Speedway is cheap gas. Many consumers won't use Speedway gas simply because it's the cheapest gas in town. They use Texaco, which has branded itself as a high quality gas simply by pricing its gas higher than the competition. Prada, Rolex, and Lexus are just a few who use prestige pricing to build strong brands.

Value is in the Eye of the Beholder-The beauty of the high price strategy - prestige pricing - is in its reliance on the price to establish value. Naive business owners love to protest, "We can't raise our prices because of products aren't worth that much". Welcome to business. That Prada handbag isn't worth $710 until it sells for that. Texaco gasoline isn't worth $2.10 per gallon until it sells for that. A Lexus isn't worth anywhere near $64,000 until it sells for $64,000.

Summary-Studies have shown time and again consumers believe that price and quality are directly proportional. In the end, your products and services are worth only as much as the consumer is willing to pay and you are willing to charge.