Wednesday, October 25, 2006

What I Learn From Apple About Pricing

The Apple iPod (in some part driving the success of Apple's iTunes Music Store) turned 5 this year. To mark the occasion, the Washington Post just did a series of articles in their Sunday Business section. They examined the advent of the iPod from a pro and con viewpoint.

See the articles:
Changing Her Tune on Apple's iPod
A Messy Age for Music : Confusion Reigns In the Expanding Digital World
Van Halen Fell Silent On Top of the World
Once a Skeptic, Now Baptized Into the Mac
Digital, Our Song for the Ages
What was particularly telling in the con camp — which was most of the coverage — was that the major complaint was about the price. In most cases, people felt that the price was a little too steep, especially compared to other MP3 players. They had other dissimilar issues, but that one really dominated.

I have to admit, that I have been very slow to pull the trigger myself because of the price. So I can understand the trepidation. For me, I just haven't found that the price matches my lifestyle quite yet. I don't see a need for it, and as with others the cost seems a bit high to me.

But this brings up an interesting issue. As business people, how do we determine prices for products or services? The answer is value.

As an example, an artist friend of mine was asked how long it took to paint certain paintings by a patron. Having fielded that question several times before, he cut to the chase by not answering the question directly. Instead he told the person that a painting's worth is not found in the amount of time it took to paint it. It's worth is intrinsic both to the artist who created it, and to those who would desire to purchase it.

But isn't that true of anything? The rarer something is, the more of a demand it has, and the desirability of it influences its worth more than the elements that make up this thing. For instance, gold is valuable because it is not only pretty, but it is rare and desirable. It isn't valuable because it was made up of 79 protons and electrons and contains 118 neutrons.

The same holds true for anything else, including the iPod. It is desirable. It is considered valuable for its ease of use and beauty. So Apple charges accordingly. And as long as people buy it, its value is set by the market as well as the seller.

Is that wrong? Doesn't perceived value seem arbitrary?

Maybe in some cases. But it is just a fact. It is just true. And the most important rule of setting prices is that the business owner must value what they do and produce before anyone else does. And the market will decide if it agrees with you.

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