I have a friend who works as an electrician. Once he was called to fix a switch that wasn’t working. He looked at it, and in less than five minutes he fixed it. After that, he charged him for his services. His customer pointed how come he had to pay that much for a job that was done in less than five minutes. My friend answered that he didn’t pay just for the time, but for the years of expertise required to find where the problem was and fix it.

The concept of value is usually discussed in Economic Theory it. Usually, we tend to think that a certain product has a higher or lower value based on the materials or the labour hours needed to manufacture it. However, when you look around, you see that some goods or services are priced not based on the production costs, but on the demand that it has, which is determined subjectively rather than objectively.

Let’s look at an example. How much are people willing to pay to attend a football match and how much for a book? While a novel may cost between 10 and 20 euro, a football game can be much more expensive, especially if two rival teams such as Barcelona and Real Madrid will play. Ask around and you will hear many people complain about the price of a book, while on the other hand, they may not even complain if they are going to watch a game. Of course, I agree these are two different forms of entertainment, but what it is the point in this?

Without entering into discussion if organising a football game is more expensive than publishing a book, for you as a business owner, it is crucial to identify what is the value that people are willing to pay for your goods or services. Ideally, it should always exceed the costs of manufacturing and providing them. It could be argued that you might encounter some situations in which you may lose a sale if you refuse to lower your prices, because some customers may not be willing to pay for it, which wouldn’t allow you to recover the costs.

In particular (and limited cases), this strategy could work if this could mean avoiding losses in the future by losing customers in the present. Sometimes, short-term profits can lead to losses in the long-term or the other way around. However, pricing strategies should be handled correctly and should consider not only the desired profits, but also the potential reaction of your competition and customers. Reducing prices constantly could be perceived by your customers that the product you offer has low value. Keeping prices up could make you be perceived as greedy. The right answer always depends on the market conditions at the moment.