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The Secret Art of Setting Price Properly

By Bryan Del Monte | Pricing

Mar 03

Several months ago, I decided to up my culinary skills, and I bought what’s known in the restaurant lingo as a “PISMO” – which is actually spelled “PSMO” which stands for “peeled, side meat on,” also known as a full tenderloin steak cut. The tenderloin is a channel of meat that runs through the center of a cow’s back, underneath the rib cage, and essentially does – well nothing. As a consequence, it’s the most tender meat in the steer, and it’s the primary cut from which meals such as Beef Wellington and Fillet Mignon are made.

When you butcher a PSMO, one of the first things you do is remove what’s called the “chain steak” and another piece of meat is known as the “wing.” With some additional trimmings, you wind up with a nice, ready to cook, cut, and grill tenderloin, like you would see in any super market in the butcher case. I spent the better part of a Sunday afternoon doing exactly that, in anticipation of making fillet mignon later in the week (which is quite economical if butchered this way, about $8 per 12 oz. steak, versus $20 at a grocery store, or $40 per restaurant/chophouse).

So why am I talking about all this?

Well, the chain meat is historically something that the chefs kept separate and secret for themselves. In that secret lies the history of one of the most abused steak sandwiches in America, the Philly Cheesesteak. In all likelihood, when Pat Oliveti made his first “cheesesteak” he used the chain meat from a tenderloin. So, when I was butchering the meat, that’s what I was thinking about. Chain meat. Cheesteak. Prices. It was all I could do not to fry up the chain meat right there and make a sandwich.

Fascinating right?

Well here’s the deal. No doubt you’ve had a cheese steak, and chances are it wasn’t made with tenderloin. Most of the time, you’ll count yourself lucky if it is steak at all. The sandwich now available at hundreds of sandwich shops, pizzerias and burger joints around the US, is most often made with thin-sliced ribeye (usually “select grade” I might add) on an Italian roll with American or provolone cheese — or Cheez Whiz, if you’re at Pat’s King of Steaks.

Hardly something you’d expect to pay $100 for, right?

What if I said to you there’s a place that sells a $100 cheesesteak every day. So many in fact, it’s the most prized item on the menu. People come to this place just to pay a hundred bucks to eat this hardened artery concoction of fat, goo, onions, and beef. Moreover, they wouldn’t have it any other way. They want to pay a hundred bucks and eat this culinary monstrosity.

And by the way – it still doesn’t have chain tenderloin meat in it (but try that, I highly recommend it, you’ll never make a cheesesteak any other way).

You might think it’s easier to sell your products by dropping your price, but in reality, sometimes the opposite is actually what’s required to make more money (and have happier customers).

THE CONNECTION BETWEEN PRICE AND VALUE

Barclay Prime sells a $100 cheesesteak. I’m not kidding you. Waygu Beef, Foie gras, truffles, Taleggio, and other haute ingredients, have made up this sandwich.

Now, when Barclay’s introduced the dish back in 2004, the economy was rip-roaring. Everyone had money. Money to be found everywhere! So Barclay’s was doing nothing more than separating a fool from his money. Better to be in my pocket, so I can spend it, than in yours. Thus, one might be quick to dismiss this super-sized c-note sandwich as part of yet the excesses of the early 21st century.

Here’s the challenge – as much as you might want to believe that, when I talked to Barclay’s Prime, they said that sales of the dish have remained steady pretty much for the better part of a decade. They also said everyone keeps asking about the cheesesteak, and that interest in this dish has yet to wane.

Here’s another fact – in the grand scheme of expensive foods, a hundred bucks for a cheesesteak is getting off easy.

The Food Hall, in Selfridges, London, sells a ham cut that is $180 per pound (about three thousand dollars per average ham hock). The Albarragena Jamon Iberico de Bellota  is made from pigs that were only fed acorns and roots to give them a distinctive flavor. The ham is then cured for three years before being put in a handmade wooden box with an apron handmade by a Spanish tailor. And just so you know what you’re getting, each ham comes with its DNA certificate confirming its authenticity.

Serve that bad boy on Easter, followed with a brief announcement before saying the grace of, “Oh hello friends, I need 200 bucks from each of you for dinner this year.”

If you’re not a fan of pork, I’ve got some other things to share.

The restaurant, Kai Mayfair, in London, can serve you up a $200 bowl of shark-fin soup. The Buddha Jumps Over the Wall dish contains shark’s fin, abalone, Japanese flower mushroom, sea cucumber, dried scallops, chicken, Hunan ham, pork and ginseng.

Bring your VISA card, because orders must be placed five days in advance so the chef can source all the ingredients, and they don’t take American Express… (well I don’t know if they do or not, just found that funny).

I can go on and on with dishes like this. My favorite is Ramen.

Yes, Ramen. The soup you can buy like 100 buckets of for a dollar at Costco. How about paying $110 bucks for one bowl of Ramen.

Again, not kidding. Owner/Chef Shoichi Fujimaki opens the doors to his menu-less, reservation-only restaurant (Fujimaki Gekijyo in Tokyo) to those who have already dined at one of his other restaurants. Once you get access to the restaurant, you will be served the Five-Taste Blend Imperial Noodles made with over twenty ingredients and two different soup stocks.

Serious soup.

Here’s the thing I’m trying to impress on you. As marketing people, what we hear is essentially this siren song of “drop your price and sell more.” Sometimes it may be true. Most times it’s not. If your customers think your product is too expensive, the price is not the problem; it’s the perception of value that is the problem.

Perceptions can be changed. And what we perceive of value is connected (and disconnected) from its price. Studies have shown, essentially, that Lem Motlow’s famous edict on the side of every bottle of Jack Daniels is correct: all goods worth price charged.

Social psychologist Robert Cialdini suggests that in some cases, businesses can increase their sales by raising prices. This is because that in some cases, judging “value” is difficult. While it’s true that most people won’t pay more for commodities – like gasoline, milk, bread, etc., they have a much harder time discerning price competition among luxury items, or items for which unique craftsmanship plays a role (or technical skill).

For example, Holland and Holland is a firearms maker. They make tremendously crafted shotguns and rifles. Their shotguns can sell for tens of thousands of dollars (sometimes hundreds of thousands of dollars). How do I compare that – a firearm that is more of a work of art than a hunting implement – against your standard Winchester 1200 pump shotgun?

Put simply – I can’t. It’s like comparing a Ferarri to a Ford. They’re both cars – but the comparison ends there.

In such cases, the price is often the greatest indicator of perceived (or perhaps more accurately hoped for) value.

Pricing is such an important signifier, says Cialdini, that “organizations will sometimes raise their prices and as a consequence, will be seen as the quality leader in their market,” regardless of whether they’ve upgraded their offerings.

I’m guessing you probably are wondering if the $100 Cheesesteak is worth it. The money aside, I suspect it’s incredible. Are they the “number one cheesesteak leader”?

I don’t know if I can answer that question. But the fact they are willing to charge so much does indeed make them unique.

The odd thing is that when you price something for free – you’re somewhat flying in the face of Jack Daniels’ axiom of “All goods worth price charged.” When you drop the price to zero, people inherently think it’s worthless. The product is immediately devalued, even if just subconsciously. A great example of this is the Chevrolet ad, where Chevy tries to do this focus group commercial, and they hear people saying “Oh I’d pay $60K for that car,” and then the badged version of the car rolls off… and they’re all shocked. Because put simply, it’s a Chevy and not an expensive import.

On the one hand, you might conclude – oh, see, look they gave the consumer great value.

What I see is – Chevrolet threw away 20 thousand dollars because their brand perception sucks that much. Up until you put the badge on it, people were willing to pay $60K for the perceived value of the car – perhaps even $10 or 15K more. As soon as you affixed a brand to it, you devalued the car by $30K or more.

Ouch.

Ultimately how much we’re willing to pay boils down to our perceived value. That number is either greater than the costs of production (in which case, make the product), or that number is less (in which case don’t produce the product). However, there is no such thing as objective “price”.

So to be blunt, chances are you have either a perception problem (of value) or a brand problem. You probably don’t have a price problem, since people are willing to pay three thousand dollars for a ham hock.

Not to mention all these problems that when you reduce the price, you ultimately create less profit for your company, which results in you being less able to support and satisfy your customers. That drives sales down. Discount pricing can quickly be a road to beind made worse off.

Some readers will interpret everything I’ve said here as “raise prices.” That would be a superficial understanding. What I’m asking you to do is understand the value of the outcomes you create for customers. I’m asking you not to sell yourself cheap.

Now, if you’ll excuse me, all this talk of $100 steak sandwiches is making me hungry and I have tenderloin chain meat to marinate and make sandwiches.