Studio Note #25: What Are You Really Paying For?

At the venue where I recently got married, we had the option to purchase the alcohol ourselves. The venue fee included a bartender, so all we had to do was show up with the liquor, mixers and garnishes for the cocktails.

We also skipped traditional glassware in favor of high-end plastic tumblers. With only about forty guests, it made service easier, eliminated the risk of broken glass and saved the bartender from constantly washing glasses throughout the evening. Besides, when the craft cocktails are unlimited and complimentary, you're not nearly as concerned about what they're being served in.

One unexpected side effect of doing it this way was that I came away with a pretty good understanding of what it actually costs to make a cocktail. By the time we'd priced the bourbon, gin, champagne, mixers, citrus and garnishes, I had a mental tally of what was in every cup that went across the bar.

A few days ago I was out at a networking event, I glanced at their craft cocktail menu and saw drinks in the thirteen to eighteen dollar range. It's easy to look at a price like that and think, That's a steep markup.

This time, I paused.

I knew what was in the glass because I'd just bought many of the same bottles myself. The ingredients weren't expensive enough to justify the price on their own, yet I didn't feel like I was being overcharged either.

What I was paying for had very little to do with the liquor or any of the other ingredients.

I was paying for someone else to stock the shelves, juice the citrus, make the syrups, keep everything fresh and ultimately deliver a drink that would taste exactly the way it was intended to taste. I was paying to enjoy it in a room with good lighting, good conversation and no cleanup waiting for me at the end of the night.

That realization stuck with me because I think business owners make a similar mistake when they think about pricing.

We tend to calculate value based mostly on what goes into the product. Materials, labor, software, shipping, overhead. Those numbers matter because they're real costs, but they're only part of what a customer is buying.

Customers are paying for everything that surrounds the product as well. They're paying for convenience, consistency, confidence and the feeling that someone has already done the hard work for them.

That's why two businesses can offer nearly identical products at very different prices and still find customers for both.

The difference often isn't what's in the glass.

It's everything around it.