What Do You Use It For?

Price the problem you solve. Not the steel and labour it took to solve it.

As a young supervisor for a construction firm I was often called upon to get specialty metal components made. It could be for a machine, a custom connection for a customer's HVAC unit, or a new product part.

My go-to person to get this done was a Mr. Breda. Breda had a machine shop close by, and over time I built up a relationship with him.

When I told Breda what I wanted, he didn't say, "let me price it out and get back to you." Instead he would invite me in for coffee and have a chat. During these chats he would always get around to finding out from me what problem the part I wanted solved.

If I said I needed it yesterday, rush job, and it would save me $10,000 because I could get the crew off site the next day, he would hum and haw and come back with a price of $5,000. I would say OK. This was a win-win, and off I would go.

Breda, true to his word, would have the part ready for me the next day.

Now you may be wondering why I didn't negotiate for a lower price. I could have, but I was still $5,000 better off than waiting a week for the part. That would mean delaying job completion and customer billing. Plus a repair crew to go back and complete the job. Way more than $5,000.

Breda, for his part, was smart. He didn't look at the steel involved, let's say $100, and the labour involved, let's say $200. A lot of people would do that. Then they would mark up the work by 35% to get a quoted price of $300 × 1.35 = $405. The quoting process also would have taken time, and I probably would then get a couple of other prices before buying.

Breda knew the value of the part to his customer. Then he priced based on that, so everyone won. He never once asked me what I thought the part should cost. He asked what I was going to use it for.

You're probably thinking: fine for a machine shop doing one-off rush jobs. I sell a product with a cost sheet and a distributor who expects a markup.

I thought the same thing.

I tell this story because years later, after developing the U-Flow seal, there was a lot of pressure to sell it at cost plus markup. The part cost about $5 to make back then, and typical wisdom was to mark it up 35% and sell it for $6.75. This was what distributors were used to.

Instead, I knew the seal solved a $10,000 problem. Without it, contractors would have to remove roof drains from the deck and purchase new ones. So I knew that I, as a contractor, would buy it at $100 and not think twice about it. So that was the price.

Down the road I was proved right, because we had no problem selling them. U-Flow went from a zero-revenue startup to sales of over $1 million in year one. Also, like the Breda example, this got crews off site quicker, and it was an extremely small part of the project price. No one worried about saving a few percent off a $100 part.

Years later we built an entire pricing model around this. We got into custom roofing parts, like Breda, and priced them according to the problem they solved — not the cost plus markup it cost us.

Here's what that one decision did to the numbers on a single seal:

Cost-plus would have put $1.75 of gross profit on that part. Pricing to the problem put $95 on it. Same seal, same $5 of material, same shop.

Two things have to be true for this to work, and Breda had both. You have to know what the problem costs the customer — which means asking, over coffee if that's what it takes. And you have to be able to solve it fast, because the $10,000 only exists if the crew gets off site tomorrow, not next week.

So the question is: what product or service can you charge more for if you know what it solves, and you can quickly solve the customer's problem?

Your cost sheet tells you what it took to make. Only your customer can tell you what it's worth.

One next step: Pick one part, product, or service you quote regularly. Before you price the next one, ask the customer the same question Breda asked me: what do you use it for, and what does it cost you if you don't have it? Write both numbers down beside your cost-plus price. If the gap is big, you've found your margin.

Further reading:

• Predictably Irrational — Dan Ariely (HarperCollins, 2008). Why price is relative, not rational — and why the $100 part looks cheap beside the $10,000 problem.
• Playing to Win — A.G. Lafley and Roger L. Martin (Harvard Business Review Press, 2013). The Olay story: P&G tested price points and found the higher price sold better because it signalled what the product was worth.
• Influence — Robert B. Cialdini (HarperCollins, 2006 revised edition). The "expensive = good" shortcut, and why a low price can make a customer trust the part less.

Ready to Find Your Margin?