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Part of running any sort of effective business is a basic understanding of value and worth the way economists understand them. In order for your business to fit into the marketplace profitably, you need to understand something about the basic principles of how price is determined.

How Much is Something Worth?

Without getting too far into the philosophy of it, the answer to the question of “How much is something worth?” is actually answered very easily: “Whatever people are willing to pay in order to obtain it!”

The entrepreneur knows this idea by heart. How much something is worth to someone is, at its core, a totally subjective idea. It’s something they “feel” more than something they can measure. A glass of water is worth more to a thirsty person than it is to a satisfied one. An autographed picture of a movie star is worth more to a fan than it is to someone who is unfamiliar with the actor. Brand-name clothes or designer shoes tend to mean more to a person who values appearance more than they do to someone who is more interested in function.

But if worth is such a vague idea, then how do you set a price for something? If the value of a certain product can vary from person to person, and they will pay different amounts for it, how do you decide how much to charge for it? The answer is a combination of knowing your customer base, and understanding the economic ideas of Supply and Demand.

Supply and Demand

Although Supply and Demand are actually pretty complicated ideas, you only need to understand them on a basic level to use them in business. Supply refers to how available a product is for purchase, or basically how easy it is to get. Demand refers to how many people want a product, and how badly they want it.

When demand goes up for something, so does the price. When supply goes up on the other hand, the price declines. In other words, the “market price” for something is the place where supply and demand agree about what something is worth for the majority of buyers and sellers.

Let’s suppose you are selling tickets for a sporting event. You have tickets for four-hundred seats in the arena where the game is being played, and you want to make the most money possible selling those four-hundred tickets. You know from selling tickets before that you will sell all four-hundred tickets and have to turn extra people away if you charge $5.00 each, and you will sell three-hundred tickets and have one-hundred left over if you sell them for $7.00 each. Supply and Demand are meeting somewhere between those two values: the place where you sell the most tickets, for the most money.

But what if this is a championship game, and more people are interested in attending? As the Demand goes up, you will find that you will sell all four-hundred tickets and still turn people away with a higher price, because more people want to see the game. The opposite can also occur: if the stadium expands its size so that more vendors are selling tickets and more spectators can attend, the price you can get per ticket will tend to go down because the seats are easier to come by and competition among the sellers is tighter.

You learn about where supply and demand meet by studying the market around you. What are other businesses who sell the same thing selling it for? What costs and services are they adding in do determine the price they think is “fair?” Do you have the same costs to compensate for? Do you add the same services?

Knowing Your Customer Base

There is more to the worth of products than simple supply and demand; quirks in your customer base can also influence price. Sometimes customers will be willing to pay for intangible things like convenience and customer loyalty. When you know the tolerance of your customer base for these sorts of things, it can help you to know what prices you can charge.

For online businesses, watching for these quirks can be especially important. If your website doesn’t ever come up in your customer’s internet browser searches, you’ll never sell products, no matter how in demand your products are or how low you can get your prices. On the other hand, customers may be willing to pay a premium for the convenience of not searching out multiple online stores if you offer an inventory that fits all of their needs in one place.

Learn what the customers in your niche want. Will they pay a little extra for better descriptions and information about products before they buy? Will they accept a slight markup for a website that offers them everything they need in connection with the good or service you’re selling? Do they want to purchase larger (or smaller) volumes than what is available in other stores? Will they come back to you again and again because of the quality of your customer service? Will they recommend their friends to you?

Conclusion

All retail, online included, works around these vague principles of worth. No one group arbitrarily declares what things are worth in the marketplace; the value is determined by something much bigger than any one customer or vendor. It’s a marvelous thing to watch really, as different customers and different vendors, all with different needs, negotiate together to decide how the market is going to price its products.

As a business owner, you’re part of those ongoing negotiations. You add your voice to the conversation by how you run your business, serve your customers, and price your goods. As you watch the shifting all around you and learn to play along, you will find countless ways to become more profitable.

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