Price, Value, and Biryani

What is a price? It's how much a person or company says you need to pay in order to receive a good or service, often expressed in a currency. The being said, in economics we expect this price to reflect the value/utility/happiness someone derives from purchasing a good/service. Higher price means higher payoff... or does it?

How do firms or individual set prices?

In the case of products, the firm or individual (let's call them the seller from now on), sets their price higher than the cost of their procuring the products plus a profit margin which includes how much they expect to be compensated for their effort. I think this stuff is always clearer with an example. Let's say the seller is an orange juice vendor. They buy 10 oranges for $10, and this means that they can sell 10 bottles of orange juice. So the cost of the oranges in each bottle of orange juice is one dollar. Now, unless this homie is making some pure orange juice, it's likely he'll put other ingredients in there. To keep it simple, and au natural let's say he just adds 50 cents of sugar and 50 cents of water to each bottle of orange juice.

So to produce one bottle of orange juice costs this homie two dollars. Very rarely would he price the orange juice at anything less than two dollars, but it can happen (don't want to get on a tangent). So, how much more than two dollars should he set his price?

This is the topic of this article.

I first thought about this question when looking at the difference between eating a Raising Canes meal, and biryani from a dope ahh Indian restaurant. I was shocked that the price of the biryani was less than half the price of a similar Raising Canes meal. It got me tweaking. Why?

When we think about how much more than their costs sellers charge we have an expectation that it is in alignment with how much value we are receiving from their efforts. Back to the third sentence of this post ^^

Applying this framework, the homie selling orange juice should prices his orange juice at how much additional value he's putting into the orange juice. Maybe he's comfortable making saying he puts one dollar of value to compensate his labor, and then 10 dollars of value because of how happy it makes people. Doing this he gets a price of 13 dollars per bottle of orange juice.

I feel like the natural response to that is; that better be some really good orange juice! This also reflects that this seller is assigning 10 dollars of value into how happy orange juice makes someone, which is a lot tbh.

Back to Canes and biryani. It's helpful that Raising Canes has an incredibly simple menu: chicken tenders, french fries, bread, and coleslaw. They also benefit from hugeee economies of scale by virtue of being an international franchise. I say all that so that I can conclude it costs less to make Raising Canes than it costs to produce biryani.

So why the difference in price? With our earlier discussion the difference between the price the seller charges and the costs that they have is their determination of the value they provide, this must mean that Raising Canes must believe they are providing significantly more value to people than biryani. Which I think gets to the crux of my issue, and why this bothers me so much. I'll also add some numbers to illustrate my frustration.

Let's say the biryani costs 1 dollar to make, and the Raising Canes meal costs 50 cents to make. And then the seller sells the Raising Canes meal for 20 dollars, and you can buy the biryani for 10 dollars. This means that the sellers believe that Raising Canes is providing 19.5 dollars of value to the customer while the biryani is providing 9 dollars of value.

There's no chance fast food is more valuable to customers (can't speak for everyone, but I really hope I am) than biryani.

Now before I lose my entire mind, I have to admit it's incredibly hard to put a dollar amount on how much value something gives you. Further, you don't always have full options to express all the different dollar amounts of value you could pay so you sometimes get stuck.

I'm ashamed to admit it, but there was a time where I would purchase the Raising Canes meal in spite of my strong disagreement with their valuation. Why? Well, I can't eat biryani every single meal of every single day, and the Raising Canes meal has a lot more protein than the biryani and a homie is tryna get swole. But if I could find someone selling a similar amount of protein at a similar level of cleanliness I would replace Raising Canes in heartbeat, and that's what I ended up doing later with a kebab restaurant.

Extended Reflection

The real thing I'm trying to speak to with this reflection of price and value is not about biryani, Raising Canes (all love, I really like the founder), or orange juice, but instead about how little I feel sellers generally think about the prices they charge and how misaligned those prices can be with the value that they provide. But, this creates an excellent opportunity for disruption for the people paying attention.

In addition, this discussion has helped me evaluate how I price my own products or services. Because I think there's a strong distinction between a company like Raising Canes and the biryani restaurant. Honestly, I'd be willing to pay a lot more for the biryani than what they're charging because I feel like I'm getting more value than what they're charging. Because the Indian restaurant has got me feeling this way, I've probably spent 50 times as much with them than I've spent with Raising Canes. That's the kind of feeling that I'd like to provide for people when charging for anything. A price which makes them feel like they got a great deal and keeps them coming back.

In order to do this, I believe you've got to spend an reasonable amount of time thinking about your pricing and how it affects what your customers think about your product or service.