“Five dollars? We could get an awesome burrito with that kind of money. That will never fly.”
Pricing may be the most sensitive topic in all of business. The way a business makes pricing decisions ultimately reflects its core DNA. Is it straightforward? Is it mechanical? Is it opportunistic? In the spirit of transparency, we will open up our kimonos a bit and hope for the best.
In big business, pricing is seen as a science. It is framework-heavy, using models like cost-plus, competitive assessments, and willingness-to-pay metrics. However, we have always leaned toward the notion that business is less science and more art, particularly for small businesses like ours. We see pricing as a form of communication. It conveys a message to a customer.
First, we looked at the current “going rate” for quality boba and thought about where we could position ourselves. In San Francisco, we determined that the going rate for good bubble tea was around $3. However, we were quite aware that some places had bubble tea for $1! This approach didn’t get us very far. It was all based on subjective criteria—the “going rate” depends on the person, and given our decision not to emulate other businesses, there was no applicable benchmark.
Then, we wrote a list of pricing options and outlined the pros and cons of each. At $3, we were at par with the market price, but the economics simply did not work. We had several premium ingredients—milk, tea, and syrup—that were more expensive than the average bubble tea shop. Although we could have compromised on one or two of the ingredients, we felt strongly about committing wholeheartedly to quality milk tea by keeping all of the ingredients “top-shelf.” It just so happened that we were both reading Steve Jobs’ biography and agreed with his philosophy of preserving quality for things unseen, like the back of a cabinet.
We then began weighing two other options: $4 and $5. $5 just seemed too steep. We thought to ourselves, “Five dollars? We could get an awesome burrito with that kind of money. That will never fly.” After much deliberation, we found ourselves in the range of $4. We knew that the high-quality boba places in other regions, like Southern California, charged as much as $4.50. We toyed with the extra $.50, but that meant we would need to carry change. Sometimes, common sense is all you need. When we told our mentors about the final price at launch, they all said, “I could’ve told you that.”
Even when we locked in the price and opened for business, we had the occasional moment of regret. We knew that some customers would simply compare us to other, lower-priced bubble tea establishments. That's when we though back to the beginning. We wanted to tell our story and not be anchored by existing perceptions of bubble milk tea—a message that we want to convey through our price. If we had concentrated too hard on what others were doing, we would have lost sight of what was meaningful to us.
We hope that gives our readers a glimpse of what went on in our heads. One aspect of pricing that we didn’t cover is margins, but we will save that for a later conversion when we revisit what we will do with our profits.
The Boba Guys share their adventures in food enterprise every Monday.