High cost to produce doesn't validate high price

When we start talking to a client about their service or product one of the first questions we ask is: how do you come up with your price?

It's a fully loaded and important question. Sometimes the answer is because it's in a competitive range. Oftentimes they rattle off a margin that they want to hit and work forward from the cost to produce. Other times we get a blank stare. Rarely do we get a straight answer.

This whole pending Silverdome deal got me thinking about cost vs. price. There's an uproar across the region about the $580,000 sales price for a building and property that cost $55 million to develop and build nearly 35 years ago.

Yes, that is pretty sickening. It's an outrageous difference even in this economy. But I challenge you to ask yourself, why is it worth more? Isn't anything only worth what a buyer is willing to pay? A realtor can show me listings up and down my neighborhood, but until I see recent comps it's all talk.

We've all seen a businesses create products that are priced right out of the marketplace because the cost to produce is just too high and their need for worthwhile margins is too vital to their success. That model doesn't work in the long-run. The enhanced value and differentiation is what gives margin its meat.

I remember reading about IKEA's model for producing and pricing new pieces of furniture. They give their designers the price (or the cost to produce, not sure which, but a starting point nonetheless) of the desired piece and then let them build it within that framework. Makes perfect sense to me. Why don't we all look at our products and services in that light?

Now let's get back to the Silverdome. Sure, this big white tyvek elephant sitting along M-59 and Opdyke is going for less than an average home in Birmingham, but look me straight in the eye and tell me you wouldn't want an average home in Birmingham over a huge, vacant building in Pontiac that supposedly costs $1.5 million a year to maintain.

You see, the market for the Silverdome is extremely small. You're only going to attract developers with another use for the land or business people interesting in bringing in large sporting events or concerts. There are two options for the property — destroy and redevelop or use it. Both come with a hefty pricetag in addition to the sales price. Just because the building is massive, impressive, hosted a Super Bowl and Wrestlemania and takes up a major footprint in the middle of Oakland County, doesn't mean that it's desirable to a whole lot of people.

When your product isn't desirable to but a few, it's just worth a whole lot no matter how big and impressive you think it is.