Why does one product carry a bigger price tag than another? Often the quick answer to that question is that the higher-priced product costs more to produce, but that might not really be the whole story. 

It’s crucial to understand the fundamental economics of transactions. No matter how much an item costs to produce or to deliver to a market, it is only worth as much as someone is willing to pay for it. This is a free-will deal between a willing buyer and a willing seller. The deal happens only if the buyer sees the value of the product and is willing to pay the price, and the seller makes enough profit and is willing to accept that amount for the item.

This is why market forces often conflict with manufacturing costs and profit margins when it comes to pricing woodworking products. It’s also how segments of the market are frequently disrupted to change demand and pricing structures.

For years, the North American furniture market used a model of products built with lots of hand work and sold through distribution channels to retail outlets. Often these products had to be ordered, had custom features, and there were long lead times before eventual delivery to the retail customer. Labor and time were the key cost factors, creating pent-up demand at the retail end as customers waited patiently for the products, thus boosting demand and perceived value.

But lower cost labor overseas and an unwillingness in the industry to adopt modern automation and manufacturing methods allowed lower priced offshore products to enter the market. Those products were mostly from Asia, but a European competitor really upended the market. When IKEA started offering affordable furniture that people could assemble themselves, it helped change the whole public perception of the value of furniture. Why should I wait weeks for a table, when I can pick one up today and quickly assemble it for way less money?

Of course, you can argue that the IKEA table and the American furniture factory table are not the same thing or the same quality. But the point is that customers didn’t care about the differences. They wanted a table today, not six weeks from now for twice the price. They didn’t see the added value or weren’t willing to pay that much for it.

Wood products that required custom installation, such as kitchen cabinets, managed to maintain more value in the eyes of customers, but still low-cost competitors, including IKEA, have made inroads.

What are your products really worth in the eyes of your customers? What do you do to educate them about the value? How do you compete with prevailing value perceptions? Until you can answer those questions, it really doesn’t matter what it costs to make your product, and it likely won’t sell at a high enough price for you to make a profit.