YOU Create Value, Price Only Captures It

The value of a product or service is measured by how much your customers are willing to pay for it.  The price you charge is your best estimate of your customers’ willingness to pay.  In its simplest form, your potential customers compare your product with your competitor’s product and your price with your competitor’s price.  If they decide to buy a product in this category, they will buy the one that they think is the best deal for them.  (The term product in this context means products, services, and all of the pieces of the offering like warranty, support, delivery, etc.)

So how much can you charge for your product?  It depends on how much your competitor charges AND MOST IMPORTANTLY how your product is different from your competitors.

If your product is better than your competitor’s, the amount you can charge is the price of your competitor’s product PLUS the amount your customers value your product over the competitions.

If your competitor’s product is better than yours, then you will charge less than your competitor.  Your product then appeals to the price sensitive buyers.  Firms who compete on price focus on keeping their costs as low as possible.

You create real value by improving your products and services relative to your competition, or if you are competing on price, by lowering your costs.

However, consumers don’t buy real value, they buy perceived value.  What do they think about your product?  You may have the best product attribute in the world, but if the customers don’t know or believe that, they won’t pay you a premium for it.  Marketing is about making sure your customers perceive the value you offer.  The best and easiest marketing plans though are about making sure the customers know your real value.  In other words, build real value and communicate honestly about it.

Price turns perceived value into revenue.  Think of it like a value scorecard.  The more value you create and communicate, the higher the score.  As a businessman, you should spend more than 80% of your effort creating real and perceived value for your customers and less than 5% of your time on keeping score (pricing).  (The other 15% is all that bookkeeping and administration stuff we have to do.)  One fantastic byproduct of studying pricing is it will point out areas where you can focus on creating more value.  More on this in later blogs.

Action:  Select one of your products and compare it to your closest competition.  List all of the differences both in your favor and in your competitor’s.  Be sure to include all of the extended attributes like service and warranty.  Think of a single customer and estimate how much that customer knows about and values the differences.  Now brainstorm at least 3 actions to increase your real value.  Brainstorm at least 3 actions to increase this customer’s perception of your value.  Do any of these actions make sense to implement for your business?