Value is a a commonly used word, but has three different meanings in the world of pricing. Whenever we hear that word used by a customer, we need to know what they mean. The first two meanings of value closely relate with the concepts from “Will I? Which one?“, the two decisions consumers make when deliberating on a purchase. These two meanings consider the value of a product before considering the price. The third meaning, reference value, is the value after considering the price as part of the package. Let’s look at these three meanings using examples.
- “Will I?” value: How much do you value air? Air is essential to breathing, and breathing is essential to life. Although it’s free, you would probably pay everything you have for air if you had to. Air is infinitely valuable. For a less severe example, how much do you value driving to work? You could walk, you could ride a bike, you could take a taxi? This type of value best fits in the “Will I?” customer decision. Will I buy a car? Not which car will I buy? Another way to think about this is how much value will you get out of buying a product in the product category.
- “Which one?” value: If you are deciding between a Ford Taurus and a Toyota Camry, and the Ford Taurus costs $30,000, then how much would you be willing to pay for the Camry? In other words, how much do you VALUE the Camry? This is an example of the “Which one?” consumer decision. How much do you value one product over another? This value is how much are you willing to pay for a product, knowing the price of your next best alternative? This is also the meaning implied in the phrase Value Based Pricing.
- Reference value: The final use in pricing contexts is the value of the combination of product and price. For example after you purchase your new Taurus, you say to your neighbor, “this was a great value” meaning you got a great deal. Similarly you might also say that you didn’t buy the Camry because it wasn’t a good value. This third meaning of value relates closely to what you expected to pay for the product. What you expected to pay is also called your reference price. So a great value is when the price is much lower than your reference price.
Action: Do a search in the Wall Street Journal or New York Times on the word value. Which of these three meanings is implied by the usage? When your customers use the word value, you want to quickly determine their implied meaning so you can provide the proper response. Do this exercise to practice that skill.