The majority of customers still pay for value when they can see it and quantify it.
In part 1 we dismissed the argument value is ‘vague’ by demonstrating there are only three things any buyer buys - image, innovation or time savings. This realization has the added benefit of removing complexity from the value pricing process. Then we looked at a sample result highlighting the fact that value-pricing results are demonstrable. Now we’re going to discuss two concerns many business leaders express, that value is a moving target and that price pressures prevent consistent use of value pricing.
There is no question value changes over time and that, in todays’ world, change occurs more quickly than ever before. Movement through a product’s life cycle from innovation to mass market, and the to saturation, occur at an ever-increasing pace.
This reality doesn’t alter the fact that early adopters of innovation often pay 3 to 4 times what the mass market pays. It simply means the mass market is going to enter the market earlier than it did previously.
Once we realize basic buying habits haven’t changed, and the only difference is when buyers enter the market, we find value pricing is easier to implement than expected. We have the same pricing triggers that let us know when it’s time to lower our price for the mass market or for the late adopters, assuming we even want to serve that group.
The key is to realize value has always changed over time and the majority of customers still pay for value when they can see it and quantify it. Those are our challenges, to identify what customers value, provide that value, quantify the value for them so they can see it and then communicate that value effectively. When we do this work for them, our customers reward us with premium prices.
Doubt that? Then why do Mercedes buyers pay 7.5 times as much as a Chevy Aveo buyer for a sedan? Why do Nordstrom’s customers pay 12 to 13 times as much for a sweater than a Walmart customer? Buyers continue to demonstrate a willingness to pay premium prices to get what they want, yet we ignore their pleas and focus our attention and theirs on price instead of value. Shame on us.
That brings us to the question of price pressures - from our competitors and customers.
Nothing keeps business leaders up at night as much as the fear of not being ‘competitive.’ That’s why competitors’ pricing and customers’ challenge “...but your price is too high” put so much pressure on them to lower prices.
Fear is an ugly thing. It triggers an emotional reaction. Emotional reactions preclude objective analysis. If it didn’t, then why would we see so many businesses following their competitors down the rabbit hole of reverse auctions? Why do we see earlier and more frequent discounting during peak selling season? Why do we see businesses giving away ‘improvements’ in their offerings instead of charging for them? Why do we see businesses invest heavily in process improvements only to give away the savings in lower prices?
Absent the fear, we’d quickly realize that when we relinquish control over our pricing to our competitors and customers we become one of many providers. We commoditize our offerings, which serves to validate our customers’ limiting perception that what we’re offering is a commodity.
Conversely, when we’re able to look those customers in the eye and say, “This is how we’re better, this is the value you’ll get and this is why our price is...” we establish ourselves as leaders in our industry. And leaders, by virtue of their nature, command respect. When we establish that leadership role, we distinguish ourselves in ways that are attractive to the vast majority of the people in our markets and we do so at higher prices than our competitors get.
The choice is yours, cave to price pressures and commoditize your offerings or distinguish them by demonstrating value and commanding prices commensurate with that value. Choose wisely.
Hopefully I’ve been able to demonstrate that value pricing:
- Isn’t as vague as previously thought
- Isn’t as complex as you imagined
- Can produce measurable results
- Is no more a moving target than it was a century ago
- Is the antidote to pricing pressure from competitors and customers alike
If you’re not using value pricing, you’re not only leaving a lot of money on the table; you’re depriving your customers of the ability to make informed buying decisions. If you truly care about your customers that should be motivation enough.