Ever tried to define the value that you offer your customers? A price is the dollar sign on a product, the tag on the item for sale, but that is not the same as value. I’ve been mulling this over lately, and wanted to share some of my thoughts. While this post is somewhat of a textbook discussion, it lays important groundwork for additional posts.
Pricing of products and services has traditionally been cost-based, determined by adding a desired profit to a cost determined by cost analysis. That is, the seller/vendor figures out what the product cost is in terms of parts, materials, labor, sales/marketing, packaging, shipping, etc. Then, s/he added the desired profit margin, say 25-35%. Or, the lawyer/doctor/consultant charges hourly fees in an attempt to place an arbitrary price on a service that portends to cover operating costs plus the alleged value on professionalism.
The cost methods are not value based because they don’t clearly and unambiguously determine what value means to the customer.
In traditional costing, the attitude has been: “here’s the price; take it or leave it.” Small businesses hanging onto this tradition may not be serving their customers well – and are leaving money on the table. The tradition does not understand that a customer’s opinion of a product’s value determines the value to him or her. This value differs from the market price which has typically determined by competition and accessibility.
I find that customers buy from the source that offers the highest perceived value; i.e., “the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives. Customer perceived value is the exchange a customer would be willing to make before dropping down to the next offer.”
Small business customers do not place the same value on three martini lunches, big promotional items, or glossy marketing efforts. Frankly, they do not care what you paid for the item or how the economic crunch is hurting you.
Customers are more interested in the following:
- Overall, do you convey an image that respects your own self-image?
- Do you communicate frequently and with a caring attitude?
- Are your services offered on a timely and dependable basis?
- Are you available and responsive?
- Can your customer expect fairness and accountability from you?
- Is your work efficient and effective?
- Do customers feel they have learned something about the services/product and about what you have brought to the party?
- Do customers feel they have done the right thing – and that you have done right by them?
Notice that these are criteria separate and distinct from market values. For example, I knew a newly hired marketing manager at a manufacturer who promised to secure customer loyalty by delivering product as soon as possible. Trouble is most of the customers did not want the product until a specific later date because they did not have storage room. So, in this case, prompt delivery was not a value to the customer.
Small businesses can do better if they realize that loyalty is a strategy and not a tactic. Loyalty is not to be presumed. Target loyalty as a goal worth securing and developing – rather than as something you can bank on.
How you move from cost pricing to value-based pricing may be difficult. You may be turning around a big ship. And, the move may be more treacherous in some lines of work than others. I believe there is profit in making the move sooner than later, but here is the big question: How do we clearly and succinctly identify what it is that our clients value? Stay tuned…
by Steven Schlagel