Customers are after two things: the best price and the best value for their money.
Naturally, you want to provide the highest level of value for the lowest price and still make a profit. Think that’s easier said than done? Read on to learn how you can provide the right level of value for the right price, without leaving money on the table.
When price outweighs value, customers simply will not buy. When value outweighs price, customers will buy, yet companies won’t reap the rewards they’re entitled to. In trying to deliver the best product-service offering to customers, companies sometimes give away too much, leaving significant incremental revenue unrealized. So, how can you tell if you are delivering too much value at too good a price?
To understand if your company is over-offering, it’s necessary to understand the price/value relationship. In a price/value map (below), customers’ perceptions regarding the fairness of price are plotted against their perceptions of the fairness of value in order to give a strategic overview of the competitive situation. The diagonal through the graph can be described as the fair value continuum. Any point along this line is where price matches value-whether or not this is the best point or your company is relative to where your competitors lie. In general, residing on the line is a good place to be when competitors reside on that line as well.
Value-based pricing requires constant price adjustments to ensure all potential revenue is being captured. Pricing too high will result in your customers migrating to the competitor who seems to offer more value at a better price. On the flip-side, providing an abundance of value for too little a price will undercut your own profit. In that situation, it’s advisable to either raise the price or to reduce the amount of value by unbundling the product-service offering.
One SPMG client, a large food service retailer, recently found itself in the situation where it was offering too much value for too little price-a potentially dangerous situation. When a company charges too low for a high-value product, customers may start to question quality. Since price plays a role in the perception of a product’s quality, a low price may convey the image of a low-value product. This organization was extremely concerned with value, as delivering superior value to the customer was entrenched in all branches of its product offerings. Consequently, as the organization did not want to unbundle the value, it raised the price.
The decision whether to reduce price or to reduce value is a strategic one and should be aligned with the company’s goals and values. Understanding and communicating the delicate balance between price and value will result in customers who feel they are getting the most for their money and allow organizations to optimize their profits.