Value vs. Price: why lowering prices is not the best way to compete
We should not compete just for price, which is an unproductive battle.
The price is important in the purchase decision but should not be the only buying reason. If we do not have differentiating advantages, or when customer perceives similar products or services, he decides just for price.
So that it’s needed adding new ideas and concepts, add value to avoid competing only on price. The salesperson needs to persuade with a value proposition, aggregate value to his offer to find advantages that differentiate him.
In short, we have suggested that the price is just one more variable in the perceived value scales of customers and consumers, and not the only component. It is best to explain it with a simple formula that everybody will understand:
Perceived Value = Total benefits and/or advantages — Total costs and/or prices
Customers always perform a mental operation, sometimes more unconscious than rational, and sometimes very calculated, to know when buying is positive. To justify the purchase, they make a balance between benefits and sacrifices perceived in the supplier’s offer, and the perceived value by the customer is based on the difference between what they receive and what they give.
In this formula, the first is the whole set of economic, functional, abstract, psychological (such as brand, quality, etc.) benefits and advantages of the product or service, and all the added and differential values. The second term includes all prices, economic costs, and also time, energy and psychological costs.
It must be stressed that part of the costs are also the time that is used to make a decision, also the time spent in making use of the service, the psychological cost (e.g. against a particular brand, or stop using the usual product to change to another) and the cost of energy spent or effort for the purchase and enjoyment of the service.
The customer will also make this assessment with your competition:
- If the perceived value of your product is greater than that of the competition, he will be inclined to your offer, and vice versa.
- If the perceived value is negative, the price is the barrier, and generally he will not buy. Or he will say that it is very expensive, he perceives nothing beyond the price.
- If the perceived value is very small, the price and the consequent price war may be what decide if he buys from you or from the competition, he will buy the cheaper, or not buy.
- On the other hand, if the perceived value of your product is very high you will sell more and better.
The value proposition
It is the seller’s job to increase this value, making the customer perceives and properly assesses the full set of benefits, including here all the factors, subjective and emotional advantages and added ideas to counter the price force. In this sense, the price and value of a product are not the same. And so we say that the price is not or should not be the only reason to buy, it is not the only element of the equation, unless we do not make any value proposition.
When a customer is asked how they perceive the value of a product, they are actually being asked to compare it with their perception of other existing purchase alternatives. And therefore a product is not expensive by itself, the answer is: ‘expensive compared to what?’…
In short, the value proposition is to explain to your customer why they should buy from you and not to your competition. This must include the whole range of benefits and advantages of your product or service that solve their problem and meet their needs, and your differential value. In other words, to provide a higher perceived value to the customer.
The dynamic perceived value.
The ‘problem’ is that this scale of customer values, this perceived value, is subjective, is abstract and it is a dynamic variable, changing, but not only from yesterday to today, but also from one day to the next. That is, the valuation of the customer is different before the purchase, at the time of purchase, while using the product, and after using the product. There is an initial, middle and final perceived value.
Furthermore, it changes with each client, it is subjective, so for each client, or customer type, each market segment or niche, you have to make a different value proposal, because ultimately we are people, and we value differently the same advantage, we have different sensitivities, as well as different economic capacities that will also affect the appreciation of those advantages.
For the same product, different customer segments perceive different values.
There are also companies that play with the initial and final perceived value, looking to satisfy their customers by promising something they can deliver, and deliver after more than they promised or surprise the customer with small details that were not in the initial accepted formula, values that were not expected. But also the opposite happens, disappointing the client with a final perceived value lower than the initial, and that is not what we want.
Reduce prices is not the best way
Well, despite being a formula, it is not accurate. That’s why the ‘easy’ way of that formula is to lower prices, but this does not always mean that demand rises, and it also generates another spiral of problems. Just like raising prices, it also needs to increase the perceived value of the product to be able to raise the price without problems. It is a Price vs. Value balance. In today’s competitive and changing world, the best way is to increase the value of our product, not to reduce prices. Rather, even to increase the price, if and only if, we increase our perceived value.
Therefore, companies and salespeople must deal with the perceived value of their product in the customer’s mind, which is a continuous job.
Furthermore, building customer loyalty, as result from their satisfaction degree, will depend on the good or bad management by the seller and the company of that perceived value in relation to the initial expectations. That is, customer satisfaction and his loyalty will depend on the difference between the perceived value and the expectations. But that’s another story. One that is priceless…
(published originally in Linkedin)