Price and Value: Discover Whether Prices are Really Relative 💵
When it comes to price and value, are prices really relative? What does pricing on purpose do in creating and capturing value for customers?
Written by Joanna Wells, Author of TeamBuilder360 and Director of Taylor Wells
A classic tenant in pricing literature is that humans are not great at discerning value regarding prices. As Oscar Wilde paraphrased once, “I do not care which shoes are cheaper, but I want the more expensive ones.”
In a B2B industrial environment, we can see the relativity of prices with regards to price and value. I also want to give a real-world example below which I think highlights a couple of issues in this price value regard. I have changed a few details to protect a certain regional business model!
We have a B2B industrial market selling services by a unit. The external cost base is different in each geography but the cost to serve is the same. All businesses claim to follow a cost-plus approach and complain about extremely intelligent procurement professionals bashing them every day. The example is as below:
|State||External cost||Cost to serve||Sell price||Actual profit per unit|
|Note: price in USD$|
It is important to note that regional buying differences should not make much of an impact as the product was procured on a national basis. It was also clear that the profit margin tended to be higher when the unit price cost base was lower.
Price Value Takeaways – Pricing on purpose while creating and capturing value
I have to be honest and say I am not fully certain why this should be so. But I am interested in whether you or any of my readers have experienced similar situations.
- I assume that as the price is lower in Idaho and DC, the buyer spends less time looking at it.
- They are unaware of the cost base and so spend most of their time pushing down the higher rates.
- Is there an element of “free-riding” by the cheaper states? Are we pushing through higher rates as their state is smaller and there is less attention paid to Idaho and DC?
- I suppose people are compensated for living in Idaho!
What Does The Research Say about Price and Value?
Research theorises that we structure the price of services or products with its attributes. As a matter of fact, what we put in the mind of the consumers is how we have chosen solutions that are right for them in the long run.
When a consumer purchases a simple service or product on an immediate impulse, it’s based on human qualities and feelings. Those are emotions like fear, greed, or a desire to belong. The same can be said about the recent developments in Australia’s property market, seeing an increase in buyers as they fear missing out on housing properties.
If we compare the price and value of basic necessities such as food and water with luxury items (like expensive jewellery and bags), the highly valued item is priced lower. While the luxurious items are priced higher.
See, customers define what they think the value is. Just take a look at people’s willingness to pay in the Auction Scene and What it Teaches Us About Value. Most customers have no problem paying for a higher price in exchange for a great value.
Say, you pay for a monthly automation software or application. So, what’s the value? Well, no matter the price as long as it’s reasonable within the market range, the tradeoff is how the app saves you hours of manual paperwork and computations.
In other words, value can range anywhere from emotional compensation or convenience.
If the product is in the same price bracket as that of the competitor, the consumer will look at the other attributes of your product and if it is better. But the way you present your price could be the factor that helps the customer make a buying decision.
- “Same price, more functions”. Your product is the same price as the competitor but with more functions. So, this makes your product more attractive than the other one.
- “Same functions, cheaper price”. Therefore, your product has the same functions as the competitor but priced lower. Thus, the consumer will choose the lower-priced item.
- “Better features, higher price, but superior design”. The product is more expensive than its competitor but has functions that are user-friendly with a smooth interface design.
Price is about Communication
Price value in businesses depends on the profit made and the cost value of a product. However, pricing is not just about the money. Rather, it is a way to communicate to the consumer that the product deserves that price.
For example, a Rolex watch would not cheapen its products to compete with a Seiko watch. The expensive price of the Rolex signifies elegance and luxury. Thus, making it cheap would deter the public from buying it.
In this case, pricing on purpose is about creating and capturing value. Similarly, an imbalance between the number of buyers and sellers causes price changes. That means a higher supply with a lower demand decreases prices. While excess in demand with low supply will increase prices. Read Price Elasticity Demand Formula.
Quotes about price and value do not mean the same thing. To enumerate, the price is an indicator of what the customer is willing to buy while the value determines the benefits that the consumer gains. To define value pricing in its literal sense implies basing the price on the product benefits perceived by the customer rather than on the exact cost of developing the product.
Price related differential
Our research and consulting work at Taylor Wells show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-2.25% more margin using better price management processes. After 9-12 months, businesses are very often generating between 3-7% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Below are some ways for pricing teams to leverage their growth:
Maximising your profit – This aims to maximise the number of customers while minimising the chances of increasing prices.
ROI or ROA based pricing – It implements a cost-plus pricing method or target return x total assets and investments.
Market-share growth – This is a short-term strategy that often involves lowering your prices to levels to gain market share which can then be leveraged to increase your prices, and margins, by conversely decreasing costs through higher volumes of sales.
Brand Traits of Setting the Price on Products for their Value
When customers purchase a product, there are traits that determine which brand they’d rather buy. In essence, the choice is based on the hierarchy of traits that they place on an item. It will then be compared to the competitor’s product traits. Lastly, the final buying decision depends on which brand has better traits, subject to the customer’s perspective of value.
Implementing the value pricing method looks at the factors that consumers place on value judgment. More importantly, companies should analyse what is most important to consumers and their motivations for every purchase. This allows marketing teams to formulate more effective sales strategies and use very specific marketing tactics.
As we fail to recognise what sets price and value apart, we fail to maximise our investment opportunities. A company may be underpricing or overpricing itself than its real value. But as we establish a brand value that has an important meaning to customers, then we can Pick the Right Market Research Methods and Pricing Strategies.
- Even when the business thinks it operates on a cost-plus basis, does it really? What else is at play in the pricing structure?
- Clear implications for optimisation i.e. making the profit on the tail of services.
- Are we presenting prices correctly to the customer? Would more or less information on the cost base help or hinder a price rise?
- Price and value are not simply about money. Indeed, it is how the consumer perceives the product as having more value than just the dollar sign.
- It shows that buyers are willing to pay more if the additional features can further boost its benefits.
- Buyers are influenced by brands. Hence, a brand name reflects a consumer’s perspective on reliability and satisfaction when using the product.
- A price and value comparison is essential to consumers. Judging which items have the better price and quality in addition to extra features are relative to their value.
“Are prices really relative?” is written by Joanna Wells, Author of TeamBuilder360 and Director of Taylor Wells
Taylor Wells is a specialist advisory firm that has developed a search, evaluation and recruitment process in the field of pricing recruiters, commercial and analytics. We started our business after identifying weaknesses in the traditional agency recruitment model. Our purpose is to support management and HR to eliminate the risk of a bad hire. Workshops and diagnostics ensure pricing or commercial teams are deeply engaged with the sales and marketing teams to achieve greater levels of margin and earnings growth. We have developed our own digital platform to identify and evaluate talent and we partner with subject matter experts to help us operate efficiently.
BA/ MA Psych. CANTAB, Msc Org. Psych, Dip.Couns Psych
>>>Read more about Price Leadership and Pricing Options
From losing good staff, changing the businesses’ commodity mindset, dealing with procurement, making sense of complex pricing arrangements and managing talent and skills gaps, you face many challenges daily. The pressure of business, work and everyday life is unprecedented. Thus, it is now more difficult than ever to choose the right path for the business.
The right pricing and commercial teams can help you generate low risk, and sustainable revenue, margin and profit growth.
Leading companies like GE, DuPont and Caterpillar have all invested in their people and pricing. Over the past 10 years, they have improved their HR initiatives to build powerful and rare pricing teams to drive revenue, margin and profit growth.
TeamBuilder360 shows you how to build teams that work together to drive revenue, margin and profit growth using a teambuilder360 canvas and a wealth of real-life examples. It also gives you advice and guidance on how to build a more productive and successful career in pricing without compromising on important career choices and goals.
For a comprehensive view on integrating a high-performing pricing team in your company,
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