Posted by: Bill von Achen | April 22, 2011

It’s Not Always About Price: The Value Proposition in Pricing Your Products

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” Warren Buffet

Perhaps no competitive issue raises greater concern among business owners than the pricing of their products and services. Charge too much and you risk losing business and market share to competitors. Charge too little and you might win more business in the short term, but you’ll reduce your profitability and potentially put your company at risk. No wonder setting and maintaining optimal pricing is such a balancing act.

Last Thursday’s Small Business column in New York Times presented examples of small business owners who have raised prices and lived to tell about it. (You can read the article by going to our Resources page and clicking on the link under “Pricing.”) The article’s key message? Price isn’t everything, especially for those who fully understand the value of the product or service they’re buying.

Think about the last time you picked a restaurant for an important business meeting, or a milestone celebration with your husband or wife. No doubt, you definitely considered the restaurant’s atmosphere, and the service you could expect to receive, and whether they were appropriate for the occasion. The quality of the food and wine might also have been a factor in your choice. But, unless McDonalds is your idea of fine dining (pity the poor spouse!), the issue of price was considered only after the other issues were evaluated.

In the same way, when it comes to important business decisions, astute buyers never evaluate a product or service on the basis of price alone, but instead within the broader context of the overall value that they’ll get as a result of their purchase. And that means that pricing your product on the basis of the value that it provides the buyer is the best way to maximize your profits and ensure satisfied customers.

A value-based pricing strategy doesn’t mean that you won’t encounter buyers for whom price is the only meaningful criterion. In such cases, buyers typically view your product or service as a commodity, with your offering virtually interchangeable with those from other vendors. If your buyer doesn’t clearly see how your product is different from the competition, or doesn’t value that difference, your only hope is to be the low-cost supplier in your marketplace.

But, even in these cases, some buyers may simply be uninformed or misinformed about the true value proposition. Depending on what you’re selling, your value proposition might be your product’s lifetime ownership cost. Or, it could be the efficiencies or projected total savings that buying your product or service can produce. (If you’re not sure about the value that your product actually provides, start your discovery process by asking your customers!)

A successful value-based pricing strategy is not driven by marketplace trends or on how your competitors are pricing their products. Instead, it depends on how effectively you educate your customer about the true value of your offerings, and why buying from you represents the better value choice. No one ever willingly pays more for a “me-too” product than they have to. But they will always pay more if the perceived benefit is greater than the cost. By focusing on the value that your product or service provides, your offering will look like a bargain at any price!

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