Everything has a price, they say. Whether you go to supermarkets, restaurants, salons, or in the office of a client, you will find price tags, menus, signage, contracts ‒ some label or document that indicates the price of what you're purchasing. That's how business works – a simple exchange of goods or services…but is it really that simple? Not really.
Over the past few decades, the market has dramatically changed and been disrupted more times than we can count. While the transaction of exchanging goods and services for a cost remains, how businesses thrive in a highly competitive environment is more difficult than ever before.
Customer value or the 'perception' of what a product or service is worth has evolved – and it continues to change all the time, which is why being deeply attuned to stakeholder wants, needs, and desires is so critical.
In the world of consumer goods, personal goals, values, advocacies, desired experiences, and principles play a huge part in anyone's purchase decision ‒ they must believe the 'value' offered is worth the asking price.
American businessman and investor Warren Buffet says that "price is what you pay, value is what you get". However, in the business to business professional services, the definition of value is a lot more complex because what is being sold is intangible.
As the line between physical and digital continue to blur with new technologies on the rise, how will the value of products and services be redefined?
Value is in the eyes of the beholder
Too often, businesses fail to understand that a low price alone will not drive sales. It depends on how they connect with their clients/customers.
Forbes Magazine says that value pricing is, in part, emanating from our ability to do endless comparison shopping online, in which prices move depending on who's selling and what the customer wants. In other words, the 'pull' factor of consumers wanting value for their specific situation forces vendors to create value-propositions – not simply a cost-plus-margin formula.
Strategyzer's Value Propositions Canvas suggests that to have a good value proposition, there should be a clear connection between what matters to clients and how the business' products and services can address them. Otherwise, they may look for a different organisation that will match their needs and help solve their problems.
More than the actual product or service itself, the real value that businesses deliver is the way they engage with stakeholders – the thoughtfulness, the effort to reach out and understand where they are coming from, and actually doing something to help them.
Businesses that put the time and effort into identifying a client or customer's underserved need and then translate that into new products and services, are the ones that will thrive in a competitively-charged landscape.
Digital enables the value
The tech world was early to value pricing, even generating their own acronym: SaaS, or Software as a Service. Whether you're using desktop computers, cloud storage or specialist applications for accounting and payroll etc., there are myriad services and pricing offers that anticipate perception of value and create a monthly subscription to fulfil it. The value lies in the use of the applications – not in owning the software.
Then the entertainment industry followed. When you subscribe to Netflix or Spotify, Apple Music or Amazon Prime, you are no longer owning the CD, film or TV episode, rather you are given access to the content for a monthly fee.
This reconstructs 'value.' Music and film companies used to rely on selling units of their goods (CDs and DVDs), or renting them (VHS tapes and DVDs) for a night or a week. This was mainly done through retail outlets.
But given that digital music and film is merely bytes in a file that can be downloaded, sent, and shared, the entertainment business model needed to adapt to the technology platforms. And in doing so, they spawned streaming services – e.g. Spotify, Netflix, Apple Music, Apple TV, Amazon, Disney+, SoundCloud – that have redefined value and how to charge for it. In 2021, Spotify has 158 million subscribers and Netflix has 209 million subscriptions.
Other industries have seen this success and explored ways to create similar value. In the commercial world – e.g. planes, vans, fleet cars, trucks, and computer systems – there have long been 'wet leases', where businesses see value in the use of assets, not in owning them. What is new about subscription is the use of the value model in the consumer market to individuals.
Some of the world's biggest car brands such as Volvo, Ford, Porsche, and Mercedes Benz are developing subscriptions where the company retains all of the overheads of owning a car – down to registration, insurance and new tyres – and the subscriber pays a monthly fee to use it.
The value of an idea
Value pricing is a more complex model ‒ there's no one formula to follow.
Knowledge, ideas and experiences are intangible. How do you put a value on intangibility given so many variables? In the words of Professor John M. Rathwell of Cornell University: "Goods are produced, services are performed."
In the commercial world, where you can make a judgement call on a tangible product and decide if it's worth paying the premium; in professional services, purchase decisions rely on the pervade of promises and selling the expectation of what is to be delivered.
You can't walk on the actual bridge before it's built, prior to deciding who wins the bid to build it. Luckily, thanks to technology, 3D printing, digital modelling and virtual reality, we can perceive the value that is promised.
Which brings us back to the crux of value-pricing – how to delight the client in a way that gives them confidence to pay a premium for the value promised. Although there is no magical formula, there is a simple truth. The better you understand your client, the easier it will be to give them the value they expect, for a price you'll appreciate.Click here to subscribe to Just Imagine.