Value versus Price

What's it worth to you?
Isn't that the definition of value?

The question that gets asked is, "What's it going to cost"?
That's the wrong question.

So much emphasis is placed on price these days. I tell clients that price, on the most part, does not matter. When we think about pricing a product for sale, the only question that needs to be answered is what is it worth to someone else.

Most entrepreneurs try to compete in the marketplace with a reduced price. Being a low cost provider is a poor strategy for most businesses. Notable exception being Walmart.

You're probably not going to be a Walmart type business in your category any time soon. So don't be the cheapest in your category.

Here's why.

1. Price is the easiest thing to copy and improve on. Competitors pay attention to others pricing strategies to copy them or beat them if they perceive a loss in market share. This is called a race to the bottom in which there will only be one business standing when it's over. And the one standing will be the one who is the most financially secure at the start of the process.

2. If the product or brand does not have qualitative differentiation in the marketplace, the product is dangerously promoted as a commodity. In the commodity marketplace, the only thing that matters is price. Whoever is cheapest wins the customer's business. It is not a sound strategy to have customers who don't care about a company. Customers who switch to competitors the minute prices are lowered are not good, nor loyal customers.

3. When the commodity game is played, loyalty is non-existent. Margins are miniscule as the entrepreneur lowers prices to remain competitive. If margins are halved, entrepreneurs have to work twice as hard to get reasonable profits. Working much harder in a low price environment with less financial rewards seems ridiculous. For example, would you rather sell a cup of coffee for 50 cents or for $5.00? There will be less customers if coffee is sold for $5.00. But at an average cost of 10 cents, profit is $4.90 for every cup sold versus 40 cents in the former option.  At 50 cent coffee, 12 coffees have to be sold to every one at the $5.00 option. Don't question the expensive coffee as an entrepreneur. Ask what value has to be given to get the customer to believe that $5.00 coffee is worth the purchase.

My wife is a sales shopper. Her favourite stores have trained her to wait for the special. She no longer believes the list price is the worth the value of the item based on periodic sales promotions. There are many like her who wait for the product to be discounted before they buy.

Discounting is an excellent way to encourage people to buy. If you're trying to move old stock, perishables, or discontinued items, discounting can be a great way to get it sold. Discounting is also the lowest form of marketing. It works. Discounting strategies bring customers in to buy. But at what price? If used incorrectly, customers will quickly learn that the value is less than the list price and wait for the discount, thus slashing your expected annual returns for short term profits.

Good entrepreneurs are long term growth visionaries not short term profit oriented junkies.

XYZ cement company was trying to figure out how to charge more for their bags of cement, when all the competitors were selling it around $5.00 per bag. The product was a commodity. Everyone knew it. With no competitive advantage, the braintrust of XYZ increased the price of their cement to $1000 a bag. At that price no one would truly buy their cement if the value in customer's mindset didn't increase. So XYZ increased the value proposition by including architect consulting, access to an engineer usage of computer drawings to aid in the design of the structure. Every bag XYZ sold was equal to 200 bags from their competitors. They became the leader in their area. They were extremely profitable and demolished two competitors in the process.

Value is the only thing that matters when pricing your product. He who provides more value to a customer will be positioned to thrive.