Ways to Estimate Value When You Just Don't Know How to Price
President and CEO, CSSP, Inc.
One of the hardest things to get right, strategically, is the true value of your product or service. This is understandable, since the only true measure of value is what an individual customer will pay at a specific point in time. Most of us look at our costs- commodity based - or competitors' prices- also commodity based - when thinking about pricing. This is silly when pursuing a specialty strategy, since the customer is your best source of value information.
Some companies, realizing this, will ask their customers directly what the value of a product or service would be. While this can give you decent guidelines for pricing, we should be aware that customers won't verbally answer this question the same way they would if they were actually reaching into their wallets to buy your product or service. Indeed, in many situations, customers will consistently under-report the prices they would be willing to pay, because they expect their answers will cost them in the future. Fortunately, there are a few other clues we can look at to help us with our thinking on prices.
Substitutes are a rich source of information about value. There are three key substitutes you should be aware of in pricing: (1) Directly competing products, (2) Indirectly competing or combination products, and (3) the ultimate substitute, not buying anything at all.
- Measured changes
This source of value information relies upon the impact of purchasing your product or service. Sometimes, this is very direct - using a product or service may save your customer money that they would have spent on something else. A super simple example would be drinking cheap beer instead of expensive champagne - you know the value is no more than the price of the champagne, since the customer will save that much by switching to another (if inferior) product. Another example would be consulting services - if working with a sales trainer, for example, is guaranteed to increase your sales by a certain amount, you would expect the cost to be less than or equal to that net value.
- Actual buying behavior
Without question, this is the best data on value. When a customer buys, you know that the value - to that customer - is greater than or equal to the price. Conversely, when the customer does not buy, you know the customer's perception of value is less than or equal to the price. If you have many, many pricing opportunities (such as in retail sales), you may want to rely very heavily on this data, as long as you have a good means of tracking buyer behavior.
How do you set your pricing? Given that 90% of pricing errors are under-pricing, what do you do on a routine basis to evaluate how your pricing fits with your company's overall strategy? We'd love to hear any stories you have about what is - and isn't - working.
Robert W. Bradford is CEO and President at the Center for Simplified Strategic Planning, Inc. He can be reached at .