Creating, Recognizing & Measuring Value
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Price is what you pay – value is what you get.
Warren Buffett, Chairman of Berkshire Securities
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Price is what you pay – value is what you get.
Warren Buffett, Chairman of Berkshire Securities
Deliver value that your customers recognize, appreciate and reward. If you want your customers to value what you offer – you must demonstrate that you value them.
Value implies trust so start by building trust. Always under-promise and over-deliver. Be known for keeping your promise and then some. Be honest. Never promise what you cannot deliver.
Don’t confuse value with cost. A product’s value is almost never equal to its cost. For example, your product might cost you $2 and you sell it for $10. The value to you is $10. The value to the customer will usually be more than the selling price. If it was only worth $10 to the customer then they have no motivation to buy. But if the value to them is greater than the selling price, they are motivated to trade their money for something of greater value. It may be worth $25 to the customer. Then they will gladly give up $10 of their money for the product. The more that value exceeds the cost of the purchase, the more the customer will want to buy from you. Always offer value that is greater than the price they pay. Your challenge is to ensure the customer sees much more value than their cost.
The Value Formula
How can value be so different from cost? Examine the following formula, then discover where you can concentrate your efforts to enhance value.
Total value = real value + perceived value
Let’s take it apart to understand it. Real value comprises the tangibles. It is relatively easy to measure. Real value can be expressed in this manner:
Real value = function/cost
Function is what the product or service does in mechanical or analytical terms. Imagine you are buying a new car. If you are shopping for the best real value, you would get the most function efficient ground transportation for the lowest cost. You could measure the car’s function factor by comparing it with the cost of your practical alternatives; public transit, car pooling, taxi, bicycle, limousine, various car models. You might wish to consider the costs of these alternatives in terms of time and inconvenience. What does your new car give you that these other modes of transportation don’t?
Having determined the new car’s function factor, you can divide it by its cost. Is its function worth more to you than its cost? If so, the new car has real value. At the end of your analysis you would buy the cheapest car. Not necessarily. Remember that what you are willing to pay for your car is based on the total value to you, which is a factor of both real and perceived value. So, sometimes without realizing it, you assign value to less quantifiable benefits and buy something that you like. Liking is not part of real value, it is part of a product’s perceived value.
Perceived Value = belief x emotion
Compared with real value, perceived value is more difficult to measure directly. Yet it can have greater impact on total value. Perceived value is the product of belief times emotion. It is influenced by intangibles such as image, credibility, beauty and feelings – all the benefits you should emphasize in your marketing efforts. Emphasizing your perceived value is the surest way to differentiate yourself from the competition – and gain you more profit. Perceived value is what makes a brand name more valuable than a no-name. Nike is one example of a company that built a fortune on perceived value. As individuals we think differently, perceive differently, and place different values on things. Beware of that. Use it to your advantage. When your prospect wants to negotiate price, remember to build up your product’s perceived value.
How can you enhance the value of what you sell? If you are only looking at the cost of paper and ink then you are forcing yourself to compete in the commodity game. Instead find ways to emphasize the value of your relationship, the creative, – the intangibles.
Always deliver real value too but compete on the perceived value.