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19 June 2009 | Paul Gostick Blog
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The Price of Everything and the Value of Nothing
This week Paul looks at how to improve your business - set your price correctly and increase the perception of the value in products and services that you deliver...

  Paul Gostick

I keep hearing that price matters. In fact one might assume that with the explosion of (price) comparison websites consumers are more concerned about price than value.

In the current economic conditions, marketers are worrying about price. Of course, in reality, people actually care more about value.

Warren Buffet famously observed: Price is what you pay. Value is what you get.

If you consider that value is a function of the benefits you get from a product or service e.g. how it solves your problem, makes your life easier or provides a better experience, and the price you pay then for the purposes of discussion value ~ benefit/price.  I accept this is a simplistic model but if the relationship is essentially true then one way to increase value would be to lower price. In fact if price went to zero in this equation, the value would be infinite!!! Clearly this is not true in practice and research shows that goods and services given away are not really valued by customers.

Perceived value is in fact the key determining factor in all purchases, for both consumers and businesses – perceived value is why you decide to buy. There are always "price shoppers," but they are in the minority. They are notoriously disloyal, so unless you have a significant and sustainable competitive pricing advantage, you will eventually lose business to those with deeper pockets and more staying power.

With the growth of price comparison websites, the notion that value online is all about price prevails even though that concept was proved incorrect in the offline world a long time ago. You might be lucky and make a few sales based on a very low price, but if that's all you're offering, you are building zero loyalty, and you are leaving yourself open to the competition. To create and keep loyal customers you have to recognise that superior value goes beyond price and it is superior value that ultimately keeps customers coming back. You are not just offering your customers a price proposition; you are offering them a value proposition.

Seth Godin recently summed up this issue, “Maybe the reason it seems that price is all your customers care about is that you haven’t given them anything else to care about”.

Think about it and ask yourself if it is true for your business – it probably is. When all of your competitors are busy cutting prices, you can actually increase market share by increasing value and providing more benefits - increasing quality and quantity, and keeping the same price point. Leading with price drives you toward the commodity end of the market where little is differentiated and goods are traded based on price instead of the added value of quality and benefits. Competing on price leads you into a cycle where you have no option, but to compete on price. It’s a vicious circle.

The price-comparison site model attaches too much significance to price, making the quality of products or services negligible. Price-comparison sites do not offer as comprehensive a service as many consumers believe. Research conducted by Direct Line and YouGov last year, 41 per cent of consumers mistakenly believed price comparison sites quoted all major insurers and 35 per cent believed that all insurers, large and small, are quoted. In fact, none of the sites provide full coverage of the market.

One of the main issues for consumers using comparison sites is that the results table of the 'best deals' is based purely on the cheapest quote first, which may not necessarily be the best deal for the individual. Although, Gocompare.com has taken a step in the right direction using a five star rating to match quotes to the customer’s required product/service features.

An organisation’s relative position within its industry determines whether its profitability is above or below the industry average. In the long run creating a sustainable competitive advantage is the bedrock of above average profitability. There are two basic types of competitive advantage: lowest operator or differentiation. When there is nothing to differentiate you from your competition you become a commodity. When your product/service features are the same as your competition it is commoditised. If you believe you can be the lowest cost operator day in day out by all means compete on price and play in a commoditised market. If not, focus on differentiation and delivering value to your customers.

Whilst today’s blog was a brief review of the dangers of leading with price, I hope it’s given you some food for thought. I’d like to leave you with a few questions for your own businesses. What are you doing to increase the value perception of your products or services? How are you differentiating your offer from your competition’s offers? How does your website differentiate itself from others in your industry? Why should a prospect choose you?

Personally, I favour a differentiated approach. Using such an approach an organisation seeks to be unique in its industry/market in ways that are widely valued by potential buyers. It selects one or more attributes that many buyers perceive as important and value. It positions itself uniquely to meet those needs profitably. The reward for getting this right is a premium price point.

You can increase your chances for success by setting your price correctly and working to increase the perception of the value your products and services deliver. Show your market why you offer more value than your competition and you will win the business.

Any feedback and comments are always welcome!! 

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