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aardmaan blog - Customer value equals profit

Customer value equals profit

Published May 21, 2009 by Gillian Hunter

How do you price your goods or services? I've often had this discussion with clients ... who say: "Ah, we can't charge so-and-so, because X-company have set the ceiling price!" or "We couldn't possibly charge more because it only costs so much to make!"

But, we forget, customers buy on perceived value. And value has a price - often much more than the cost of making the item or what competitors are charging for similar products. However, you need to do some homework to get there.

There is a simple equation to help work out what customer value is (source: Marketing Strategy Third Edition by Paul Fifield).

Value= Customer benefits - Cost - Effort - Risk - Price.

The trick is balancing the benefits so that they outweigh the downside of the purchase - the cost, effort, risk and price. That isn't enough ...

Be different For customers to pay a premium price - or certainly upper quartile prices - you need to find out what your differentiators are. How does your offer differ from the competition?

If you're the same as everyone else - you are not giving people a reason to buy from you - and then it all comes down to price. And, you'll have turned your offer into a commodity - competing on price!

Don't cut off your nose Customers don't create commodity products - you do that for them! If you can't differentiate your offer in the customer's eyes - you won't add value.

The interesting thing is, most people don't want to pay bottom dollar price in the B2B market - because of the perception that you "get what you pay for" and somewhere along the line you'll pay the price for buying too cheap. To be continued ...