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Thursday, January 20, 2011

Value vs. Price-A Simple Thought

A common refrain even from those providing lower prices on services or goods is not to sell on price. In the field we see many who won’t entertain taking a service unless they get the lowest price. This is a good enough minority to carry a few companies, regardless of the quality or their offerings. What is correct regarding price, is that virtually every buyer makes purchases based on their perception of the value, of which price is a component.

Advertising is an attempt to boost the perceived value of a product? If successful the product raises its sales volume or price or both. It’s pretty easy to find the perceived value of a particular product. It is in its sales. If the object is to increase sales, then increase the perceived value one of three ways. The first is to reduce the price. By definition this raises the true value of the services/goods which should (note should)also raise the perceived value. Considerations here are profit margin, market share, overall profit etc. The second way is to raise the perceived quality of the product. This can be done through marketing and advertising. Possibly even by raising the cost. The third way is to actually make the service or product better and have the quality recognized. Truly making a better mousetrap usually (but not always) results in a change in the perceived quality. It works better when combined with getting the word out. Unfortunately for consumers the second method can create believers, without actually making a better product.

In the end market share can be controlled to the extent that perceived value is controlled. In a Win-win scenario what is offered is the best value. When that happens, various price points correspond to the needs of the customer, fulfilling a value proposition judged to be acceptable by the consumer.
This produces products of roughly equal value at various price points along a scale. For those needing fewer features or durability the price will be lower. For those with greater or more specific needs the cost will be higher, but in each case the value to the buyer will be roughly the same.

You can fool some of the people …

If the product isn’t selling well the perceived value needs to be boosted. In the long run it is likely best to raise the “real” value through added quality or targeted pricing (read changing the price), rather than just through marketing, which doesn't change the offering itself. There wouldn't have had to be a "new" GM if there hadn't been such a strong belief in being able to make people believe what they were told. We are now being treated to raised value in the cars made by the domestic manufacturers, or it could be called higher quality. With others offering more value they found they couldn't stay in business otherwise.

It seems so simple...


Unknown said...


You are right on time!

When the first car manufacturer (I believe it was Honda) added the sixth number wheel on the odometer, it said in a clear voice that the car would run even after 100,000 miles - quality or perception!

When cell phones get more and more features - like a camera & voice recorder, folks going into the courthouse in our area would have to leave the phone with the guard, because cameras & recorders are prohibited in court. So some of the phone manufacturers created a model without these features and the lawyers could carry in their phones again. Sales to lawyers blossomed for the dumbed-down phone so they could have ready access by phone while in the courthouse. Real value!

Good post.

-- Jack

Thoughthebrowser said...

I'm reading Bill Bryson's At Home. He says in the history of the world, lower price always wins. That why we have the incredible shrinking cereal packages and candy bars.