What is your product or service worth?

Author: Stewart Clark / Date: September 16, 2014

Category: Business Performance

Pricing… pricing… pricing… it’s all about the getting the price right – so that your price point is not only accepted by the market…. but also delivers sufficient profit to your bottom line.

So what is the right price, who determines this and how is it calculated?

To answer these questions I normally discuss two concepts – “Cost” and “Value”.

Cost – is the cost of delivery of a product or service for sale, so this is your cost of goods sold, your fixed and variable overheads at a product or service item level. It is important to understand accurately what this cost level is, as if you can’t sell your product/service for this price, then you are making a loss from the start and the sale is clearly not viable.

Arguments will often be put forward that “it’s not that easy”, “our product/service is special” and that “we package multiple items so it’s impossible to calculate the raw cost”. Fact is that it’s not impossible, albeit it is harder if you have poor financial recording in place. Regardless, you must understand the base cost of your product or service.

So that then leads us to the concept of Value.

Where Cost is from your perspective, Value is from your customer or client’s perspective.

Value is how your customer views the price you are asking – it is emotive, it is subjective and it varies from customer to customer. Sounding hard? – well it can be, but here is a few steps to follow.

Consider what your customer needs, what features are important and why they need it.

  • needs – differentiate between simple desire (ie. nice to have – a bit ambivalent) versus critical (ie. the world will stop turning without it – a must have item),
  • features – look at aspects such as speed of delivery, customisation, size, shape, after sales service, risk mitigation, installation, access, control, longevity/durability, look/style,
  • why – perhaps the most important – what will this purchase fix or satisfy? – is it health, wellbeing, comfort, financial, growth, knowledge, safety?

A quick example – for a plumbing firm

Issue                                                                 Install a new tap Fix a broken toilet
Need This is a nice to have – a replacement to what’s there already This is important – until it is fixed, there is no toilet in the house
Features Quality of workmanship and clean up Speed – needs to be done now
Why A style or functionality change, something that it desired but not critical and not impacting key health, financial or safety points A house without a toilet is not going to be a happy house! This has health and safety issues

 

So assuming that both jobs are going to physically cost the same in parts and labour to repair – which one is going to deliver more value in the mind of the customer?

For me it is clear – the toilet problem is critical, the tap replacement is not. Equally, if I’m the owner of the broken toilet with a household of people who have to go next door to use a loo – I am going to be less concerned about the cost and more focused on getting it fixed. If I have someone on site that day – that is valuable to me. Equally, if I am just having a tap replaced – with no urgency – shopping around for the “right price” is going to be more in focus.

You can overlay any industry or product you like, and you will see that same criteria hold. The nature of the value will of course be different; for instance a caterer may display value with size of a meal, or a painter with the quality of the finish, a furniture manufacturer with the strength of the product, a courier with the speed of the delivery, or an air-conditioning mechanic with the knowledge and advice they offer, yet a carpet layer could show value with the quality of the “bounce” in the underlay.

All of these are the same in that value is being shown – but remember, it’s only important how your customer sees value – not you!

Naturally you can impose some value suggestions to the customer in your marketing and sales process (which I recommend), as the quality of your interaction with the customer will enable you to identify and build more value in their mind.

So with the concepts of Cost and Value you can then get down to a simple assessment of what is the viability point for your pricing.

Cost + Desired Margin    must equal (=)      Value (from customers perspective)

Accepting that your Cost calculations are accurate, your Desired Margin is going to come down to the level of Value that you can identify for the customer.

The better the value case you can build or show for the customer, the greater margin that you can obtain. If you are not willing or able to do this, then your margin will be diminished to what the wider market will offer for your commoditised product or service. 

So…..stand back and assess the value that you are delivering to your customer – from their vantage point, and then critically asses your pricing – is it too high OR too low?

NOTE: there are many subtleties to this topic – with this article only touching one important aspect – so contact us if you wish to explore it further or want to understand how to apply this in your operation.