- understand the value that you offer
- feel that they have a reasonable chance of receiving that value after purchase
Remember that customers do not buy features, they buy benefits – and they select a product or service based on the total value offered.
Paraphrasing & Quoting Wikipedia:
Value is the relationship between the consumer's perceived benefits versus perceived costs of receiving these benefits. It is often expressed as the equation:
Value = Benefits / Cost
The customers get benefits (e.g. productivity, additional revenue, labor savings, etc.) and assume costs (e.g. purchase price, implementation, training, maintenance). Value is subjective (i.e., a function of the customers’ estimation).
Quite simply, a business wins an order by convincing a customer that they provide more value than other businesses. Customers, particularly those technically inclined, do not buy based on fluff and tend to rationalize any buying decisions. I have heard too many product and marketing managers justify their pricing premium with broad statements such as “We’re the name brand”, “We have the best specs”, “We’re easy to use”. Those statements and $2.50 will get you a ride on the NYC subway. Sounds like motherhood and apple pie.
You need to quantify for the customer and yourself what are the unique differentiators and the value that they bring to the customer versus the next best alternative.
Let's use a new car purchase as a simplified example:
You are looking at justifying the purchase of a Ferrari.
- You consider the best alternative, e.g. a small Honda Civic compact car. This is your reference price.
- A new Ferrari purchase will offer you faster commutes to work, fun weekends, less stress, ability to pick up good looking girls - things that the alternative compact car do not.
- However, the Ferrari will cost you extra huge insurance premiums, premium gas, extra maintenance costs, and a private parking space so it won’t get keyed. These are the unique costs which are negatives.
Economic Value Analysis (EVA)
By using an Economic Value Analysis (EVA), you can determine how much value you offer, how much more it costs a customer to work with you, and what your net positive unique value is to a customer. Many of the values change depending on customer and marketing segmentation. An EVA avoids fluffy propositions and forces you to "put your money where your mouth is". You attach a dollar value to each product feature/benefit to help quantify its worth to a customer. You can also consider it as visualizing your pricing and value positioning.
For an EVA, you need to determine :
- The Reference Price that a customer will compare your product pricing against. This can be a competitor’s price or the best alternative (which could be to maintain status quo and buy nothing - a price of "zero").
- Total Differentiation Value – the gross sum of all the unique differentiation value that you bring. This could be cost savings, increased revenue, increased productivity, less rejects, etc. Use a common Unit of Measure to quantify this value and map this Unit of Measure to a metric that has meaning to the customer, e.g. a KPI (Key Performance Indicator) or cost. You can attach a benefit and value to less tangible or concrete items such as Brand Name if it is meaningful to the customer. In the Ferrari example, one unit of measure may be satisfaction from use of the product.
- Total Negative Differentiation Value – the unique costs of having your product and buying from you, e.g. maintenance, training, installation, warranty, disposables costs.
- Net Unique Value - the positive differentiating value that you offer over the competitor or alternative after the unique costs of doing business with you are factored in. This is your sweet spot, what you have to promote and base your pricing on. This is what shows up on sole source bids.
- Economic value (EV) - the maximum amount a customer should be willing to pay, assuming that s/he is fully informed about the benefits of the product and the offerings of competitors. A customer may believe that he/she is getting a fair price if your sell price is at or below the EV (getting more than what he/.she pays).
Determine the Economic Value before negotiating with your customers. An Economic Value Analysis will help you substantiate your net unique value in quantifiable units of measure that a customer cares about and will help justify your premium.