There are usually two reasons that a product’s price increases: either the cost of the product itself (manufacture, labor, materials) has gone up or the value of the product is now higher. Although convincing a customer that your price has to go up is not always an easy sell, the value proposition is definitely the worse of the two. Unless you are able to spell out the Value-Benefit equation clearly.
Most businesses determine the sales price of goods or services based on the costs incurred to produce them plus a flat profit percentage. This is rarely a good idea. In many businesses, however, sales price is based on perceived value rather than on costs plus profit. Government is certainly one of those, but so are live concerts, home entertainment, many types of computer software, even smartphones. When an Apple iPhone first releases, for example, its price will be far more than the costs associated with building it and tickets to sporting events are often far more than the cost of producing the event divided by the number of tickets sold.
That’s because these are some examples of products and services that are sold based on a Value-Benefit rather than a cost plus profit basis.
Calculating Value-Benefit is relatively easy for some things, much harder for others. Concerts, for example, value theirs based on the perceived popularity of the acts that will be performing during the concert while smartphones often base their initial value on the expected demand from consumers. Computer software is valued based on its expected benefits to the consumer who purchases it.
For your business, consider the value and the benefits your products or services bring to the customer. If, for example, your product improves most businesses’ bottom line by 8 percent, then you know the value of your product and can price accordingly. This is why some business accounting software, for example, costs much more than others on the market without pricing itself out of competition. The value it brings and the perceived value the consumer sees in it outweighs the big cost difference.
The Value-Benefit model allows flexibility in pricing and means that the salesperson and sales team can pitch products based on an expected value or benefit to the customer rather than on a flat price plus profit basis. Bigger clients mean bigger income, smaller clients (who receive less value in dollars and cents) mean smaller profit. As the smaller customer grows, however, so does the value of the product you’re selling them.
The best way to approach a Value-Benefit price discussion is to begin with a value proposition for the customer. Find out what the customer needs, what benefits they will receive if you fulfill that need, and what it will mean to their bottom line if you do so. By asking about these things, you not only show an interest in their business, but also show that you’re looking to help them rather than just sell to them. We already know that these are key relationship-building ideals that improve sales. This approach also adds value to your product as the customer sees the benefits they could gain from using it.
In short, make your company, product or service an important asset to the client. One with high perceived value. Price will follow.