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Creating Pricing: Understanding Price vs. Value

Price Vs. Value

The issue that seems to plague new – and current! – business owners the most is deciding what price to charge for their services. Pricing is a hard topic to discuss and finding your sweet spot can sometimes feel impossible. Not to worry though, we’re here to help.

The most important factor to keep in mind when creating a pricing structure is that there is a BIG difference between price and value.

  • Price is what someone is willing to pay.
  • Value is what someone gets for paying that price.

Don’t Try to Compete on Price Alone

You never want to compete solely on price for two fundamental reasons:

1. If you don’t make a profit you won’t stay in business.

Many people make the mistake of discounting their prices for new customers below a sustainable level because it’s “only going to happen once.” However, the message you convey by doing this is that customers should wait for and/or ask for a deal before purchasing your services a second time. Before you know it, you have to run specials constantly to get business, and your effective rate is cut to that of the discounted price. Think J.C. Penny’s.

Note: Running constant specials/sales can be a valid strategy as long as you build that into your pricing model from the beginning. If you assume you’ll always run a sale or give a discount, make sure your original prices reflect that, so you don’t accidentally cut your margin to an unsustainable level.

2.  You don’t create loyalty.

If you compete solely on price then your customers will go with whomever is cheapest, which means you won’t necessarily have steady income or get all the business from a particular organization. Your customers will be constantly shopping around and, best case scenario, you may be asked to meet the price of the competitor to retain the business; or, worst case scenario, the client may just change vendors without contacting you at all.

Compete on Value Instead

Instead, you want to compete to be the best value, which seldom means being the cheapest.

Being the best value means creating an overall experience that makes the client feel satisfied and important.

This is usually accomplished by meeting and/or exceeding the client’s expectations in three main areas:

1. Timing – Delivering work on time or early can go a long way toward making a client feel valued and toward making you stand out from the crowd. When was the last time you got something from someone early? It doesn’t happen very often and it’s never forgotten when it does.

2. Consistency – Maintaining the same level of service throughout the relationship. This may seem like a no-brainer, but it’s amazing how many times we inadvertently favor new sales over consistent clients. Think discounts for new customers, putting off doing work for current clients while trying to land a new bigger one, or even something as simple as an author who asks her list to buy her new book for $9.99, then offers it for sale for $.99 a month later because she wants more sales.

As this infographic from invesp.com explains, it costs five times as much to attract a new customer as it does to keep an existing one. Think about this the next time you are tempted to offer a special deal to a new client. It may be better to offer it to an existing client instead….

3. Products and Deliverables – We said earlier that being the best value usually doesn’t mean being the cheapest.

For instance, the basic frame of the Cadillac Escalade and the Chevy Suburban are almost identical. When you compare the two, Escalades have similar engines, less seating capacity and get worse gas mileage, yet sell for approximately $25,000 more. Why? Because of the status they convey and the perception that the finishes are higher quality, they are seen as more valuable.

Whether this is right or wrong doesn’t really matter. What matters is what the client perceives and experiences – what they get is not limited to the deliverable itself, but the experience of obtaining and owning that deliverable.

Focus on Quality to Deliver Value

At Cloud Friday, we pride ourselves on the quality of our work and on the value we deliver. Stay tuned for our next post outlining a how to use a value-based approach to determine pricing.

To learn more about how we can help take your business to the next level, contact Cloud Friday today! to get connected with one of our incredible independent Small Business Advisors and get ready to take your business to the next level.