- September 28, 2019
- Posted by: Roger Walker
- Category: Business
Every entrepreneur should therefore strive to create value for his customers if he wants to survive and not fall into the trap of falling prices.
But what is value? How is it established? Today I really want to talk to you about this.
What value is not?
Giving a definition of “value” is not really easy. Very often, we fall into the error of confusing it with other things, in particular …
1) We confuse value with production costs
Many believe that the value of a product is the sum of the costs of individual raw materials plus the costs of labor and the tools used.
But if this were the case, then the price difference between a Porsche and a Volkswagen, cars built in the same factories, using the same machinery, and which are made of the same components, would not be explained.
2) We confuse the value with the price
There is a very common tendency to believe that a product with a high price is also a valuable product. This depends on a psychological mechanism that I will talk about later.
In reality, the concepts of “high price” and “low price” are relative and change according to the person, the object and the context.
I’ll give you an example: did you ever want to download a paid app on your phone and then didn’t do it because it was too expensive? Still, it will have cost at most $1 or $2, maybe just a few cents.
What is value really?
This example of the app is perfect for introducing a more realistic definition of “value”.
The value of a product or service is, first of all, a perceived value, i.e. it depends on the individual customer.
Furthermore, the perception of value depends on the beliefs of the client, on his experience and on the utility that he recognizes for the good or service.
Think of weddings: brides are willing to spend thousands of euros for a dress they will wear only once! Why? Because that dress for them represents an important moment, the realization of a dream, the will to be beautiful and many other things based on their interiority.
Or imagine yourself lost in the desert and suddenly meet a stand that sells fresh water bottles. You would be willing to give everything you have in your pockets just to have a glass. This is because you really need it!
How can we define the perception of value?
Some time ago, I read this sentence, which I find, is clear and easy to understand: the perception of value arises from the comparison between the benefits that are received from a good or service and the sacrifices (monetary and otherwise) necessary to obtain it.
The moment a customer is about to make a purchase, it is as if in his head he operated a scale with two plates: on one there are the benefits, on the other the price.
If the customer believes that the benefits given by the product or service are less than the sacrifice of the price to pay, then he will not buy.
If, on the contrary, the benefits seem greater than the sacrifice, then it will buy.
Perception is not reality: The benefits are not what they seem
Now I’ll tell you a great truth: the perception that a customer has benefits is not the reality of the benefits themselves.
Is it not clear to you? I try to explain it better.
You would never buy something that …
- It’s inconvenient
- It causes pain and blisters
- It causes back pain
- Fatigues the musculoskeletal system
- Complicates walking
- Deform parts of your body
Put like that, I really don’t think so!
Yet heeled shoes are exactly that!
They are not comfortable or functional and do not solve any problems, so why do many women voluntarily undergo this torture?
Because heeled shoes offer them benefits that go beyond mere utility and that, affect their identity.
The perceived value can in fact be of different types. It can derive …
- From the utility of the good / service, for example the water in the desert,
- From the coherence with the image we have of ourselves and that we want to transmit to others; this is the case of fashions and status symbols.
High-heeled shoes are appreciated because they make the wearer feel more woman, or more beautiful, or more elegant, or a thousand other things that depend on the individual personality.
And many women are willing to spend money on shoes!
High perceived benefit in terms of identity = high perception of value = greater availability for purchase regardless of price.
Smartphones are another excellent example to explain this unconscious process.
The things an average user does with an iPhone are the same things that he could do with a much cheaper smartphone, but if the iPhone confirms or materializes something of our identity (“I’m rich” “I’m in step with the times” “I’m a lover of new technologies” “I want to be appreciated”) then to shell out almost a thousand euros to have it will not be a sacrifice.
The importance of value for an entrepreneur
Everything I’ve said so far means a simple thing: if you are an entrepreneur, the more you can get the value of your good / service to the right target, the more you can free yourself from market prices.
Let me be clear, prices always depend on the match between supply and demand and you cannot do exactly what you want, but you can increase the perception of the value of what you offer.
To do this you have to work on the benefits, material and emotional, that the customer can obtain and make sure that these are always apparently higher than the economic sacrifice (the price) you ask in exchange.
How to improve the perception of the value of your products or services?
If perception is not reality, it means that we can influence it.
There are several things you can do to increase the perception of the value of your offer. Many rely on psychological tricks with only a temporary effect, while there is one that can really make a big difference: it’s the customer experience.
A customer, when making a purchase, often doesn’t do it just to get a good or a service, but he also does it for the experience itself.
I’ll give you a clear example.
If I go out to dinner, I don’t choose the restaurant simply because I want to eat a certain dish. If so, I’d just have to buy it at the supermarket and eat it at home.
I go to the restaurant because I want to live the experience of being at the restaurant!
I want to live the experience of not cooking, being served, spending a couple of hours in an exclusive or lively environment. Maybe I want to feel pampered. The reasons may be varied, but they go beyond mere food.
Now, if I go to the restaurant and …
- I have to wait 40 minutes to order,
- The waitress is rude,
- The dishes arrive cold,
- As soon as I throw the last bite down, the usual rude waitress tells me that I have to free the table immediately because there are other people waiting,
- At the time of paying I am scolded because I want to use a credit card and they would prefer not,
Do you think I’m having a nice customer experience? Do I feel that what I am paying is acceptable for the service received?
And if instead I went to another restaurant and:
- I was greeted by courteous and quick staff,
- They brought me free appetizers while I wait for the main courses,
- The dishes arrived perfectly hot,
- Let me eat calmly,
- At the time of paying the bill I could use the card I prefer,
- Finally they offered me tastings of grappa and bitters,
In your opinion, wouldn’t I be experiencing a pleasant customer experience? And wouldn’t I be willing to come back even if the prices were a little higher?
Each product or service has a “boundary” of elements that can make the customer experience positive or negative and influence the perception of the value of what customers are buying.
This phrase expresses well the attitude that an entrepreneur should have: “Try to offer your customers something more than what they expect”.
What if the price transmits the value?
At the beginning of this article I said that one of the most common mistakes people make is to confuse value with price and that this error is caused by a specific psychological mechanism.
We are in fact led to think that a high price equals a high value, and is an association that we do automatically.
Obviously, the reality is different, as shown by the example of cars built with the same components but sold at different prices based on the brand and target.
The most courageous entrepreneurs can exploit this automatic association to its advantage.
Instead of playing downward in an attempt to remain competitive, why not raise prices so as to induce a perception of greater value in potential customers?
Attention, I’m not telling you to raise the prices inappropriately! The market would punish you immediately. The upside should be studied at the table and justified.
Remember that nothing prevents you from raising prices more. The important thing is that the “economic sacrifice” you ask your customers is always proportionate to the material and emotional benefits they can get.
The perception of value is all here!