What is perceived value for the customer
Pricing based on perceived value or differentiation
Every manager knows, even intuitively, that your company has to bring something new to your market in order to be successful. In other words, it has to be different and innovative in order to win the customer's buying decision.
In many cases this is clearer in the values the company can calculate and the pricing it can exert with its customers over time. In the end, why do you think iPhones are so expensive? Is it just production costs? To demystify this, in this post we will analyze the cases where pricing is based on differentiation.
See also:Complete price guide
What is pricing?
The activity of pricing or pricing includes the definition of mathematical and also strategically practicable pricing and the type of billing for your products or services. In general, the problems with pricing are fixed costs, variable costs, definition of contribution margin e point of equilibrium, competitive analysis and positioning.
If you're interested in pricing, we have an article on What is a Price?
How do I differentiate?
Differentiation and innovation are not trivial. It is precisely because of the associated challenge that many researchers and management professors have tried to develop simple application methods so that entrepreneurs can critically evaluate their business and develop new products and services that enable value-based pricing.
In this context, the best tool that we have value curve, presented in the book "The Blue Ocean Strategy". It is a suggestion for a simple chart that will help you create a unique and differentiated value proposition. The exercise, as shown below, is: on the Y-axis list your competitors and on the X-axis you list the value attributes that your customers evaluate when making a purchase decision.
Then you will rate each attribute (it can be from 1 to 10) to generate the value curve of each of the competitors. In the above case, it is clear that Ringling Bro and the regional circuses are delivering exactly the same value to the customer, just on a different scale. That is, although they have different positions (Premium vs Economy), the general proposal is the same.
The Cirque du Soleil has completely changed its logic and really differentiated itself, ignoring the attributes of the value "Astros Circus", "Shows with animals" and "Several riding stables". There are also unique values such as “Theme”, “Refined Environment” and “Artistic Songs and Dances”.
Like price is based on perceived value
This pricing model takes into account the situation and vision of the customer more than the company's internal attributes such as production costs. Before we go any further, to be clearer, we should remember the classic price tiers of 5:
- Cost increase
- Point of equilibrium analysis
- Business model definition
- Competitive analysis
- Positioning and strategy
With pricing based on perceived value, you will practically ignore the 1 and 2 dots because while they are interesting, the 3, 4 and 5 dots become much more important. That is, what will make the difference once you understand how your customer sees you and how much they are willing to pay.
Let us take a very simple case to illustrate this. Imagine you are a key chain and as a transparency good practice you have all of your prices tabulated and displayed in store.
- Key copy: $ 20
- Key copy (search and send): R $ 50
- Barrier exchange: R $ 50
- Lockout outside of business hours: R $ 150
Did you fix it There are two very beautiful phenomena in the pricing of this key ring:
a) Differentiation and innovation in the key copy service. If he tries to increase the convenience attribute for the customer, he can charge more than the same service! In this case, for example, it is irrelevant that the freight cost is R $ 10 because its profitability has risen sharply and the competition is probably much less than the usual service of making keys.
b) Perception of the value of services outside of business hours. In the case of the off-hours locker swaps, you will surely find a customer desperate not to find other locks to help you and will see value and be ready to pay 3 times the base value of the service just to get it done is.
Problems with pricing according to perceived value
Of course, the above case shows the best scenario of them all, where you took the chance and it had no ill effects. However, there are some important precautions to be taken when calculating prices using the perceived value method:
- Understand your customer: This is the most important point. Many times we assume that the taste and way of determining the customer is the same as ours and we shoot the bolt. Through conversations and testing, ensure that the customer is buying from you for the reasons you think they are. It never hurts to understand what your competition is doing and how they make their customers happy.
- Do gradual tests. Because it's much more emotional than financial pricing, you need to test understand how far your customer is willing to go. That is, translate these feelings into numbers. How much is a customer willing to pay for an out of business lockout? Does it differ from region to region?
- Be polite. In some cases, for example when exchanging keys, it seems like you just wanted to take advantage of someone else's emergency. So always be familiar with the customer, especially when testing whether new pricing makes sense. Sometimes it is worth charging less so as not to ruin the relationship with the customer.
- Don't forget about finances. This is a powerful method that has the potential to increase your revenue significantly, but it doesn't preclude the need to carefully monitor your costs and prices as a whole.
Prices based on perceived value or differentiation aims to dramatically increase your revenue because it focuses on how you make your customers look ready rather than paying how much you are willing to receive. The more you know your customer and have different products and services, the more money you can make and grow. If you want to price professionally, visit our spreadsheets to help you calculate your selling price.
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