I read a great article written last year by Adrian Kingsley-Hughes in ZDNet.com called “The Price Factor” that talked about the problem of falling computer prices.
It’s a problem because computer companies risked it all for marketshare to the point where profit margins are razor thin.
And, as Kingsley-Hughes points out, consumers don’t know any better because they don’t understand the relationship between price and value of the computer they bought. He humorously points out how intelligent consumers will buy the cheapest computer possible but expect it to be a supercomputer when they get it out of the box.
THERE’S A DEEPER ISSUE
Computer manufacturers have not done themselves any favors with this low-cost provider mentality. But the real problem, in my opinion, is the price-to-value ratio that customers perceive.
If they buy a $1,000 computer or a $5,000 computer, can they tell the difference? Only the savvier, educated consumer would but most wouldn’t. Maybe down the road the average consumer will discover the difference but early on in the sales funnel they certainly wouldn’t. A computer is a mysterious device to most people and price isn’t clearly linked to value prior to the purchase. It’s not really linked to value until long after the product has been paid for.
And it’s true for other products and services as well: When the value is unclear, customers will measure with price because that’s all they can measure by. The result is likely to be an unhappy customer… no matter what price they paid. (Mabye they found a place to buy it cheaper or because the service isn’t very good, etc.).
However, when value is clear, they can make a more educated purchase decision. But this leads to the next problem: Business owners who understand the importance of highlighting value can end up spending too much time on features and end up commoditizing their product. Their menu of products or services works like a dial: Customers who want to spend less can dial down the service and receive less; customers who want to spend more can dial up the service and receive more.
A perfect example is going on right now in the Smartphone industry. Smartphones are highly commoditized — in hardware features and service features, and the resulting prices. In the midst of this price-war, Apple’s iPhone is happily a higher-end phone that is in such demand there are waiting lists for it.
While most phones are commoditized, Apple has clearly and cleverly established charge-what-it-wants dominance because of the value people associate with the iPhone.
HOW CAN IT BE FIXED?
First, educate your customers so that they know that your prices aren’t arbitrary. Help them to understand that your products and services are priced higher because they have a higher value. Bring clarity to what goes into your products or services. However, be mindful that you don’t commoditize your prices. There is a relationship between price and value but it shouldn’t be a strict apples-to-apples ratio. Avoid pricing your products so that they pay X for a widget and X+1 for a widget with one extra feature.
Next, focus on the value of the benefits (not the value of the features) and make your price an expression of that value.
Then, make sure that you recognize and position the value of the product or service in relation to the price all the way along your sales funnel, not just as a quick obstacle the prospect needs to overcome before they become customers. Think about your price-to-value ratio as an ongoing element throughout your sales funnel — something you highlight in every stage.