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Do your customers know the value of your product? It may seem like an odd question at first, but the truth is that many companies consistently fail to communicate the real value of their products. . Naturally, such misconceptions are rarely advantageous to companies.
More than 20 years ago, experts at McKinsey & Company discovered that: 80% and 90% Many mispriced products are priced too low. And that remains true today. That’s a lot more potential revenue lost right away than you might imagine. According to him, if the price increases by 1% without changing the sales volume of the product, operating profit will increase by 11.1%. This comprehensive study The Harvard Business Review book was published in 1992 and is still widely cited.
Related: 10 Questions to Ask When Pricing a Product
Where does the value go?
Your products and services inherently create some value for your customers. This is called the “actual value.” In an ideal world, everything you sell would be priced based on its actual value. But we don’t live in an ideal world. Actual value is very difficult to calculate and can vary from customer to customer.
Not all customers will be able to understand or, frankly, even benefit from the overall potential of a particular product. For example, smartwatches can track hundreds of unique exercises, but the value of these additional features is obscured when all you do is perform them. Marketing also has an impact. Returning to the smartwatch example, failing to effectively communicate useful features and leaving them unnoticed by potential customers could have a negative impact on this “perceived value”. there is.
Now, customers may agree that your product creates a certain value for them, but that doesn’t mean they’ll pay for it. dozens of elements Urgency, income, brand loyalty, advertising, social influence, and more can influence how much a particular customer is willing to pay. Finding this number is difficult, but very rewarding. If you can identify the maximum amount your customers are willing to pay, you can maximize profits while capturing as much value as possible.
Many businesses cannot determine exactly how much their customers are willing to pay. What this means is that the price you would normally expect a customer to pay is instead the “target price.” This is the value that you and your team have determined is as close as possible to your actual willingness to pay value.
Finally, if you work in a field where sales are important, you may find that concessions and discounts take away the added value. In this situation, the final price paid is called the “realized price.” How much value was lost during all these steps? Many people are thinking quite a bit. Bain & Company interviewed dozens of CEOs, CMOs, and other executives from more than 1,700 companies. Approximately 85% A higher percentage of respondents believed they could do better when it comes to pricing.
How can we capture more value?
Let’s start by understanding how much our customers are actually willing to pay for our products and services. You can do this by surveying your customers, organizing focus groups, experimenting with pricing, and hosting auctions.
If you’re not happy with what your customers are willing to pay, you may need to take a step back and focus instead on their perceived value for your product or service. Helping customers feel more valued through activities like branding, outreach, and communication directly increases the amount they are willing to pay.
Alternatively, you can adopt a completely different pricing structure. More and more service-based companies are turning to metrics-based pricing to provide an adaptable structure to each customer’s perceived value. Examples of metric-based pricing include usage-based pricing, such as gym punch passes or cell phone minutes, or user-based pricing, which is popular in the SaaS space. There are many great examples of metric-based pricing around us. A mechanic often charges by the hour, whereas a bowling alley often charges by the game. These metrics work because they are reasonable, predictable, and fair.
Related: How to get the price you deserve for your product or service
Don’t miss out on potential profits
Let’s look at mathematics together. Imagine for a moment that he runs a coffee shop where he sells lattes for $5 a cup. It costs $1 to make these lattes and gives you $4 in profit. If you sell 100 lattes, of course you will make a profit of $400.
But unbeknownst to you, your customers are willing to pay $7 for the same latte. This translates into an even more generous $6 profit, meaning you’ll earn an additional $200 profit for every 100 lattes sold (150% increase). In fact, even if you sold 90 lattes instead of 100, your profits would still increase by 135%.
In other words, don’t leave money on the table. If your customers are willing to pay more, now is the time to find out.