The Dangers of Building Value on Price alone
You will know people buy based on perceived value. It’s all part of the Value Equation: Value = Benefits – Cost. Whether it’s done formally, or more likely as an informal, subconscious mental decision. When someone is making a purchase decision, they make a value decision. It doesn’t matter whether the “buy” under consideration is a consumer purchase, or a business purchase, the ValueEquation will come into play – “will I get value for the money I spend?”.
It’s about the “Transformation” - the before and after evolution that your customer will go through after using your product or service. This is the core of your offer, the change it will make for them. At its core, every offer boils down to a transformation. That’s where the real value lies.
If there was one thing that really annoyed me in all my years consulting it was winning a job, whether it was a straight client quotation, or a government tender, it was winning the job because I had the lowest price, as if price was the main differentiator that set me apart from my competitors.
Do you understand what constitutes “value” in each of your market segments?
Do you have a clear idea about what makes up your customer’s value equations? Value is rarely only price, it is about what your product/service will do for them (the benefits); their value equation.
Do you have a value proposition for each of your key market segments – a compelling statement that clearly identifies why customers should ONLY buy from you, and not your competitors; a clear statement of the tangible results a customer gets from using your products or services? If you can’t clearly communicate this, of course you will struggle.
Some years ago I blogged on “What is happening with your customers?” Here are some points:
“Whether it is three years of depressed economic activity kicked off by the Global Financial Crisis (GFC), the on-going uncertainty about Europe’s ability to pull itself out of their quagmire, or doubts about the US economy reviving, people seem uncertain about the future.
A recent newspaper report suggested that Australian retailers have been forced to extend their summer clearance sales, as shoppers have left them with piles of unsold stock.
And people are responding to uncertainty with thrift, both on a personal and a business level. Australia's savings rate is at a two-decade high, due to consumers remaining fearful over the future of the global economy.”
Price became key driver in the Value Equation with fear and thrift driving people’s decisions. Retailers responded accordingly, both in Australia, and overseas. Neither businesses nor consumers could afford to be indulgent.
A number of reports suggested customer behaviour was changing, and that this was not a temporary change, but more likely a permanent change.
To maintain healthy sales, businesses adopted price-driven marketing strategies.
So in Australia we had what were dubbed the “Supermarket Wars”, with staples like milk and bread reduced to ridiculously low levels, led by Coles. Woolworths retaliated. The slogans were “Down, Down!” and “Cheap, Cheap”. The Supermarket Wars lasted seven years.
The Penalty - retailers suffered losses in terms of margins, consumer loyalty and an inability to pull out of the downward cycle. Research shows that if price becomes the main selling point, customer loyalty decreases. Operational costs don’t go down, so if prices keep coming down, businesses run out of margin. Price conscious consumers and thin grocery margins are a problem.
But there has been a change! It was intriguing to read recently that the two major retailers in Australia were moving away from price as their main differentiator. And just as intriguing to read the reasoning was based on similar experience elsewhere. The ultimate cost of price wars on retailers is currently being played out in the UK, a retail market which shares many commonalities with Australia’s.
A Dutch study examined the market impact when the leading Dutch grocery chain Albert Heijn slashed its prices in response to Aldi and Lidl, finding that there was an 8.2% reduction in food prices. This cost Dutch supermarkets €900 million in one year alone and more than 30,000 employees lost their jobs.
As a result of the losses, Woolworths pulled out of the “War” two years ago, and has reaped a good increase in earnings from their supermarket business. Coles has now blinked as well, having seen a continuing drop in earnings.
They are changing the Value Equation
If Price can’t be used to create value, then the benefits have to be upped.
Coles and Woollies have shifted their focus to service quality, social programs and connecting with the community.
By moving away from price and focusing on a story telling strategy, both supermarkets can engage consumers with a process called “internalisation”. This is where people accept the endorser’s position on an issue as their own.
While food prices won’t necessarily go up any time soon, consumers shouldn’t expect to see any further significant price drops. Instead, Coles and Woolworths will draw attention to other important attributes. They will build on the benefits.
Let’s talk about You!
Building value on price alone is, to me, nothing but a profit leak. Once you start focusing on Price as your discriminator to build value, the only way is down - at the expense of your margins.
As Rashid Kotwal said, “many businesses operate on two assumptions that are often never tested and end up costing them dearly.
The first is assuming their clients know and fully understand the value they get for their money. The second is assuming what they themselves believe is valuable to their clients is actually the case.”
What you think you're doing for your clients and what they truly value can be poles apart. And if that's the case you spend more and more effort and money promoting aspects which don't advance sales, rather than spending your effort in areas which will.
The only way to differentiate yourself is to explain the value you provide. Explain in great detail how you get your results and what they mean in real terms for your clients.
Don't assume your customers know all this. They don't. What's obvious to you because you do it day in and day out is not obvious to them. And yes, it is about blowing your own trumpet.
You want to make more sales so that your business can grow and stay sustainable...
...but you also know that you don’t want to resort to cheap attention-seeking or sleazy sales tactics with low margins to get you there.
The value has to be in your Offer. The Benefits the Offer extols must be more than superficial benefits; they must be deeper than that, benefits that meet an emotional need for the buyer. How it will transform them.
Can you add additional benefits? More clearly state the existing benefits? Create more value for the prospect? When you make your offer irresistible, the sales will follow.
Simply having a great product with awesome features and desirable benefits isn’t enough. You need a great offer - one that walks your customer through the logical *and* psychological journey from "I don't really think I need this" to "This is exactly what I need! Can I buy it from you right NOW?"
What are the additional factors what will allow you to charge a price commensurate with that Value Equation?
When you have the right offer, that builds Perceived Value based on the real benefits you offer, here's what happens:
- People are excited to talk to you about it
- You don't need to lean on persuasion and pressure tactics
- You raise your sales conversion rate (which means more revenue, even with a small audience)
- Sales get much easier to make, and your customers are happier than ever!
All because you crafted the right value offer, one that speaks directly to your market without sounding fake, pushy, or salesy.
If you struggle to communicate the value of what you offer, it's often because you haven't identified the key transformation your target market is seeking.
Could your Value Equation be Improved?
There’s nothing like an outside view of your Value Equation?
Very often when we read something we’ve written, we read what we expect to see. And miss the mistakes, or lack of logic, or lack of persuasiveness.
Or buy "Small Change, Big Result", my manual on how to increase your success rate with proposals and quotations; make a few small changes, and reap the rewards.
© Copyright 2018 Adam Gordon, The Profits Leak Detective