Think of price as a value scorecard. Price turns perceived value into revenue. The more value you create and communicate, the higher the score. So how much can you charge for your product? You have to determine how much your competitor charges -- AND, MOST IMPORTANTLY -- how does your product differ from your competitor's? (Think competitive price monitoring and assortment intelligence).
The value of a product or service is measured by how much your customers are willing to pay for it and the price you charge is your best estimate of your customers’ willingness to pay.
In its simplest form, your potential customers compare your product with your competitor’s product and your price with your competitor’s price. If they decide to buy a product in this category, they will buy the one that they think is the best deal for them.
So what comprises the best deal? If your product is better than your competitor’s, the amount you can charge is the price of your competitor’s product PLUS the amount your customers value your product over theirs.
If your competitor’s product is better than yours, then you will charge less than your competitor, thus appealing to price-sensitive buyers.
Create real value by improving your products and services relative to your competition.
Note, however, consumers buy perceived value. You may have the best product attributes in the world, but if the customers don’t know or believe that, they won’t pay you a premium for it.
An exercise in boosting perceived value:
1. Select one of your products and compare it to your closest competition.
2. List all of the differences both in your favor and in your competitor’s. Include extended attributes like service and warranty.
3. Think of a single customer and estimate how much that customer knows about and values the differences.
4. Think of at least three actions to increase your real value.
5. Think of at least three actions to increase this customer’s perception of your value, and put them into action.
(Take a look at Upstream Commerce's Guest Post by Reuben Swartz: How Retailers Can Gain Pricing Power Through Product & Service Differentiation).
Marketing is about making sure your customers perceive the value you offer. The best and easiest marketing plans are about making sure the customers know this real value. Build real value, communicate honestly about it, and price accordingly.
What are your thoughts about real value, perceived value, and effective pricing? Thanks. Mark