The difference between value and price

By Julia Keady

Being able to determine and communicate the difference between value and price is one of the most important ingredients for a successful business. Price is pretty simple. It's the dollar value for which something can be purchased. Value, on the other hand, is a measure of the benefit of that item minus the cost of it.

To put that differently, value is the same as profit, except that the final result isn't necessarily measured in dollars. For instance, imagine someone who is considering purchasing a car for $30,000. The price is known, but the person needs to weigh up the benefits. They decide that the car will take them to and from work, take their family around on weekends and help them do the shopping. They might weigh up the cost of public transport, the necessity for family transport, the convenience of private transport, their status needs and the resale value of the car.

If they decide that the benefits outweigh the price, they have arrived at a positive value proposition for the purchase. If they decide that the price outweighs the benefit then they have discovered a negative value proposition and might seek a cheaper car that provides the same benefits. The difference between the cost and the benefits is the value of the car to that person.

Establishing a positive proposition

In order to sell their products and services, a business needs to know what its value proposition is and communicate that. A plumber who knows that you need your toilet to flush has a strong benefit proposition and can charge accordingly, but only up to the point where his value proposition (benefit minus cost) is roughly equal to or better than the value proposition of his competition.

Value propositions are amenable to 'massage'. Advertising and marketing are all about establishing a positive proposition in the mind of the customer. For example, there was time when the first smartphones to hit the market were significantly more expensive than their competition. However, those top brands successfully convinced many consumers that their products were easier to use, more reliable, more functional and gave them a higher status return. In time, competitors were able to close the gap in public perception of benefits, which meant that the original suppliers had to reduce their prices in order to maintain the same level of 'value' to the consumer.

Your value proposition must convince your customer that the benefits of your services outweigh the cost. The greater the gap, the better the value and the more likely they will purchase. Next time you are considering discounting your price, consider how you can massage your value proposition instead.

Are you communicating your value well enough?

 

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