Like beauty, ‘value’ is in the eye of the beholder. Each one of us makes a unique assessment of whether what we are buying, provides value for money for us.

If you sell homogenous items (Your item is identical to the next sellers – i.e. an Xbox is the same whoever sells it), there is a danger that customers can simply Google the item and instantly find other suppliers at a cheaper price. If your product is in some way unique, or you sell knowledge, expertise or creativity, then that direct comparison becomes much harder. Buyers have to make their judgements of value for money based on many subjective elements.

At a seminar we asked two halves of the audience to suggest a price that they thought would be fair for three specific purchases. Group A had to assess the price of a ‘steak and chips meal’, the ‘completion of their tax return’, and then a ‘valet of their car’. Group B were asked to assess the price of… ‘A beautiful 12 ounce steak cooked fresh to order, accompanied by triple cooked, hand cut, skin on fries crispy on the outside and fluffy on the inside, with delicious fresh seasonable vegetables’. Their ‘tax return completed within HMRC deadlines, checked to ensure all available tax allowances had been claimed, and ensuring the right amount of tax is payable’, and finally ‘The car valet using top quality cleaning materials to bring it back to show room condition’.

Essentially the same three choices but with half the group having the more embellished descriptions. On average, expectations of value were roughly double when compared with the much simpler descriptions.

The temptation for anyone in business is to cut to the chase and present a clear and crisp proposal with the price. This often leads to a simplification of the work being done and as a result a lower appreciation of value from customers. Sometimes the desire for speed and simplicity has a high cost on the perception of value. You must take time to properly ‘sell’ the benefits of the higher priced option, and use language and materials that support a higher price point.

Another seminar asked consumers to choose between 4 levels of domestic plumber to fix a washing machine. The very best arrived within 30 minutes, debated the merits of repairing or replacing the machine, had the parts on his van, fixed it, tested it and cleaned up the mess. The worst only arrived after persistent chasing, didn’t consider the replacement option, disappeared for hours to get parts and left a mess and his lunch leftovers behind. Two other options were part way between these two extremes, and prices were £40, £55, £75 and £100. The seminar attendees were overwhelmingly biased towards the top two options. Many surveys conclude that bottom prices with lowest service levels may be attractive to as little as 10% of the market and usually based on affordability rather than a value for money decision. The top end options can attract as much as 20% of the market, again not always based on value for money as much as a desire to have the best or not wanting to waste time shopping around, and from customers who have plenty of money. The ones between these extremes weight up pros and cons and make a value for money judgement that suits them.

What this showed is that cheaper providers can have plenty of work, but are often busy fools who are doing lots of work at low prices and making little profit. The premium providers can get better prices for better products or services, but there are fewer customers that can and will pay the premium. So what is the right answer? The best option is to offer premium options for premium customers, and have other options with fewer features and benefits at lower prices. We often use the simple ‘Gold/Silver/Bronze’ analogy. Don’t pick one price point, pick two or three.

This works well for many service or expertise based businesses where it isn’t possible to buy an identical alternative.

There needs to be a clear differential of service as well as price, which could be the calibre of team member that handles them, or the speed of service. But each customer can, like in the plumber example, choose the level of service and price that suits them. By offering these choices you can hit three segments of the market with solutions tailored to them. Having done this with many businesses, they have often been amazed by who opts for Gold and who opts for Bronze. What is most evident is that many of their customers have valued the extra features of the Silver and Gold options and chosen to pay more for them.

The objective for any service business should therefore be to offer 2, 3 or 4 service levels (any more is simply confusing), and to ensure that each one is described in expressive detail and focussed on the value you deliver to the customer, not on how you do it.

The other side benefit is that if you are in a competitive situation, the competitor usually has a single option on the table whilst you have three. Your odds of winning are immediately improved!

Peter Hill
Author Pricing for Profit (available on Amazon)