Following on from Gill’s blog last week, I have been thinking more about pricing, the difference between price and value and the role of marketing in setting and managing pricing and value.
I was also inspired by watching the film “Pretty Woman” and in particular the scene when Vivian (played by Julia Roberts) is negotiating her rate to stay for a week with Edward (Richard Gere). Having agreed on a price of $3,000 she tells him “I would have stayed for two thousand.” To which he responds “I would have paid four”.
At its most simple level, price is absolute while value is relative. Good value for a product or service to one person could represent a very different price to another person’s definition of good value for the same product or service. In yesterday’s blog, Seth Godin talks about what “it’s too expensive” means. While it appears at face value to be a comment on the price, in reality it rarely means “I don’t have enough money to pay for it”, but more often is a judgement of value or simply “it’s not worth it”.
Another way of looking at this is to think of the following equation, borrowed from The Commercial Works who are experts in working with companies to optimise their pricing:
Value = Benefits – Price
They have a three step model for pricing:
Create Value – understanding the customer: what they value and how to deliver it
Capture Value – setting and managing pricing and price increases
Sustain Value – creating an on-going system that proactively monitors value and adjusts price
In their second step, they describe how pricing models typically evolve from a ‘cost plus’ approach where businesses aim to achieve a set margin and focus heavily on sales volume and costs to maximise profit; through a market-led strategy where matching competitors is the key driver of prices to a value-led model which focuses on understanding and delivering customer value and pricing accordingly.
Any of us who have ever sold anything have probably been told “it’s too expensive” and we’ve also probably walked away from a successful sale or two thinking that we “could have sold it for more”. Understanding and building customer value is a critical marketing activity if we are to get pricing right. In the film, Vivian got 50% more than she was prepared to take, but could have got 100% more if she had understood the value to Edward!
Chris