Tools and articles

We're being squeezed on price

How many times do we hear that lament?

Sounds like a big problem so let's break it down to understand the problem.

What is the value of your product to your customer?

Yes, this is a trick question. It's not about how much it costs or how much you sell it for. It's about what it's worth to your customer. Presumably it's was worth more to them than they paid for it, otherwise wasn't a bargain for them. We buy something because we expect to gain more than the loss of the money. Basic business sense eh!

The question of what the value of a product is, is becoming more critical as we tend to take for granted the physical object. This is because we're presented with an abundance of choice in alternative physical products and who we can buy it off. However we are becoming more particular about the experience of choosing, buying and owning a product.
Value in this sense is esoteric. It cannot be objectively measured, like the cost of a widget or the sale price. It must be valued qualitatively in terms of how much fun you had choosing it, how easy it was to buy, and how you feel wearing the shirt.

Go ahead and list the ways your client values your service. Write down everything that comes to mind. It will make you feel better about charging a higher price.

What is the value of a sale to you?

Yes there is all the satisfaction and sense of purpose value, but allow me to consider the hard numbers in this case. Did you know that by discounting a product by 15% which has a gross margin of 30%, means you have to sell double the volume to make the same profit?

It's true, and if you increase the selling price of a product that has a gross margin of 30% by 10% you will increase your profit by 25%.

So go on increase your prices, but only after you've fully integrated the maximum value perception. For advanced thinking on integrating an idea, click here.

For your copy of a chart explaining the relationship between profit, margin and discount, click the PDF Button at the top.