The word value is ambiguous. It has so many meanings. Business people use it frequently, making the assumption that people understand it.
When Tom Nagle used it in the phrase “Value Based Pricing” he meant the buyer’s incremental profit relative to the competitive alternative.
When selling B2B products, incremental profit to the buyer is a great definition of value. It’s meaningful and practical. However, there are two limitations to this definition. First, it isn’t specific enough. What value do you deliver to a B2B customer? You can say, “I deliver more profit”. Yes, it’s what the buyer wants, but it’s not how the buyer thinks about value. The specificity comes from how you deliver more profit. The second problem is profit doesn’t apply to B2C sales. Consumers value goods too. But consumers don’t worry about incremental profit.
I’ve come to define value as the RESULT of solving PROBLEMS. In B2B, the result can be more specific than profit, leading to incremental profit. For example, a company may have the problem that their factory equipment fails too frequently, taking down the entire production line. A vendor sells a solution to reduce the number of failures. The result is fewer failures. That resonates with buyers. We can then go on to calculate the incremental profit from reduced failures, which may be huge if it’s the difference between an entire production line operating or not.
In B2C, consumers buy products to solve problems too. Imagine a buyer’s refrigerator just broke. They have a problem in that they don’t have a way to keep their perishables cold. They may buy one that has a water and ice dispenser on the door. What’s the value of the ice dispenser? They had a problem: they didn’t like opening the freezer to get ice out, and the regular tap water wasn’t filtered, so it tasted terrible. The value is a convenient means to get tasty ice water.
What is Value? Value is the Result of solving Problems. If you learn to think more often in terms of your buyers’ problems, you will gain a much deeper understanding of the value you deliver to them. And of course, you’ll be able to charge higher prices for the right products to the right customers.
Share your comments on the LinkedIn post.
Now, go make an impact!
Tags: b2b, b2c, pricing, pricing foundations, pricing skills, pricing value
