This post should be read after the post on “The Categories of Value”.
Suppose you like to have a new pair of glasses. How much are you ready to pay for the best fit glasses?
This is certainly a difficult question because there are several variables that impact the translation of value to money.
- Considering the practical need: what limitation the new glasses reduces?
- Considering the status value: what people would think of me wearing these glasses?
- Considering my own pleasure when I look at the mirror – what is the value of me liking my look with those glasses?
- How much money I have? Can I afford the truly best fit glasses? Would I have to give up something else? If so what is the value of that?
- What is the “fair price” for the glasses? We all hate to pay more than what we have to.
The first three parameters state the difference between the three categories of value. Personally I assume the practical need is the most important in this case. But, it seems others value it quite differently.
The decision, involving all the five key parameters above, has to be done every time we face a choice. When we face a complicated decision we should always look for the inherent simplicity. The last parameter, the not-too-rational question of whether the price is “fair”, poses a major simplification of the decision process. The reason is that instead of translating our perceived value to money we rely on universal “fair price” as representing the value.
Establishing a fair price requires finding a reference-price. What could be the common reference price for a pair of glasses? As there could be a variety of practical-need features (multi-focal, anti-scratches etc.) as well as a variety of esthetical parameters and variety of brand-names (important for the status), there are several price-references, like $15, $200 and $800 for a combinations of features and brand-names. When a specific choice is considered one is able to “tolerate” a certain deviation from the reference-price when there is a justification. In other words, the reference represents the worth of the average value, and when a specific product is perceived as somewhat ‘better’ than the average, all the customer has to do is to validate that the additional value is worth the deviation from the reference. This justification works when the deviation from the reference is relatively small. When the deviation is significant there is a need to find a new reference, like the multi-focal glasses has different reference than regular glasses.
Marketing has to face the reference-price and find the justification for charging more, or establish a new reference, which covers the added value of the specific product/service. When the main value is based on practical-need the rational should be the unique value of the extra practical-need that the product yields. Status has its own rules and opinion-leaders and if they give the product a nod it is possible, even desirable, to charge much higher price. The real difficulty lies with the category of value of pleasure, because not only the client has a real difficulty to translate value to money, she is not going to tell us what she thinks. Presenting the product image as significantly higher than the reference is a real marketing challenge.
The good news about the reference-price is that it limits the negotiations between sellers and buys. When there is no reference, like when the product is actually a project, developed according to the specifications of the client, then both sides fall into the trap of cost-plus. This is a natural lose-lose situation. I’m afraid we still do not have a universal solution for a win-win. Do you?