Valuing Differentiation With Premium Prices

All the gurus say that for your business to be success you have to follow a differentiation strategy so that you stand out from your competitors. Provided you are different in factors which matter to customers you then have a competitive advantage based on being better, cheaper or different.

For the differentiation advantage to turn into extra profits you have to be able to justify why customers should be prepared to pay premium prices.

Inspired By Footballers Pay

I started to think about why people are prepared to pay premium prices after I read the sports news this morning about two Manchester United footballers who have agreed new deals. One player is 28, the other 29. Both are England internationals and have many years of first team experience. Both are tall and strong and can play in the same position. But it is reported that one player has agreed a deal for £60,000 per week while the other will receive £120,000.

So why is it that Manchester United are prepared to pay one player 100% more than the other?

Small Differences Can Make A Big Impact

Everyone who watches Manchester United accepts that the one player is better than the other. He is a little more aware of what is happening in the game. His positioning is a little bit better. He is a better passer of the ball.

And all the small differences add up to one big difference when the Manchester United management decide how much each player is worth to the team.

Easy Pricing Mistakes

It is very easy to misunderstand the value that your product or service creates.

When you look at the advantages from a supply perspective, the differences are very small and knowing how small, you may not have the confidence to add much of a premium price.

But turn the situation around and look at it from the customer's perspective.

These differences in the two players may mean that once in every five games, a goal may be scored by the opposing team which could have been avoided if the better, more expensive player was in the team.

And over a thirty eight game season, that could be an extra seven or eight goals conceded so eight games may be drawn instead of won, gaining the team eight points instead of twenty four.

Championships are won or lost on much smaller margins than that.

Look At Customer Consequences

To understand the value of your differentation, you need to look at your product or service through the eyes of a customer and in particular look at the different effect of the consequences of purchase and how these consequences relate to their goals.

Remember people buy something for what it does, not what it is.

I think that it was in the excellent book "The Strategy and Tactics of Pricing" that I read about the example of two paint brushes.

The first was a standard paint brush which cost $10 to buy.

The second paint brush was special. The company had invested a fortune and developed innovative bristle technology that meant the paint could be applied twice as quickly and achieve the same quality.

So is this new paint brush twice as good as the standard?

Yes.

So should it be priced at $20?

No.

When you are buying a paint brush, you are buying the ability to put paint on walls, doors and any other object.

Your goal is to make whatever you are painting look nice as quickly as possible.

It is time which matters and this is where the extra value of the paint brush comes in.

If the faster speed of the new paint brush will save you ten hours work, its value is worth much more than $10 to you.

Identifying Your Extra Value

So you are not a professional footballer and you don't sell paint brushes but you can still apply these ideas.

Look at your products and services and compare the consequences of buying from you rather than from your competitors.

Identify where the differences are and calculate what this means to a customer [segment if possible and you can set up price boundaries].

You now have the maximum price premium you can charge but your task is to persuade the customer to pay more so you have to give an incentive to buy so you both share the gain.

You need to educate your customers to appreciate the extra value you are providing and provide proof through testimonials or demonstrations.

Valuing Differentiation With Premium Prices

If you have gone to the trouble of creating sustainable differentiation in your products and services, it is essential that:

• you capture this extra value through premium pricing so that your profits are higher than industry norms or
   
• You knowingly intend to offer better value for money with the intention of gaining share. Your competitors may react but going back to the paint brush example, their room to manoeuvre is very limited. The price of the standard paint brush pay fall from $10 to $5 but that has little effect on the value of the time saving which is worth much more.

This is why knowing, understanding and applying the principles of customer value are so important and why customer focused entrepreneurs do so well.

If you would like a free report please click on "How To Price What You Sell"

To Your Success

Paul Simister

Your Profit Coach, business coaching for customer focused entrepreneurs

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