How much is a customer willing to pay for a product or service?
You might think that the most obvious way to find out would be to simply ask the customer. After all, your customers dictate the market price right?
It may sound counter-intuitive but basing your prices strictly on customer input is probably one of the worst ways to price your products and services.
I’ll use buying shoes as an example. If Kenneth Cole came up to me and asked me how much I would be willing to pay for his latest shoe design, I’d probably say $50 (I’m cheap when it comes to shoes).
After all, at the very basic level, it’s just a pair of shoes right? But if the shoes were guaranteed to increase my height by 2 inches, I would probably be inclined to pay a little more.
The example above illustrates that it is much more effective to sell solutions and not products. I don’t need a new pair of shoes but I wouldn’t mind appearing a little taller.
If something you are selling provides a unique benefit or saves a customer hundreds of dollars worth of time by increasing productivity, then your prices should reflect these savings.
Another common mistake is to base your prices solely on the cost of materials. When my wife and I first launched our store, we priced our products based on a 4X multiple of our cost of goods which seemed to be an excellent margin.
But then we realized that customers were willing to pay much more because we were providing a priceless keepsake for their wedding day.
Do not base your prices solely on the cost of materials.
Your job as a small business owner is to try and find out what problem the customer is trying to solve and charge them a premium for goods and services that reflect the true value of your business.
What Is A Unique Value Proposition?
If your business blends in with the competition, your only leverage will be to reduce prices which will erode your top line. Even if you sell commodity items, you need to differentiate yourself from the competition in order to command premium pricing for your products.
That is why it is absolutely crucial to establish your unique value proposition.
A unique value proposition is an exclusive or differentiating aspect of your product or service that defines your business. It must be a strong statement reflecting your company’s ideals that draws a customer to what you have to sell.
Here are a few examples.
If you watch college basketball on television, you’ve probably seen Dick Vitale chomping on DiGiorno pizza during the commercial breaks. DiGiorno’s unique value proposition is that their pizza tastes as good as delivery pizza except that it comes from the freezer.
Their unique selling point always rings in the back of my mind every time I walk down the aisles of my local grocery store. In fact, I don’t buy any other frozen pizza brands anymore because their pizza is inexpensive and good.
Another great example is Head and Shoulders shampoo. There are hundreds if not thousands of shampoos out on the market. But when I have dandruff, only one brand pops into my head that will solve my problem.
Coming Up With Your Own Unique Value Proposition
So how do you come up with your own unique value proposition? Make sure that you structure your USP based on the following criteria.
- Emphasize a particular benefit from using your products. In the Head and Shoulders example, their shampoo solves the dandruff problem
- Find something unique to say about your business. Do you carry the largest variety of a certain product in the area? Do you sell hard to find products? Can you do something that no one else can do?
- Make sure your USP paints a mental picture. For example, “KFC sells chicken that is finger licking good” creates an excellent mental image.
Here are some good examples of unique value propositions that have already been ingrained in my head. (Note: A unique value proposition is not a slogan or a tag line. It just so happens that these slogans represent the value propositions of their companies very effectively)
- Advil, advanced medicine for pain.
- Bounty, the quicker picker upper
- BMW, the ultimate driving machine
- FedEx, your package on time guaranteed
Make sure your unique value proposition paints a picture. For example, “Quality electronics at low prices” is not a good USP because it sounds generic, doesn’t solve any problems and doesn’t paint a mental picture of the business. Here are some pointers on how to come up with a USP.
- Focus on what problem that you are trying to solve for your customer. Customers don’t give a damn about features or bells and whistles. They have a problem that needs to be solved and you are the only one that can solve it.
- Take a look at your competitors and find characteristics of your business that differ from the rest. If you can’t find anything unique about your business, then you should probably find another market to pursue.
- Look at your business from the point of view of a customer. If you were in the market for your goods, then what would you look for? What aspect of the business would compel you to purchase from them?
After you’ve jotted down some notes, try and formulate a sentence or two that summarizes it all. Make sure it paints some sort of picture in your mind. For our line of wedding handkerchiefs, our slogan is “Personalized keepsakes to dry your tears of joy”.
It’s simple, catchy and captures the joy and happiness of a bride on her wedding day.
Our value proposition is that…
- We carry the largest selection of wedding handkerchiefs on the Internet
- We offer fast turnaround times on personalized goods
- We will make sure our goods arrive to your wedding or special event on time
Demanding Top Dollar
Once your unique value proposition is ingrained in the minds of customers, you’ll be in the position to demand higher prices. One of the biggest problems a small business faces is what I call pricing inertia.
You’ve sold a product for years at a certain price. You’re making a good profit and you are satisfied with your cash flow. Why should you raise your prices?
This question can best be answered with another question. Why be satisfied with a good profit when you could be making an astronomical profit?
The fact is that if you don’t know what problem your customer is trying to solve and what he or she is willing to pay, you could be leaving a lot of money on the table at the end of the day.
For example, when I first launched my course on How To Create A Profitable Online Store, I only charged $299. But then a funny thing happened.
Every time I raised the price, I would attract more and more customers and the quality of my students went up as well. Clearly I had priced my course too low in the beginning because the value I was providing was many times greater.
Take a moment to think about the value you are providing before you decide on a price. More often than not, you are probably undervaluing your products.
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- What To Do If A Competing Business Undercuts You In Price
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