Last week I saw an interesting infographic on social networks saying the following: “Something is happening, Facebook, the most popular social network, does not generate content. Airbnb, the large provider of accommodation, does not own properties. Uber, the big taxi company, does not own any vehicles. Alibaba, the biggest marketer, has no inventories…”
Well, this is already happening a long time ago. Generally, we think about products as tangible items, as physical goods with a set of attributes (features, functions, benefits, and uses) that are capable of meeting one or several needs and requirements. But the product nowadays can also be something intangible, which cannot be perceived by the senses previously, at least not until they are used, and in that sense the product can be a service, or may even be an idea, a concept, a philosophy, a story, that is also perceived by buyers as able to satisfy their needs or desires and therefore as subject of exchange.
A product can be a good, a service or an idea.
In fact, on most occasions is a set of all of them. A beauty treatment is a service, but the idea that sells is the desire of youth. There are companies that sell ‘experiences’, and that is something else than just a service. Ideas are also the religious ideas, political ideas, environmental awareness, and also the reputation of the seller. The salesman, the trust he can generate, his personal look, his charisma, are also part of the product that he sells. Other main and differential psychological attributes of the product are the Brand and Quality, which also add value to the product.
People buy more by ideas, by emotions, by feelings and heart. They buy benefits and solutions, they buy advantages and buy services that are intangible. And they buy the ideas they perceive from the seller, and in the seller.
Said this, we can better address the concept of the perceived value of the product which allows us to avoid entering price wars, allows differentiation and even to increase the price of the product.
The Perceived Value Formula
We should not compete just on price, which is an unproductive battle. The price is important in the purchase decision but should not be the only buying reason. If we do not have differentiating advantages, or when the customer perceives similar products or services, he decides just for the price. So that it’s needed adding new ideas and concepts, add value to avoid competing only on price. The salesperson needs to persuade with a value proposition, aggregate value to his offer to find advantages that differentiate him.
In short, we have suggested that the price is just one more variable in the perceived value scales of customers and consumers, and not the only component. It is best to explain it with a simple formula that everybody will understand:
Customers always perform a mental operation, sometimes more unconscious than rational, and sometimes very calculated, to know when buying is positive. To justify the purchase, they make a balance between benefits and sacrifices perceived in the supplier’s offer, and the perceived value of the customer is based on the difference between what they receive and what they give, something like this:
Perceived Value = Total benefits and/or advantages – Total costs and/or prices
In this formula, the first is the whole set of economic, functional, abstract, psychological (such as brand, quality, etc.) benefits and advantages of the product or service, and all the added and differential values. The second term includes all prices, economic costs, and also time, energy and psychological costs. It must be stressed that part of the costs are also the time that is used to make a decision, also the time spent in making use of the service, the psychological cost (e.g. against a particular brand, or stop using the usual product to change to another) and the cost of energy spent or effort for the purchase and enjoyment of the service.
The customer will also make this assessment with your competition:
- If the perceived value of your product is greater than that of the competition, he will be inclined to your offer, and vice versa.
- If the perceived value is negative, the price is the barrier, and generally, he will not buy. Or he will say that it is very expensive, he perceives nothing beyond the price.
- If the perceived value is very small, the price and the consequent price war may be what decides if he buys from you or from the competition, he will buy the cheaper, or not buy.
- On the other hand, if the perceived value of your product is very high you will sell more and better.
The value proposition
It is the seller’s job to increase this value, making the customer perceives and properly assesses the full set of benefits, including here all the factors, subjective and emotional advantages and added ideas to counter the price force. In this sense, the price and value of a product are not the same. And so we say that the price is not or should not be the only reason to buy, it is not the only element of the equation unless we do not make any value proposition.
When a customer is asked how they perceive the value of a product, they are actually being asked to compare it with their perception of other existing purchase alternatives. And therefore a product is not expensive by itself, the answer is: ‘expensive compared to what?’…
In short, the value proposition is to explain to your customer why they should buy from you and not to your competition. This must include the whole range of benefits and advantages of your product or service that solve their problem and meet their needs and your differential value. In other words, to provide a higher perceived value to the customer.
The dynamic perceived value.
The ‘problem’ is that this scale of customer values, this perceived value, is subjective, is abstract and it is a dynamic variable, changing, but not only from yesterday to today, but also from one day to the next. That is, the valuation of the customer is different before the purchase, at the time of purchase, while using the product, and after using the product. There is an initial, middle and final perceived value.
Furthermore, it changes with each client, it is subjective, so for each client, or customer type, each market segment or niche, you have to make a different value proposal, because ultimately we are people, and we value differently the same advantage, we have different sensitivities, as well as different economic capacities that will also affect the appreciation of those advantages. For the same product, different customer segments perceive different values.
There are also companies that play with the initial and final perceived value, looking to satisfy their customers by promising something they can deliver, and deliver more than they promised or surprise the customer with small details that were not in the initially accepted formula, values that were not expected. But also the opposite happens, disappointing the client with a final perceived value lower than the initial, and that is not what we want.
Lower prices are not the way
Well, despite being a formula, it is not accurate. That’s why the ‘easy’ way of that formula is to lower prices, but this does not always mean that demand rises, and it also generates another spiral of problems. Just like raising prices, it also needs to increase the perceived value of the product to be able to raise the price without problems. It is a Price vs. Value balance. In today’s competitive and changing world, the best way is to increase the value of our product, not to reduce prices. Rather, even to increase the price, if and only if, we increase our perceived value.
Therefore, companies and salespeople must deal with the perceived value of their product in the customer’s mind, which is a continuous job. Furthermore, building customer loyalty, as result from their satisfaction degree, will depend on the good or bad management by the seller and the company of that perceived value in relation to the initial expectations. That is, customer satisfaction and his loyalty will depend on the difference between the perceived value and the expectations. But that’s another story. One that is priceless.
Raúl Sánchez Gilo is a Spanish engineer, traveler, salesman, chess player, and writer. And not necessarily in that order. Thanks to his long experience in exporting technical products to more than 60 countries, throughout Asia, the Middle East, Africa, Europe and Eastern Europe, the author now shares the secrets to success in sales in his first book: “Sell More and Better, Eternal Sales Techniques beyond Internet”. A must-read literary experience for the thousands of salesmen, entrepreneurs, sales managers, sales trainers and coaches, exporters, business owners and sales students, among others.