Jump Start: Perceiving Is Believing
Giving customers value for their money—not necessarily a low price—is key to your company's success. Whether you are selling a luxury item to consumers or a staple to other businesses, you will win sales if you offer customers more for their money than your competitors do.
Many foreign companies understand this. Initially, many overseas rivals deliver value by leveraging their lower cost of production. As they become more skilled at production and gain deeper understanding of the market, they add value through innovation.
This was brought home to me recently when I met the owner of a Little Rock business that makes gloves for firefighters. He had lost half his sales to a company in Pakistan. Ouch.
"How much cheaper were their gloves?" I asked.
"That's the sad part," the owner replied. "While it's true that they have a lower cost of production, their new glove actually costs more than our glove."
I didn't get that. "How could that be?"
"Their glove is better. It's more flexible."
The Pakistani company has figured out how to increase the value of its product through innovation. And because its cost of production is probably lower than that of the Arkansas company, it likely has cash available to market the gloves as well.
Continuously improving your own "value for the money" is key to staying in business. Consider Apple's megahit iPod. The price doesn't change. But what you get for that amount is better every 6 to 12 months. Can you say the same about your products? Is your value to customers better than it was a year ago?
I think the minimum target for a company should be a 20% improvement in value perception every year. This does not necessarily mean you should lower your prices. Rather, you must improve your value proposition. Here's how:
1. MARKET YOUR CURRENT VALUE. This is the easy one. Make sure you get credit for what you're doing now. Don't hide the value and quality you build into your product. If you are using higher-quality raw materials than your rivals, tell your customers. If you customize each order, tell your buyers. And tell them if you have a sustainability program that reduces your carbon footprint. Clearly state your customer benefit and the reasons you are able to deliver on it, and you improve your value proposition.
2. ADD PRODUCT VALUE. Make your product or service easier to use, more effective, or more advanced than the competition. Ideally, this is where 50% to 80% of your value improvement comes from. Try using a lean manufacturing or Six Sigma approach, in which you find ways to reduce cost throughout the process.
3. LOWER YOUR CUSTOMER'S TOTAL COST. Look beyond the purchase price of your product or service to its lifetime costs to consumers, including their costs for installation, service, replacement, and usage. See if you can trim anywhere along that chain. Total cost often offers opportunities for small improvements; when added together, they can be very large.
4. LOWER YOUR PRICE. Your final step will be to look at your offering, price, and profit margin to see if your value is out of line. I met with a small company recently that sells a luxury product at a premium price. But when they looked closely at what customers were paying relative to what they received, they realized that over time the product had become less valuable to consumers. They were now charging too much. They cut the price a bit and accelerated the development of innovations that can help increase their total value to customers.
When customers feel that what you have to offer is worth more to them than the money in their pocket, they buy. It's as simple as that.
Back to BWSmallBiz December 2007/January 2008 Table of Contents