How does selling based on price competition, versus selling based on the value proposition
to the customer, affect profitability and customer satisfaction?
Let’s go meet Rick, the fish seller.
He has a wide variety of fish and shellfish on sale at the market.
One of his products is fresh halibut, priced at $6.99.
There it is, let’s zoom in to take a closer look.
Rick’s “Plan A” is to sell all his halibut today for what he thinks is a fair price.
In the case of halibut, he sells for $7 (well, $6.99, but let’s round up to make the calculation
easier), while he bought the fish this morning at the harbor for $4.
So in “Plan A”, Rick will make $3 profit margin.
If “Plan A” does not work, and Rick keeps the fish in his store for too long without
selling it, the fish might become…. well….
“fish of second freshness”.
Under this “Plan B”, the price drops to $1, while Rick’s cost was $4.
In short, he will make a loss of $3.
Better find some customers right now, and see if he can make “Plan A” work.
Selling fish of second freshness, even at a steep discount, might not be very good for
Rick’s brand reputation or his margin!
Rick meets Jane.
She passes by the fish store, and Rick asks her if she is interested in buying some great
quality fresh fish, hoping he will be able to sell halibut for $7.
Now Jane is really on her way to the bakery and not interested in buying any fish.
She declines and walks on at a brisk pace.
She actually hates fish, and can’t wait to get away from the smell.
The value of the halibut to this potential customer (Jane) is zero.
As the value to the customer is lower than the price, there will be no sale.
The next person passing by is John.
Rick asks him if he is interested in buying some great quality fresh fish, hoping he will
be able to sell halibut for $7.
John stops to look at the fish on sale, opportunistically asking Rick what’s on sale today.
John’s thinking is: I am really on my way to the butcher for some steak, but maybe I
should check out the fish as well.
However, John is not used to eating fish very often.
He mostly sticks to steak, chicken or spareribs.
He’s OK with fish, but not a huge fan.
To him, the price tag of $7 sounds too high.
The value of the product to John (its ability to fulfill John’s need for food)
is only $5.50.
If he can get a nice discount from Rick to take the price below that $5.50, he might
be willing to go for it.
If Rick works from the assumption that his potential customer John only cares about price,
which is subsequently confirmed by John asking for a deal, then Rick might be tempted to
drop the price from $7 to $5.
At $5, John has a slight incentive to buy: the perceived value of the product to John
is $5.50, while the product is now offered for $5, so John can realize $0.50 of benefit
(the difference between value and price).
Rick makes a small margin: $1, or 20% of the selling price.
If a sale is made on these terms and with these assumptions, both John and Rick could
turn out to be unhappy.
John the customer because he really wanted to buy steak (which for him is the best value
for money), and bought fish instead with only a small benefit.
Rick the seller also feels it was a bad sale because he doesn’t make enough margin to
compensate for all the time and effort he puts into his business.
The “system” benefit (value to customer, minus cost to seller) is very low, at $1.50.
Let’s take the sales conversation into a different direction.
What if Rick strikes up a conversation with John first, and finds out what is important
to his potential customer.
Is John buying food for a special occasion?
Is John looking for a certain taste?
It turns out that John has recently become very health-conscious.
Based on that important information, Rick explains him the features of fish as a product,
and the benefits to a healthy lifestyle of ingesting a sufficient amount of omega 3 fatty
acids and protein, which are to be found in abundance in fish.
John gets a lot more excited!
The perceived value of the fish goes up significantly now that he understands the value to him.
The price of $7 sounds like a very good offer
now that the perceived value to the customer is $10.
If a sale is made on these terms and with these assumptions, both John and Rick could
turn out to be happy.
John the customer because he gets great value for money,
and introduces more variety into his meals.
Rick the seller because he makes enough margin in relation to the time and effort he puts
into his business, ensuring he will stay in business for years to come.
The “system” benefit (value to customer, minus cost to seller) has grown to $6, due
to different framing.
Remember that customers don’t buy a product or service, they buy the results or benefits
that a product or service gives them.
I hope you enjoyed this short explanation of how selling based on price competition,
versus selling based on the value proposition to the customer, affect profitability and
customer satisfaction.
If you enjoyed this video, then please give it a thumbs up!
On this end screen, there are a few suggestions of related videos you can watch next.
Please subscribe to the Finance Storyteller YouTube channel!
Thank you.