I am working with a company right now that is outperforming most of its competitors, while charging 50% to 100% more for the same products. How is it accomplishing this? The secret is that it offers “ego-satisfaction value” that customers really want to buy. And this is for what most people would consider a completely non-emotional, non-ego-centric product.
Big surprise, huh? Yet you would believe this was revolutionary new thinking, if you look at what most of the marketplace is doing.
Most businesses are creating their own personal recessions right now that will follow them for years. Discounting (because they think they need to in order to survive) is killing their futures more certainly than any government policies can. The cost to overcome this “devaluing” that they are creating for themselves will far outweigh any possible gain they think they might have generated during the last year.
Creating “value” has been the subject of conversation around boardroom tables for decades. Sadly, in most cases, that conversation gets no deeper than adding more “features” or adjusting price for a product or service that really needs to be rethought. Consumers and corporate buyers are more interested than ever in value, but their definition of that term is being modified to demand more Alpha-style fulfillment than our economy has experienced in a long time. As consumers feel more pressed and corporate buyers feel more threatened with lack of job security, both are looking for more evidence that they are not just OK, but also valued.
Here are two critical things Alphas know about creating value that will drive growth (or limit loss) in any economy:
- You have to understand who assesses the value of your product, and
- Discounting is the quickest way to increase your pain rather than decrease it.
Sound simplistic? Then why is it that well over 90% of all companies get these two things incredibly wrong. Even those who start off handling these correctly and build both market share and Alpha influence eventually fall into the trap of incorrectly assessing value and believing that discounting can save them from decline. We are seeing it all too clearly right now throughout the marketplace.
- Critical fact #1: VALUE is in the eye of the beholder (that’s the customer)
“Value” is an estimate by a potential customer of how much he thinks he will gain by purchasing what you offer minus the “pain” he thinks he will experience in purchasing it. This “gain” vs. “pain” formula is critical to understanding how to strategically make your product or service more attractive. The potential customer is making critical judgments about what you sell vs. what they want to improve in their lives.
Psychologists have long held that people typically act either to move away from pain or to move toward gain. It is the individual’s perception of what creates pain or gain that really comes into play in creating strategic differentiation and market growth. Without this understanding, you don’t have a prayer of selling “value.”
- Critical fact #2: the “beholder” is not you
More important to remember is that this pain vs. gain “valuation” is done by the prospective customer, not you.
Businesses of all sizes are notoriously guilty of thinking that they know what customers want. Sadly, that self-assessment is almost always proven to be false.
This only gets worse during tough economic times. As cash flow and profitability are pressed, the pain at the corporate level gets translated into movement away from strategic sanity and toward self-destructive tactics that actually work against the company. More pressure is placed in panic upon “making the sale” with little regard to how what is being sold can become more attractive in ways that mean something to the customer.
What means something to the customer is often far different than what means something to the marketer. As customers move away from pain and toward gain, they make many assessments and judgments. On the “pain” side is certainly monetary cost, but there are also many other factors, including how hard it is to get it, how hard it will be to work with the people selling it, etc. Monetary cost only becomes a real factor when the buyer doesn’t have money and can’t get it.
Luckily, we are still in an economy where that is not a significant factor. Most companies and consumers are more careful about spending in order to preserve what they have, but most have money to spend on the things they believe they really want, need, and will fulfill core ego needs.
We all know that if we were to discover that we have a fatal, but curable disease, we would find a way to pay for the cure, even if we did not have medical insurance. In much the same way, we will find a way to get the things that overcome even less critical needs. To a lesser extent, we will find a way to fund the purchase of something that increases our self-image and self-perceived value to others. In the Alpha model, these ego-satisfaction needs are referred to as “Self-Satisfaction” and “Personal Significance.” After these are satisfied, other monies available might be used to buy other things.
So, here’s where the conflict comes in: most marketers make their assessments of what customers will buy based upon THEIR avoidance of pain and desire for gain.
There is little real understanding among the typical corporate marketer (other than Alphas and emerging Alphas) about what people really want to buy. The result is that they try to create more value by adding features, adding amounts included, and/or lowering price to “increase” value. The trouble is that customers just want to satisfy the basic functional need with something that also fulfills their all but insatiable need for self-satisfaction and personal significance. Features, amounts, and pricing do little to address those emotional, self-perception needs in ways that cannot easily be overcome by a competitor who recognizes real buyer needs.
If you want to increase value, you have to really understand more than the functional needs being addressed. You also have to understand the core emotional needs customers want to fulfill with almost anything they buy.
- Critical fact #3: DISCOUNTING is almost all pain and little gain
Why do most marketers fall into the trap of price reduction as a means to “increase value?”
It’s easy, even if it is self-destructive. It certainly doesn’t take much creative, strategic thinking to suggest discounting. It’s also what most salespersons have been brainwashed into believing by buyers who manipulate them.
Price only becomes a factor when all other things are equal OR when the buyer thinks he can get away with demanding a lower price. So, the typical marketer gets lots of feedback about how they need to lower their price, simply because they have not differentiated themselves in ways that mean anything to real customers.
The problem is not just a matter of poor marketing; it is also a matter of bad business management. Profit is the lifeblood of a company. Without it, the company fails. People lose their jobs. Suppliers feel the pain. The economy falters. More companies fail. And a death spiral begins.
A drop in price of just 5% across the board can mean a drop in profit for the company of anywhere from 10% to 50% depending upon the benchmark net profit. In order to compensate for that drop in profitability, drastic cuts must be made on the cost side. On the contrary, minor changes can create value that could drive prices upward by 10% to 25%. In many cases, I have seen minor changes in value perception generate value increases of 30% to 100%, which drives even greater sales growth (which only increases net profit further).
I know. It’s easy to say, but much harder to do. That’s only true if you hold to the premise that price is a critical factor in creating value. Eliminate discounting from your vocabulary, focus upon self-satisfaction and personal significance fulfillment for your customers, and it is amazing what changes will be wrought by your salespeople, your marketing team, and even your administrative team.
People naturally want to sell and buy real value. Forget your old perceptions of value, and you will be shocked at what your people and your company can do.
Wes Ball is president and founder of The Ball Group, a strategic innovation and growth creation company. He is also author of The Alpha Factor – a revolutionary new look at what really creates market dominance and self-sustaining growth. Find out how you can use the Alpha model to create dramatic, sustainable growth for your company no matter what the economy is doing by calling Wes directly at 717.627.0405 or email him at w.ball@ballgroup.com.