What a small hardware store owner can teach you about creating value

Pepe PaezPepe Paez is a technologist with a deep enthusiasm for marketing strategy. With more than 10 years in the software development industry, he keeps a strong understanding of technology that goes where he goes and is part of his signature in new projects. Most recently, his interest and expertise revolves around Pricing Strategy and overall Strategic Marketing, where he tries to disrupt thinking by going back to basics.

He likes to spend his time between finding new things, being silly with his family and trying to actually enjoy a yoga class. You can find Pepe on Twitter, LinkedIn or email him directly pepe@obsidian.mx


The importance of understanding value

Don Roberto is the owner of a small hardware store in northern Mexico, on a whim he decided to buy a few pallets of wood boards, after a couple of weeks he noticed customers were not buying any of the boards because he bought them at regular retail price. His was deemed too expensive.

At this point in the story, what would you do?

Most people I tell this anecdote answer the same way Don Roberto’s oldest son did: sell the thing at cost, stop the bleeding.

Don Roberto wouldn’t give up so easily, he sent his son to buy some boards from a competing hardware store and put them on display at half the price of the competition, his son protested, surely his father had lost his marbles, why would you buy more stuff and then sell it below cost?

But he did as told and the new boards with the cheaper price were prominently displayed right next to the original ones.

Now, if you’ve noticed anything about planks of wood is that if they come from the same area, the same tree; they share some characteristics such as color, grain, and density; and so they become particularly useful for high-end decoration purposes.

When asked by customers why the different price point Don Roberto simply replied: “The ones above are much higher quality, that’s why they are more expensive. The ones below you can buy from any store but they’ll charge you double this price and they are not really good quality.”

He sold out within a week.

At this point many people agree that Don Roberto was very good at marketing, that his approach was ingenious and to some extent bold.

But there is something more intrinsic to what he did, something far more fascinating: Don Roberto created value, out of thin air.

In strategic marketing there is something called value-based pricing, and this is nothing more than setting your price based on the value delivered to your customers. Many companies still function on a cost-plus scenario and while commodities operate just fine under that tent it is still critical to understand how your offering drives value to your customer, how it compares to the alternatives in the market, and how much leverage you have to drive price up and have a positive impact on your bottom line.

But what is value? It is not the monetary aspect of a transaction, nor the feature that makes your offering better than the competition, it is the benefit derived from the usage of your offering in terms that the customer will appreciate. I’d like to focus now on 2 key aspects of value.

First, value is customer specific.

You think your new product is so cool everyone should buy it, and who wouldn’t right? I mean, you designed it and spent countless hours actually building it, you finally have it in your hands and you can’t wait for the world to stop suffering from not being able to tell if they washed their hands 5 or 7 times a day.

There is a saying that goes “One man’s trash is another man’s treasure”, the same applies here. Just because you find it valuable doesn’t mean others will (and vice versa!).

From a business perspective value is most likely anything that will keep your operation in growth or from going under. It might refer to keeping customers, signing new deals, cutting operation costs, expanding to new markets. And as such value is associated to something; it can be a patent, a service, a new technology, a process, a new face or a court order.

So what does it have to do with your product? Your product does not have value to the customer in and of itself; it has features that allow the customer to obtain that value. Just because I have a faster computer doesn’t mean I am more valuable to the company, but it has a faster processor so I can use the feature to drive a benefit to the company (reduce turnaround time to quotes, faster shipping, less quality escapes) thus creating value. And it will be specific to the customer.

Second, value is relative to the next best alternative.

If I were to offer you a regular bottle of water right now, would you be willing to pay 100 dollars? Probably not, chances are you have a bottle of water right next to you or you could get one for less than a buck on a corner store.

But what if you were stranded on the dessert with nothing more than an empty canteen and a vulture circling above and casting a not so nice shadow to guard you from the sun?

If your product does exactly the same as the competition, then why would customers buy your product and not the alternative? It is well known that you want to have a competitive advantage and the reason goes beyond being able to charge more, it is so that your customer will measure you both on the same terms, and those terms are not price but value.

The value you deliver will be the result of one aspect of your offering: that which distinguishes you from the next best alternative. If you don’t have something that adds value then you might as well call it quits because you are setting yourself up for failure from day one.

And here is the kicker, one of the most common alternatives customers have is to simply do nothing. Think about how many times have you thought “nah, I don’t really need it I already have X”. When you fail to recognize “DO NOTHING” as a next best alternative then it is quite likely any customers you have today won’t return for more or you’ll lose them when someone else does recognize it.

Third, value is measured in currency.

Yeah, I said 2 key aspects, but really if you can’t automatically see that value is measured in dollars and cents then you need to re-read the whole thing again.

Any benefit a customer obtains (new deals, customers, markets, etc) means either more profit, less leakage, better yield, more dividends, higher ROI; call it what you will: it-is-still-money.

Value is so powerful when it comes to marketing, it can drive your operation up or crash it rather quickly; it is just as important as understanding what is it that your customer needs not just what it wants. But that is a topic for a separate discussion.

So, recap:

  • Value does not follow the law of energy conservation; you can in fact create value.
  • If it is customer specific then you better understand customer segmentation.
  • In the words of Sun Tzu: “know thy enemy”; otherwise you will be wallowing in defeat many times.
  • And finally, if you can’t drive an economic benefit to your customer then you will be driving yourself out of the market.

Below, I share with you my “What is value based pricing?” presentation:

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  • Miguel Mejia

    Very interesting, I agree, price is determined at the moment of buying, no sale no value.