Value proposition: What’s price got to do with it?

One of my longtime friends, who also happens to be an expert writer and consummate marketing expert, has always been fond of saying "In America, you are what you say you are until proven otherwise." I love that line because you can apply it to just about any facet of life, politics certainly but also your personal or business life as well. But for me, I always pull it out whenever anyone wants to talk about their value proposition and price.

Money talks

That's because the price you set says a great deal about what you think of your value proposition. For example, when I was back in graduate school one of my professors gave us all a "price test". It was a list of bicycles with various descriptions for the type of wheels, gears, shifters, seats, etc. that they each included. Plus, each bicycle had a list price.

Our task was very simple. Rate the various 20 or 30 bicycles on the list by quality on a scale of one to five; five being the best and one the worst.

At the next class the professor returned with our test results. As we guessed, there were no wrong or right answers.

Instead, he had run a regression analysis on the variables or descriptions of the various bicycles along with each bike's price to determine which variable influenced our ratings the most.

Guess which variable won? Price. By a wide margin.

People often use price as a proxy for value

What none of us had realized (or at least most of us), was that the descriptions often repeated (or nearly so), and in those cases only the price changed. This fact was pretty well masked by the professor's use of narrative descriptions that were lengthy and didn't follow a set pattern. That is, one might start out touting it was a 10 speed (this was some time ago), while another would start by stressing its superior brakes.

In short, for a lot of the students, the list of features became a blank wall of text, so predictably we fell back on price as the best or only available gauge of quality. The list of bikes became what a lot of marketers would call a "blind item". That is, something that the buyer typically doesn't really know how to rate on a real quality scale, so they look to other clues that rightly or wrongly (but hopefully) give them a good measure.

Diamonds are often given as a perfect example. (I mean seriously, how many of us really can see that slight flaw, with or without the jeweler's loupe? We just nod our head to avoid looking like we don't get it.)

But, even "difficult to evaluate" products have a price ceiling

So what does that say about price and your value proposition? Well, if you take this concept to its ultimate conclusion, you might assume that the highest end of the market is the limit, since the higher you set your price the higher your product's perceived value.

Alas however, we all know that it doesn't work that way. First, there is a limit to the "blindness" of even the most difficult to evaluate products.

Value becomes evident with experience

But further, while quality may be hard to gauge up front, most products become much less so over time. That is, use has a way of showing the buyer their purchases' true value.

So for example, while the class as a whole might have rated the most expensive bikes as the best on paper, if a number of us had actually purchased a few bikes we very well might have discovered our error and undoubtedly word of how we had been duped would get around. We also had limited time and to some degree, limited interest.

True buyers might be willing to put in a lot more time before drawing a final quality conclusion that was sealed with our hard earned cash. Hence, the second part of my good friend's quote, "... until proven otherwise."

Think twice before cutting price

So where does this story most often apply? I bring it up whenever I'm speaking with someone who is playing with an urge to price their product low.

Perhaps they are enamored of the freemium to premium concept. Perhaps they are hunting for ways to shorten their sales cycle for a while, or maybe they are simply looking for a way to move a few more "units."

Price reductions can backfire

Now, there are a whole lot of reasons to look at any of those moves a bit sideways. After all, not every product fits a freemium/premium model and not all sales cycles can be forced to go any faster regardless of the price. But as my little story tells, one additional reason is that it might just say your product stinks.

Douglas McCartney is a revenue-focused sales and marketing executive with more than 15 years of senior leadership experience at start-up to mid-sized B2B software companies. You can find Doug via his LinkedIn Profile here: http://www.linkedin.com/in/dfmccartney

Have you determined the highest value your company can offer?  Download the "Do it Yourself Guide" for developing compelling value propositions.

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