How price enters into the value equation
So, how does a product's price enter into this value equation? A product's price simply reduces the product's potential contribution to the customer's bottom line. The customer's inducement to purchase - what is left after price has reduced the value in the offering - is the financial payoff to the customer that comes from going ahead with the purchase. It is the offering's expected net contribution to profit in the customer's business.
The question for buyers
The question for prospective buyers in most situations is not whether to make a purchase in the product category, but which product or service to buy. The answer to that question, according to this version of the value equation, is to purchase that alternative which offers the greatest contribution to the buyer's bottom line.
| Question |
| A potential buyer is trying to decide between two widgets, X and Y, where X offers $235 in use value at a price of $75 and Y offers $200 in use value at a price of $55. Which is the buyer's better choice? |
| Answer |
| It's Widget X. That's because the contribution X promises to make to the buyer's bottom line is $160 ($235-75=$160), while the contribution promised by Y is only $145 ($200-55=$145). The purchase inducement offered by X exceeds that offered by Y by $15. X's $15 purchase advantage makes X the buyer's better choice. |
When a product's price exceeds its value-in-use, the offering's net contribution, and inducement to purchase, is negative. The customer is better off not buying the product. Whatever the customer would gain from the product itself is more than offset by what she would have to give up in paying its price. If, for example, a widget's potential value-in-use to a business is seen as $50 per unit, but its price is $55, there is nothing to be gained from buying the product. The customer's business would end up losing $5 for each widget it bought!
In most situations, however, a very different situation exists. In most situations, the prices charged for products and services fall far below the values-in-use that customers expect to obtain from them. In many cases, because of competition, products' use values are in multiples of 5 to 10 times the prices at which they sell. Just think about the hardships companies would endure if they had to go without things like telecomm. services; then compare that with the prices paid for such services.
© 2001 CustomerValueCenter