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Price is what you pay Value is what you get: We all know and admire Warren Buffet for his business skill and wit. This quote from Warren Buffet talks about the concept of price and value. Most times we are trained to think that an expensive item is of good or high quality. However, this might not always be the case. This quote exposes the most common myth about the market. Although price can be an indicator of quality, it is not always the case. Clever marketers exploit this perception of buyers and price products accordingly. Hence, as a buyer, we must always be sharp and look for the value of a product or service.

 Market dynamics are often shaped by prices and demand for a product. Product pricing strategy focuses on a few factors such as – customer willingness to pay, and the number of potential sales at Price point A vs Price point B. Most importantly, they focus on the perceived user value for a product. A product or service is rarely priced at the cost or making charges. It usually is about how much the market is willing to pay. The market analysis defines the price and dictates the cost of a product/service.

Price is what you pay Value is what you get

Now, let’s start with the value – this is the most important thing for a customer. This is also the most important thing that a business will focus on. Most new businesses or startups will try to understand the value of goods/services to the customer. The value is defined either as time saved, convenience, uniqueness of a service etc. Based on these factors, the product pricing strategy comes up with a commercial value that something is worth to the customer.

The last part is very important because different products are worth different prices to customers. Hence as a business, you must be careful to define your market segment and the ideal customer. The most common business cases include Tier A, B and C customers. Tier A customers represent the ideal customer base. Tier B and C are fringe customers, but they contribute to a large segment of the revenue.

Hence, a product price relies heavily on your Tier A customers. In an ideal world, the sales from Tier A customers must return expected profits for the company to deem the product successful and keep it in production. We also call them anchor customers. A key strategy is to include these anchor customers as a part of product development so that you can define what gives them the highest value.

Value Vs Price

The value vs price debate is the most common conversation that you’ll find in pricing strategy meetings in a company. If you are a startup, rest assured that your investors will ask you about the base of your research for coming up with the pricing strategy. It not only needs to ensure the longevity of your business but also provide a compelling reason for the customer to keep returning to you. If you have these two cases clearly articulated in your business plan – you can expect a compelling narrative for investor interest.

From an investor and business point of view – if you can provide a compelling reason as to why a customer’s perception of value from your product is high, then they will view your business as attractive. In an ideal business case – the value of your product must be so high that the customer must feel that they are paying a low price for such a high value. It creates repeat business and loyal customers which businesses and investors love. The same argument applies whether it is a startup or an established business.

If you are a startup founder or an individual in product-related roles or in leadership positions trying to convince the board – think about these aspects first. The more you start from value, it becomes easier to articulate your business case for the longevity of products and create a strategy for repeat business with low churn.

Price is what you pay Value is what you get

Warren Buffet

References:

https://www.simon-kucher.com/en/insights/value-perception-understand-and-enhance-your-products

https://www.bankrate.com/investing/best-warren-buffett-quotes