Monday, May 21, 2012

What is Total Value?

Value is not the same as cost. 

In fact, a product's value is almost never equal to its cost. For example, your product might cost you $2 and you sell it for $10. The value to you is $10. 

The value to the customer will usually be more than the selling price. If it was only worth $10 to the customer then they have no motivation to buy. But if the value to them is greater than the selling price, they are motivated to trade their money for something of greater value. It may be worth $30 to the customer. Then they will gladly give up $10 of their money for the product. The greater the difference between the perceived value and the cost of the purchase, the more the customer will want to do business with you.

Always provide value that is greater than the price they pay.

The Value Formula

Take a look at the following formula, then see where you need to concentrate your efforts to create value. Every product and service can be described this way.

Total value = real value + perceived value

Let’s take it apart to understand it. Real value comprises the tangibles. It is relatively easy to measure. Real value can be expressed in this manner:

Real value = function/cost

Function is what the product or service does in mechanical or analytical terms. How much money does it save you or make for you?

Imagine you are buying a new car. If you want to get the best real value, you would get the most function (efficient ground transportation) for the lowest cost.

You could measure the car's function factor by comparing it with the cost of your practical alternatives: public transit, car pooling, taxi, bicycle, limousine, various car models. You might wish to consider the costs of these alternatives in terms of time and inconvenience. What does your new car give you that these other modes of transportation don't?

Having determined the new car's function factor, you can divide it by its cost. Is its function worth more to you than its cost? If so, the new car has real value.

At the end of your analysis you would buy the cheapest car. Right? Not necessarily. 

Remember that what you are willing to pay for your car is based on the total value to you, which is a factor of both real and perceived value. 

So, sometimes without realizing it, you assign value to less quantifiable benefits and buy something that you like. 

Liking is not part of real value, it is part of a product's perceived value.

What is Perceived Value?

Compared with real value, perceived value is harder to measure. It is influenced by emotion, image, and other intangibles - all the benefits you should emphasize in your marketing efforts.

Perceived values are not bad - they are a reality. As long as we are individuals we will think differently, perceive differently, and place different values on things.

Beware of that. Use it to your advantage. When your prospect wants to negotiate price, remember to build up your product's perceived value.

By the way, always deliver real value too.

George Torok Keynote Marketing Speaker Co-author of Secrets of Power Marketing
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