Overview
Have you ever considered buying something until you saw the price and thought, “No way – that’s too expensive!” and later realized you missed out? Products and services are priced the way they are for a reason. Usually that high price is justified (after all, they probably wouldn’t be in business otherwise!), even if it’s not for everyone. It’s often a big mistake to consider the cost but ignore the value.
For the last four years or so, I’ve been intimately involved with the software sales process. It’s been enlightening to see what makes people spend $20,000 to $200,000+ on software. One of the biggest things I’ve learned? People that buy (and who usually have great success) are the ones that focus on the value much more than the cost. Don’t get me wrong, cost is still a very important factor, but many groups evaluated multiple solutions and chose the one with the lowest cost, completely ignoring the potential value.
In this article, we’ll discuss the distinctions between cost, price, and value, why a value focus is important, how to calculate the potential value, and some real-world examples.
Comparison of cost, price, and value
Cost (from the vendor/provider’s standpoint)
Cost is the total of the expenses it takes to provide your product or service. It could be a combination of materials, labor, services, etc. that are variable and/or fixed in nature.
Price (charged from the vendor/provider’s standpoint)
The price charged by a vendor can be based on the costs incurred, plus a profit margin, or it can be derived based on the value the customer should expect to receive (often it’s a bit of both). The market generally has a huge impact on the price that vendors are able to charge their customers based on competition and the laws of supply and demand.
Value (from the customer’s standpoint)
Value is what a potential customer feels a product or service is expected to be worth to them. It could be based on personal utility, the amount they can resell it for, or how it will help them save time or achieve a goal. The perceived value should be higher than the price, otherwise people are very unlikely to buy, and that becomes more difficult the higher the price range.
Why a value focus is important
At the end of the day, it’s all that really matters
Simply put, people buy when the perceived value is greater than the price, like the scale above shows. The bigger the difference between the value and the price, the easier and quicker the potential buyer’s decision will be. Rather than wonder if the buyer is seeing the value, make it completely obvious. Offer an ROI calculation based on the buyer’s scenario, the best you can.
The greatest value is usually not obvious
Value comes from differentiation and closely aligning a customer’s problems and needs with a product or service’s solution. Often a solution solves multiple problems that are several levels deep. Uncovering the need behind the need and building multiple layers of benefits is a great way to maximize perceived value.
Aligned value is how checks get signed
It’s frustrating for everyone when a clear business case is built for a product or service with a strong buyer champion, but the initiative stalls with the check signer. Aligning the value with strategic initiatives at the check signer’s level (and above if needed) is crucial, especially when there are a lot of projects going on (when is that not the case?).
How to calculate the potential value
Consider the direct benefits
If you’re purchasing something that saves you time, the most direct benefit is the value of that time saved. That’s pretty easy. There are all kinds of ROI calculators out there (we offer them on our Excel add-in page and our training page). Make sure the calculations make sense (erring on the conservative side) and include all costs (employee benefits, bonuses, etc.). A similar approach can be applied to purchases that help you grow.
Consider the indirect benefits
Ignoring the indirect or intangible benefits can make a big difference. Let’s say you’re considering a software product that will automate a process people hate doing that often causes errors. Other factors to consider are the cost of rework, the potential implications if there are uncaught errors, and the cost of recruiting, hiring, training, and integrating new employees when people quit from the current disengaging process. Preventing the loss of valuable tribal knowledge lost when good people quit is tough, but it should certainly be considered, as is the effort and time it takes to build new relationships.
Consider the opportunity cost
What happens if you do nothing? Is that even sustainable? What will you miss out on if you choose a particular product or service? Everything has an opportunity cost, and it’s worth considering whether it’s well beyond just the investment of funds, time, and energy.
Examples of value
Sports
Most major sports leagues choose a most valuable player (not a most costly player). It’s usually the player who had the greatest individual impact to their team’s success. Without them, it’s a totally different team. There are all sorts of advanced ways to calculate the contribution. In baseball, wins above replacement (or WAR) is an advanced metric that takes into account all kinds of factors to establish a value metric. Their historical performance is used along with current market rates to determine the contract they’ll get based on their expected value. What if you took that approach with all your strategic investments?
Real estate
You can look up the market value of real estate pretty easily these days. It’s mostly driven by recent, nearby comparative sales and the location, quality of the schools/neighborhood, and the condition of the property. The value could be driven up based on a lack of supply or great demand – maybe a particular property will save a lot of time commuting, establish great relationships, or offer more safety. Some people buy properties just to flip them or resell them based on the expected value.
Businesses
There are several ways to calculate the value of a business, including the stock price, multiples of sales, multiples of profitability, etc. Many techniques take into account the net assets of the company, the cost of the assembled workforce, processes, and systems, the ability to fund its operations, the competitive landscape, and the growth potential. The calculation is generally based on the expected value of the business over the next several years.
Summary
In the examples above, the expected value is calculated based on a variety of factors – certainly not just the cost – but that’s not the way many strategic investments are evaluated. If you don’t take a value-based approach to purchasing decisions, you might be missing out! Often the potential value is a lot deeper than you might have thought. Don’t ignore the indirect or intangible value – it could be greater than the obvious value! Calculate a rough ROI and compare it against benchmarks, existing customer references, and of course, your gut. Lastly, consider the long-term price and value. People that consider the long game often have much more success!
What helps you define value? Share your thoughts in the comments below!
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