Price And Value! — Quotidian — 384
(Transcript of video originally posted on 3 Apr 2022)
Do you remember this advertisement? It would end with a reference to something that’s priceless. Remember?
We know the value of something. How much value it gives us… How do we justify the price?? When we shell out money and purchase it, how do we reconcile to ourselves… that this price is okay for this value… Let us take a look!
Price and Value… In fact, in Quotidian 354, we have addressed something quite similar already. A diamond.. A bottle of water… Do you remember? The Cost of Value, we had called it. A little extension from there, a few thoughts shared in addition to those.
Firstly, what is meant by “Cost”? When setting a “Price”, what does a seller typically do? They enumerate ALL the things they have spent money on..
So, probably there is material cost. What have I used.. to create this.. Then, there is labour cost. Who all have I employed? What did I have to pay them as salary? Then, there would be overheads, expenses, … taxes.. and so on. So, all of these put together, comprise the Cost. And, somewhere near this number is where they set the Price. After allowing for a Profit Margin. At least, that is the common line of thought. At the same time, from the customer’s perspective, they look at Value. When we go to a shop, when we go to a service, and consume that service, we look at the Value we can get.
Values are of multiple kinds. A lot of variation exists too. For example, glasses as thick as this one, perhaps, for this child, it is vital. The child will be ready to pay anything, the parents of this child would be willing to spend a large amount, but probably, it is not as important as it is for him, for me. So, changing person to person.
Similarly, it can be dependent on time too. Sometime back, there was this rumour about Uber. That Uber was tracking the battery level on your device, and hiking the price, using its surge price algorithm. Hiking the price because it knew you wouldn’t take risks when you were running out of battery very soon. Okay, it has been proved to be just a rumour, but… Value of something goes up depending on that particular time. The day BEFORE the exam, the book is SO HIGHLY VALUED. But, the day after the exam, we know how things go!
Similarly, there is that beautiful balance between supply and demand. If supply is severely limited, demand naturally, automatically, goes up, they say. Remember this vehicle that they call Thar? From Mahindra! One Year waiting time! Who would be willing to wait one year, when new versions of vehicles are being launched every year… I wonder.
And, of course, finally, there is this geographical… or, who it is relevant for. If you go to an Eskimo, and offer him a block of ice, and ask for money, surely, he won’t give you the money, he would possibly LAUGH at you! On the other hand, if you go to somebody suffering in the Chennai summer, in the month of April, then, he would be ready to pay you money, for that beautiful block of ice. Provided it hasn’t melted already! So, value varies!
And, how much do they vary? Well, there are thirty different types of values we can offer, say researchers! Remember the Maslow’s Hierarchies?
Based on that very pyramid, there are these Functional Values. Does it simplify? Does it save time? Does it reduce cost? Does it improve quality? Does it help in organisation? What function does it perform?
Then, at a higher level would be the emotional effect it has. What is the Emotional Value? Here is where we find questions like, does it reduce my tension? Does it reduce my anxiety? Does it calm me therapeutically? Does it attract me? Is it triggering some kind of desire in me? These fall under the Emotional Value level.
At the third level, are the Life-Changing aspects. What is life-changing here? Well, does it allow me to have a sense of history? Does it make me proud of my heritage? Remind me of my roots? My country? My company? My society? That is the life-changing aspect of Value Addition.
And, finally, you go to that, … point where you say, okay, enough of me, what can I do for the people around me! You transcend your self. Till now, you were pandering to your own personal needs. Now, you transcend it, and wonder what social impact you can have. And, that, they say, is the fourth level.
In each of these levels, you can provide value as a service provider or a product manufacturer, to your end customer. And, with each of these, the customer will measure what your impact is, whether your cost is justified, whether your price is justified.
We can even draw ourselves a simple chart. If we are selling it at a very high price, not many will buy it. So, you will be at the end of the curve, like this. But, even if two people buy it, they are buying it at a thousand dollars apiece. So, I get two thousand dollars of revenue. You can tell yourself. At the same time, you can even sell it for one dollar, in which case there will be a lot of people purchasing it… but, again, revenue will not be too much, but many many more people are buying it.
Between these two, there will be a magical point. You could even call it an inflection point. At the magical point, you will be able to maximise the profit. For every good, there is a beautiful point, where that is the “rightest” cost to set for the product. If you set it at that price, probably you won’t get too many buyers, but the profit will surely be maximised, says economic theory. But, theory is never the real thing, after all… Is it? It is not enough to really solve all the problems! Because, … yes, the theory might point to a particular point there.
But, there is the question of Quality. Your product’s quality may affect what happens to this curve.
There is the question of pandemics like Covid. That will throw a spanner in the works.
And, how does your competitor react to the price change that you are doing?? That has an impact too!
And, finally, the perceived value! You may have set the cost, set the price, but what value does it offer me… We saw thirty items just a while ago! Those thirty items will drag this graph, one in each direction! That is why setting the price … and setting the cost price of your product is not such a simple game!
Talking about “Games”, you may wonder if it is just the roll of the dice! Which is why perhaps, there is a book with such a name! Don’t just roll the dice! Particularly, if you are going to be selling a software product, here is a useful short guide, says Neil Davidson and a few others. There is even a second edition of this out now. We are going to look at some interesting tidbits from this book now.
Okay, what is this “Perceived Value”? And, what are the ways I can raise it… in the eyes of the customer, how do I make my product be perceived as more highly valued? — There is a chapter dedicated for just this, in that book. Here are some suggestions they give.
First of all, the most important suggestion, please roll out the next version. To raise the perceived value of a software, there is no better approach than that! Don’t keep drumming your drum, saying, this is great, this is amazing, just show them the next version with more features, with faster performance, and so on.
Just a couple of days ago, Chrome launched its 100th version. A few days before that, it even made noise about the upcoming launch of the hundredth version, the first three-digit version, some software still checks for two digits and may even crash if our three-digit version is launched, … they said in a helpful marketing communique! A pride-filled blog post! The first product to reach “three digit” version number. How foolish, how silly, how ridiculous, you may think. But, a hundred milestones. When you think about that, you feel reassured that 101 is around the corner. Trust is built.
Similarly, they say, add “Personality” to your product. As if to convey, the software is not just bits and bytes. It has a life of its own. So, there was this newspaper.. There IS this newspaper. The New York Times. It is a hundred and seventy years old, I guess. It still is probably the only newspaper which doesn’t print in color, which has very dense typeface and font, and focuses on SLOW journalism. It has carved out an exclusive place for itself. And it is proud to be called the Gray Old Lady. It has started showing some colors these days, but, for so long, it was proud to be “out of fashion”. That was ITS personality.
Talking about personality, how about bringing your personality INTO the product? Meet Mr. Pravin Shekar, a good friend of mine. He is the Outlier Marketer. If you visit his website, you would have to tilt your head this way and that! His moustache is so alluringly beautiful. He is so famous for his moustache. Not just that! It is so hard to separate the man from his offering. What is his company? His company IS Pravin Shekar!
If you look at his books, he is obsessed with the color yellow, and he is obsessed with that round head of his.. will be so apparent. There is that blatant exposure of himself in his product. And, that is adding value! If I go to a bookstore, I may be able to locate a Pravin Shekar book faster than I can locate anybody else’s book! And, in this crowded world, it is such an asset!
I am sure you agree!
After that, he adds one more suggestion. He says, try and trigger LOVE. What does he mean by triggering love?? Well, Chennai-vasis might know about a bookstore called Crossword. Higginbothams is still around, has been around for many long years, yes, venerable old institution. But, Crossword, a Mumbai-based bookstore chain, when it came to Chennai, it was almost like a breath of fresh air. What was special about that? Well, they innovated in many ways. They provided reading spaces. Anybody could go, take a book, sit down at the cafe, read it, without paying for it! They brought a children’s corner.
All that was really good. But, the thing I liked the most? Here and there, from a random book, there would be these things sticking out… A small card. A bookmark. Sriram Recommends — it would say. Who is this Sriram? He is the Founder. And, the card would say “Sriram Recommends” and it would contain a mini review of the book. And, if I buy that book after reading that review, and if I didn’t like that book, I can return it, it will be refunded, no questions asked! That was a nice way to Trigger Love! There is somebody real on the other side! He is not just a book seller. He is a book reader too. Just like us! That thought they triggered in us? That adds to the perceived value!
And, finally, this connection! The internet’s biggest boon has been, for companies to connect with their users… Not just that. For companies to become platforms where users can connect with users. If you can stitch these two somehow deeply into your product, the way to connect with users, and the way for users to connect with other users, the perceived value… Remember Metcalfe’s Law? Simply because of that law, simply because of that Network Effect, it will become more famous, and the perceived value will skyrocket.
And, he goes on and on. This is the table of contents. How to set pricing? What is advanced pricing? What is versioning? What is the process? Is Free okay or not? How to set bargains? The analysis goes deep and wide! Towards the conclusion, the reader is led to believe…
Yay, they are going to give us a magic formula, that is when he recounts a story of two people.. who after many failed startups, design an oscilloscope, an audio oscilloscope like this. Nineteen Twenty, Nineteen Thirties, perhaps. At that time, they designed something like this, named it version 200A, not version 1… because, they felt nobody would buy it if it is called version 1! Such smart inventors, when coming to the burning question of setting a price for it… they didn’t use any formula, they didn’t compare it with any competitors and give a “competitive” offer.. They just said, let us set it at $54.40. Fifty four dollars, and forty cents. Where did THAT number come from?? Well, if you know your American history, long ago, somewhere around the 1850s, there was this fight between America, Russia, UK, Spain, about some borders.. Something similar to the Pakistan / India Kashmir border, there was a border fight. And, it happened at 54 degrees 40 minutes latitude! In memory of that fight, perhaps a favorite history lesson for these inventors, they decided to recall the slogan from the war “54 40 or Fight” and they used that for this! How is this relevant and meaningful??
But, wait! Who are those two people?! Hewlett and Packard!!
So, probably, you can also succeed if you roll the dice! But, you have to be reactive. You have to be sensitive. You have to always keep your ear to the ground, listen to feedback from the customers, and be ready, in an agile manner, to jump along, and match what the customer expectation is.
Whatever price you set for your product, whatever value you end up offering, I would like to enjoin you to NOT DO one thing though.. And that would be my closing thought for the day. Take a look at this device. This is a coin-operated binoculars. If you visit places of interest, to assist you in looking at things very far away, you drop some money into it, and using it as a binoculars, you can look around! This one is setup near the Golden Gate Bridge, as you can see. A binoculars to view the scenery. If you look at that product, sturdy! Rain, sun, wind, it can withstand the vagaries of the weather. Great magnification! Shows you things as if they are at arms’ length! But, my problem with that product is…
That is the binoculars. The optics is just that. The lens, the eyepiece, the long range.
Everything else… is the coin receptacle, is the timer for two minutes.. a hole that takes only quarters.. springs to detect if you have dropped a quarter or not.. quarter container… spring-loaded devices to block the eyepiece when the two minutes are up… Don’t design a product to cripple its use! Build what you build in the best possible manner! Get a good name with customers! Let that be the pathway for your profit, and for customer delight! Thank you!