Confused as to why some of your competitors can sell professional services at considerably higher prices? Differentiating between the following terms allows them to do so:
- Cost is the amount you spend to produce your product or service.
- Price is the amount you charge for providing your product or service.
- Value is the amount your customer believes the product or service is worth.
Knowing the difference can increase your profitability
Imagine that the cost for a doctor to deliver one of their treatments to one of his patients is £100 for supplies and an hour’s labour at £200. However, the value of the service to your client – that may have a dramatic effect on their quality of life – is far greater than the £300 cost, so the doctor may decide to charge a price of £500.
As the above example illustrates, your price should be in line with the benefits that you provide your clients, while bearing in mind what your competitor’s pricing strategy is.
Your price should be in line with the benefits that you provide your clients
Benefits = value / price
To maximise your profitability, find out:
What benefits your clients gain from using your product or service. In professional medical services, these benefits may appear somewhat intangible. Due to their regulation, buying professional services is a bit like flying in an aeroplane. It’s very likely that the quality of the service has been vetted to the extent that you can safely expect to travel from point A to point B in one piece. So what can one do to avoid the commoditisation that drags prices down to rock bottom levels, as it does in the airline industry?
One answer is added value. You can’t avoid noticing the number of no-frills options arising in this space, leaving ample opportunity for competitors that provide added value to their services in an effort to avoid profit erosion. Benefits can be considered the outcome of value over price. Increase the value, and the benefits will also increase, as in the following example:
Before: Value (100) / Price (£10) = Benefits (10)
After: Value (300) / price (£20) = Benefits (15)
But it isn’t easy. As you can see from the example above, if you want to double your price, you must triple your value.
The criteria your clients use for buying decisions. Most of the time, your prospective clients do not have the knowledge to judge your expertise and experience, or the quality of your facilities, your instruments or your supplies. Therefore, prospective clients usually ask “how much is it?” when they are aiming to evaluate less tangible factors.
Pricing can be a considerable criterion in buying decisions, but it isn’t the most important one. Rather, it is a metric on which to base further assumptions, about things that are considerably more important to them. What does your price say about your service? Does it say superior or inferior quality? Does it demonstrate clarity or complexity? Does it communicate honesty or artifice? Does it shout cutting corners, or sparing no expense? This is often known as the price = quality relationship.
Premium pricing, in fact, is a pricing strategy that is intended to exploit the (not necessarily justifiable) tendency for buyers to assume that expensive items enjoy an exceptional reputation or represent exceptional quality and distinction.
The value your clients place on receiving the benefits you provide. How does one, for instance, put a value on better health, increased mobility, better eyesight, improved appearance, or rejuvenation of confidence? For example, why is the average price (and therefore perceived benefit) of laser eye surgery in the UK estimated to be £3000? Who arrived at this figure? And how? Why do some practices in this marketplace charge approximately £1500 on either side of this average (£1500 to £5000)? Is there a limit to variability?
Wherever possible, set prices that reflect the value you provide – not just the cost.