In my experience, small and medium-sized businesses too often tend to focus on the benefits of what they perceive as value and how to price their products or services lower than their competition. While it’s imperative to build your brand and vision as a business owner, it’s equally if not more important to visualize your business through your customers’ eyes.
Marketing and business development have always been passions of mine. Ten years of marketing experience combined with an MBA has allowed me to combine academic theory with real-world application. Through years of observing and working with small and medium-sized businesses, I’ve noticed that value proposition and current competitive advantage theories are generally neglected aspects of acquiring customers, while pricing is overstated.
A common question I ask business owners is: “Why go to you versus your competition?” The answers I get the most often include “I’m cheaper than everyone else” and “My company has the best customer service.” This is where a value proposition comes from. By definition, value proposition involves innovation, a feature, a service or a product designed to bring value to the customer. For example, let’s say I own a business and create my products based solely on what I believe is valuable to prospective customers. If potential customers interpret my products as valueless, then it doesn’t matter what I believe, even if I know that my products are the cheapest and best in class.
Value and competitive advantage are interrelated and essential elements in maximizing revenue. A true competitive advantage is one that cannot be duplicated or will be extremely difficult to duplicate. Price has long been known to be a competitive advantage if a particular business can produce a product or provide a service at a lower cost compared to its competition. While in some industries this may be the case, I tend to disagree that price is a true competitive advantage, especially for small and medium-sized businesses.
I’ve seen an HVAC client consistently drop prices on tune-ups and other services in hope of enticing customers to schedule appointments. While this helped increase the number of initial service appointments and subsequent short-term revenue, this strategy was counterproductive to long-term revenue growth. The increase in customer volume proved to be temporary as less than 10% of those customers who were acquired because of discounting remained customers past 24 months. Initially, discounting heavily in this particular client’s industry seemed like a competitive advantage. Over time, it became apparent that the discount customers were hard to retain due to the overwhelming majority of them continuing to search for the lowest price.
In my experience in multiple retail and service industries, I’ve noticed that discount and value-based customers both purchase based on their perception of value, but that’s where the similarity ends. While discount customers are often easier to gain but harder to retain, value-based customers (who are looking for the best product available versus just the best price) are the exact opposite: They’re harder to find and even harder to gain, but they’re also loyal and typically generate higher-ticket sales and more revenue. For small and medium-sized businesses, I’ve found that solely focusing on one type of customer or the other generally results in revenue gaps and stunted growth.
Knowing what your customers find valuable and creating products, services and processes that acknowledge their value perception can allow for higher price points. The majority of our retail and service clients offer discount and value-based pricing, depending on inventory and seasonality factors. Based on our clientele research, consumers will often pay a higher price if the value is there. For example, I have a client in the saltwater aquarium maintenance industry. After two years of researching competitor prices relative to the value that they offer the consumer, I suggested a 25% increase in maintenance prices. Even with the increase on services, most consumers saw the value — the total client attrition rate was less than 8%.
Equally as important as creating value is projecting that value to prospects and current customers alike. Ultimately, prospects and customers still need to be persuaded to see the value of what you’re selling. One strategy that’s consistently worked for our clientele is using the three modes of persuasion: ethos (credibility), pathos (emotion) and logos (logic).
• Ethos involves sharing how a business is credible, reliable and relevant to the consumer. A basic example of how to use ethos is to list any accreditations, licenses and the number of years you’ve been in business. Celebrity endorsements are another effective way to establish your credibility.
• Pathos is about inspiring an emotional response, whether positive or negative. Think about how you can appeal to consumers through positive emotions (as in the holiday car commercial showing a bow on the hood and the entire family running out of the house in giddy excitement), or conversely, how you can elicit memorable negative emotions (similar to how anti-smoking ads attempt to convince smokers to quit by highlighting health consequences).
• Logos has to do with the logical reasoning of why a consumer should choose your company. Consider sharing statistics, charts or other evidence that can help persuade your audience. Such evidence can include data on relevant market trends and legitimate technical data that compares you to your competition.
Using persuasion strategies to project a value proposition in conjunction with offering high-quality products and services can help nullify a business’s urge to consistently discount as the main method of generating revenue. Of course, there are exceptions to every rule, and I’m in no way stating that discounting doesn’t work or that price isn’t important. My opinion is merely based on balance and the observation that if a customer perceives a product or service as invaluable, then purchases based only on having a quality product at the lowest price become few and far between. In the age of the enlightened consumer, value can be a more positive representation of a true competitive advantage compared to price.
