When customers first encounter a new product or service, they usually have only the vaguest idea of what it is worth to them. In a few cases the product may have quantifiable material benefits – this is true of some financial services, and some business purchases. This gives a clear rationale for the price of the service – if something will make you £10,000 in profit, it is probably worth paying up to £9,000 for it.
Mostly, though, it is hard for us to know what we should pay for a product. It is intrinsically difficult to predict the enjoyment we will get from consuming it, and even if we can, it doesn’t naturally translate into a sum of money. Instead, we are likely to compare it with something similar we have encountered before and use that as a benchmark.
Imagine your friend from Estonia is visiting, and discovers that one of your neighbourhood pubs serves her favourite drink, which is made in Tallinn from local ingredients. You offer to buy her a glass of it. How much would you expect to pay? Consider these four scenarios:
- Imagine it is poured from a bottle into a wine glass. You might compare it with wine, and expect to be charged £4 for 175ml.
- If it’s poured into a champagne glass, it might be £7 for the same amount.
- If you instead discover that it is sold by the half pint, you are likely to compare it with beer, and £2 for the half pint will seem reasonable.
- If it is served in a shot glass, you would probably think of it as a liqueur and be happy to pay £2 for 25ml.
That’s a price difference of 11 times, just based on how the drink is presented. Of course the alcohol content is also a factor – but not a factor of 11.
Whichever products we most closely associate a new purchase with are the ones we are likely to use as a price guideline. Most products could potentially be compared with a number of different alternatives. The supplier therefore has the opportunity to shape our expectations by creating an association with a more expensive product.
The benefit matrix
Every product benefit can be seen in terms of something deeper. Think about your product or service and all the benefits it provides. You should think hard to work out all the reasons somebody might buy from you. Then look in turn at each of those reasons and see if there is something more basic behind it. For instance, the taste of a drink might provide sweetness – which is a basic biological desire – and it might also provide familiarity, comfort and reminders of pleasant memories. These memories in turn can be broken down into something even more basic. Ultimately, every benefit is based on two fundamental emotional drives, pain and pleasure, and two fundamental material benefits, time and money (you can ultimately consider money and time also to be enablers of pleasure, but adding this extra level is not much help in practice).
Here’s an example for an accountancy firm:
Primary (level 1) drivers
Level 2 drivers
Level 3 drivers
Compliance with regulation
Reduced likelihood of fines and penalties
Direct cost savings
Doing the right thing for society
Sense of community
Increased sense of control
Improved firm strategy
Reduced tax bills
Greater ability to grow the business
This matrix of values shows all the different reasons – conscious and unconscious – that influence somebody to buy your service or product. In any given situation the customer will only consider a small number of these reasons, which is a powerful opportunity for you.