How much would you pay?

by Steve McKee

How much would you pay?How much would you pay for a five-pound bag of potatoes?

If you saw two similar bags of potatoes, one priced at $3.00 and one at $3.25, I suspect you’d choose the $3.00 bag. Even though the price difference is small, it offers a better value.

But what if one bag was priced at $3.00 and one at 59 cents? Would you still choose the cheaper one? Perhaps not, because you’d figure there was a reason why it was so inexpensive—and not a good one. Your value equation would be different in this case than when the potatoes were close in price.

Now take it in the other direction. One bag of potatoes is $3.00, and another is priced at $8.50. You may indeed still choose the $3.00 bag, but I’ll bet you’d stop and consider why the other was priced so high. Maybe there’s something really special about those potatoes that provides a different sort of value. Some people, I dare say, would purchase them just to find out.

One of my most popular BusinessWeek.com columns is “Five Words to Never Use in an Ad.” One of those words is value, and for good reason. What constitutes a value is not only different for everyone, it can differ by purchase occasion. And as the potato example demonstrates, it can even differ based on the dynamics of any set of circumstances.

I was fascinated to read an interview with David Ovens, Taco Bell’s CMO, in which he described the brand’s value proposition in three ways: price value (79-, 89- and 99-cent menu items), abundant value (larger products like a triple steak burrito) and quality value (new ideas like the “Fresco” menu). The chain’s pricing strategy further reinforces the point, and as a fairly regular customer of Taco Bell (thanks to my teenage son) I find even my own value equation changing depending on the circumstances.

Like a complicated mathematical formula, value is based on a number of variables. Change any one of those variables and you change the result. That’s why it’s vital to put the “who” before the “how much” in your pricing strategy. Value is as much about your customers as it is what they’re buying.

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Steve McKeeSteve McKee is a BusinessWeek.com columnist, marketing consultant, and author of “When Growth Stalls: How it Happens, Why You’re Stuck, and What To Do About It.” Learn more about him at www.WhenGrowthStalls.com and at http://twitter.com/whengrowthstall.

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  1. Great post – I think it’s important to remember that price isn’t everything, but if you don’t make it easy to understand what the differentiator is, then you make price the deciding factor for you client.

    The difference between the simple analogy and real life consulting is that often the price is different depending on the relationship. Your bag of potatoes won’t likely cost less for a ‘good’ customer, while a consulting fee can change for long relationship, good referrals, and alignment with values.

    Despite that difference, I would think your analogy stands up.

  2. Steve,

    Nice post. There’s a similar story that you might enjoy that comes from the Silicon Valley Humane Society…

    For many years, the Humane Society had charged an adoption rate of $25 for cats and $40 for dogs. At those relatively low prices, the adoption business was brisk, but the problem of cats and dogs being returned to the shelter was overwhelming the staff and facilities. At the same time, the California Veterinary Medical Association conducted a study that looked at what types of animals get returned to shelters, and an offshoot to this study also looked at the relationship between the rates of return for animals and the price that had been paid for them. This part of the study showed that there was a very strong correlation between the amount paid for the animal and the likelihood that the animal would someday be returned to the shelter: the lower the adoption price, the higher the likelihood that the animal would be returned.

    Armed with the data from the study, Benninger went to her board to propose significant price hikes. She wanted to raise the adoption price for both cats and dogs to $110—an increase of over 400 percent for cats and almost 300 percent for dogs. Naturally, Benninger’s staff and the board pushed back on the proposed price increases, citing the opinion that while the price hike might make a dent in the return rates, it would significantly affect their adoption rates. The staff’s resistance to the hike could be summed up quite succinctly with one question: “Who’s going to pay $110 for a six year-old dog?”

    Despite the resistance, the board approved the price hikes. Guess what happened? During the first year, adoptions actually increased 10 percent and more importantly, their rate of return was cut by 50 percent. The response was exactly as Benninger had predicted: As the perceived value of the adopted animals increased, so too did the reluctance of their owners to return the pets to the shelter. In the years that followed, the Humane Society Silicon Valley continues to use price with great success as a major tool in instilling the perception of value among their customer base.

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