Even if you know your product is perfect for this customer and would solve all their problems, if they don’t understand this, the perceived value isn’t there and they won’t buy from you. Getting the thought into the customers head – that your product is the solution to all their problems – is the last step. How do you do this?
The first step in this process is realizing what your value add is over the competitor, what your competitive advantage really is. This is sometimes hard for companies because it requires a bit of honesty about the market. Chances are, you probably aren’t that different from the competition. Especially from where the customer is sitting, there probably aren’t huge differences between you and the competition, even more so in a service business where the product is not tangible.
Think of a Venn diagram with three circles in it. One represents what your company has to offer. The next represents what your competitor has to offer (whether a specific competitor or the competition in general it doesn’t really matter). And the third circle is your customer’s demand – what they want to buy. How does this look in your head?
Are the circles equidistant, with you and the competitors each offering something unique that the customer wants? Does your circle overlap with the customer’s significantly more than your competitor’s? Vice versa? Chances are, none of these views are correct. In almost every market, unless you’ve introduced a radically new product, what you offer and what the competitor offer are very similar. So smash those two circles together, until there’s just a tiny piece of each sticking out. In most markets, this is the total amount of differentiation between companies.
Now add in the consumer circle. Since there is so much overlap between companies, they tend to have very little that can only be satisfied by one firm. Your competitive advantage is just a tiny sliver out of those three huge circles. Clearly, we need to emphasize this well in order to justify a price premium to customers.
Pressing the Advantage
So, how do you do this? Let’s say you’re a trucking company. There are a lot of trucking companies, and most people tend to see them as a commodity – they all do the same thing, get my stuff from one spot to another. To differentiate yourself and show the customer that extra slice of value you add that your competitors don’t, you need to break it down for them. Since you’re a smaller company, each shipment gets more individualized attention and can head out of the warehouse faster, since there aren’t as many things that could delay it going on around. On average, this means your shipments get there 5% faster than the industry average. Not only this, but your drivers are safer because you individually interview each of them. Being in such a small company, you can tell when they have any kind of safety issue that would impact their performance on the road. So, you have 10% fewer accidents than the industry as a whole.
These are the sorts of things that will set you apart to a potential customer and give them reason to really consider you. However, we can take it one step further. Rather than just listing a bunch of statistics to them, we can make talk their language. How much is it worth to the customer to have their shipment 5% sooner. Even if this is just a few hours, they could have had that shipment at work in their business that much sooner, whether it is inventory, inputs, or something else, having it early is worth money to them. The same thing can be done with safer drivers. How much did logistical issues cost them last year? Reducing that number by 10% would be free money for their business.
When you are able to attach a dollar value to all the fringe benefits your company offers, you are then able to quantitatively justify a price premium to your customer. You can say “we offer $X more in value for the same product (or service) than our competitors” and then justify splitting that value with them. Your estimate doesn’t have to be perfect either, as long as it is reasonable. In fact, allowing the customer to come up with their own number gains even more buy in from them. How could they not want to buy from you if they themselves calculate that they will save $X thousands of dollars.
This method of pricing based off of value is one of the single most effective tools for differentiation in existence. Using it, the customers in your micro-segments won’t be able to wait to buy from you! The only part left to consider is the relationship and the manner of the sale, which is what we will be discussing next week!