Price to value ratio and customer surplus.
That's what I want to talk about today.
What is it?
What is the price to value ratio
and what is the customer surplus?
There's actually a few
And one of them is that
the customer surplus.
According to Google.
According to Britannica.
Some I just quickly searched is how
much is the difference between a
price, the customer, our customer
pays for an item and the price that
he'd be willing or she'd be willing
to pay rather than do without it.
So basically what's the difference
from what they paid and what
they will be willing to pay.
But that's not really the
definition I want to focus on.
Although that's an interesting topic
of conversation in and of itself.
But a lot of what I really want to focus
on is when you're pricing your services.
How much value is actually
captured by you and how much
value is created for the client.
And at least in theory, the more
value you create on top of the price.
The more valuable and therefore the more.
Likely why to sell whatever
it is you're trying to sell.
As the basis for value pricing.
For example, a lot of times
a lot of people get hung up
on how do I do value pricing?
Ah, it's not an easy conversation to
have, but it really requires understanding
what is the true value of hiring you?
And according to Ron baker
value is the price that someone
is willing to pay for something.
But that even with that definition
of value, it's really about
how much extra value are you
creating on top of your prices?
So let's say you charge 1000
or 2000 or $5,000 per month.
Is expected to, is your client
expected to gain in terms of an ROI?
Usually financial, but not always.
And if not financial, then what?
What emotional benefit are
they getting from hiring you?
But either way, let's talk
about just the financial ROI.
How much are people getting back?
From the products and
services that you sell.
And sometimes it's a complicated thing
because on the one hand you could drop
your prices and sell more of a thing.
And leave a lot of value on
the table for your clients.
And that's a good thing.
You want to create as much value
for your clients as you can,
and take a fair and reasonable.
Commensurate a piece of the value for
you and capture some of that value.
However, dropping your price obviously
will have an impact on what you can
do in terms of delivery and scaling
issues and the actual hard costs.
For consultants, they'd be very low.
But time is still a factor.
But if you price too low, sometimes
people don't want to buy it either.
So that becomes a whole
So if I'm looking for a solution to a.
A an expensive kind of problem.
I'm not looking for a cheap solution.
I'm looking for something durable.
I'm looking for something proven.
I'm looking for something
that's going to work.
If I'm going to invest in say a CRM.
I don't want to get
something that's brand new.
I want to get something that is
established has been around a long time.
That is fairly mature.
In this product
development, and I want to.
I want to make sure that's
going to be solid.
So I'm willing to spend more, to
get a good solution because then I
can invest in it for the longterm.
I don't need to.
Buy the cheapest thing,
because I want the right thing.
I want to buy it right now twice.
I don't want to have to
migrate my CRM later on.
For example, I'm just picking
something and then maybe the same
with selling marketing services.
So if I really need my company to
grow this year, let's say we're going
through hard times or or we just have
ambitious growth goals, I'm not looking
to hire the cheapest option out there.
And so companies can afford those that
can afford to spend more, we'll spend
more because, and prices and values.
It's always relative to
the person buying it.
So if you're the cheapest option that
may appeal to someone who doesn't
have money and is looking for a
solution, the best solution they can
get for the limited funds they have.
Ideally, you're selling to people
who have an expensive need.
Basically they need to have a
big gap in where they want to
go and grow in their value.
And therefore they're willing to
spend a good amount of money to get
there, to allow you to invest yourself
appropriately in terms of your
time, energy, effort, and expertise.
All this is to say is when you are
dealing with pricing, You want to
leave as much customer surplus as
you can, meaning you want to leave
as much value that the customer.
Maintains on top of your costs.
So let's say your services cost
a thousand dollars a month.
Ideally, they're growing
by $10,000 a month.
In addition to the regular growth
because of you, or if not that
directly over the period of a couple
of years, the things you do will spin
off additional revenue or profit.
Over the long-term, you're building
out systems, hiring people, and you're
creating leverage for them in the business
through systems and structures and
measurement and ways of doing things.
So that would be an example of
adding surplus and it should far
exceed your prices at least.
Significantly exceeded prices to account
for variables and risks of things, not
working the way they were intended.
So the contrary factor here that I
want just hone in on for a second.
You're not charging enough
no one wants cheap advice.
I think there was a, there's
a book on pricing psychology.
That I can't remember.
And I think I wrote about it before.
And what it was basically saying was
that they had a hard time selling
these seats at this Broadway type
show in New York for cheap, because
no one wanted the cheap seats.
They were in the back and
they weren't that great.
What they did was actually increased
the prices and that actually allowed
them to sell more because no one wanted.
A crappy experience and whatever else.
So even though the seeds
were okay, maybe they're just
further back or what have you.
No one wanted the cheap seats,
so they couldn't sell them.
So by raising the prices that
actually showed people that
there is more value here.
So price can be an
indication, a signal of value.
And so you need to be careful.
You can't just drop the price down because
then you're going to dissuade the very
people you want to help because they're
going to perceive it as not a good
solution for the thing that they want.
So I just wanted to share this idea with
you because on the one hand you want,
you need to make sure if you're having
trouble selling or retaining customers.
You need to make sure there's enough
value on top of the prices you charge.
Number two is it needs to be
correctly positioned price wise
that people take it seriously.
And they therefore buy it
because it's not, it doesn't
seem like a flimsy solution.
And the last thing I'll say is
that you want to price it in a way.
And this is why I don't always
believe in maximizing the price
because it affects your longterm.
I get affects who are.
How long has the client
got to stay with you?
If you're charging 10 grand a month.
It's only a matter of time before they
hire a full-time senior marketer to
replace your income, your salary, so
how do you price in a way that leaves
enough value on the table so that they
stay with you longer and you capture
more profit in the long run and add
more value, creating more surplus.
And at the same time.
If you want people to
recommend and re and be highly.
Excited about recommending you to people.
Sometimes leaving a ton of
value on the table and keeping
your prices at a certain level.
Allows customers to not only feel
like they got a good situation out of
working with you, but they got a really
good situation out of working with.
The value is so dramatic that they
have to tell their friends and
ideally that's where you're going for.
So your price has to be high
enough to command your profit.
And a lot of people are undercharge
and that requires just knowing how.
You know how much value you can
create, frankly, from your service.
And that takes a bit of experience.
Low enough to be compelling and to have a
lot of customer surplus, but not too low.
That people don't take it seriously,
especially people that have.
The value of the solution the most and
have the highest need for what you offer.
So that's the challenge.
That's why price is a, this.
That's why economics exists.
There is pricing is a really challenging.
I'd rather play with the edges
based on supply demand results.
How are you doing relative to You're
in over your past for your clients.
And how confident are
you to get an outcome?
Because price is always a
signal at the same time.
You have to keep a high customer surplus,
not only to make your clients happy, but
also, so that it's profitable for them.
But also so that they recommend
and refer you in the future.
So just wanted to share
that concept with you.
I hope this is helpful.
It's not about maximizing
the initial sale.
Sometimes it's about leaving
enough customer surplus.
On the table so that clients.
Love working with you and feel like
they've got a bargain and therefore
recommend and refer you to others.
Like it's a no brainer.
To work with you and ideally want
your offers to be a no brainer.
And that doesn't mean cheap.
It just has to be clear ROI.
And sometimes it's about you too.
It's up to you to prove that ROI.
I Hope this helps