Maximizing Your Price – the Value / Benefit Equation

Price increases are currently occurring at a faster rate than we've seen in the US economy for nearly 25 years.  The driving forces behind these increases seem to be the rising costs of labor, raw materials, etc.  Although these are certainly valid, the real reason for these price increases should stem from the value of the product or service you're selling, not the cost associated with them.   Unfortunately, for the past two decades, there have been many companies leaving billions of dollars of profit on the table because they've been basing their pricing on cost rather than the value / benefit equation.
 
Why should anyone pay more for something than the amount incurred to produce it?  For many companies, this seems like a logical question.  They determine the cost of their goods and services from a cost-plus model which says that the price you charge should not be out of line with what it costs you to produce it.  However, if this was true for all items in today's marketplace, then we'd all be paying a lot less for tickets to concerts and sporting events, as well as items like computer software, DVDs, etc.  When companies understand that the real profit is made by pricing their items according to the value / benefit of what the customer is going receive from their product or service, their bottom line will reflect it.  Over the years, I've found that the larger the company, the more confident they are with their role in the marketplace, and thus the more confident they are in pricing themselves based on the value / benefit equation.  Small companies, on the other hand, are less confident and are more likely to set prices using the cost-plus model.  Although there are many successful companies that use the cost-plus model including Costco and Wal-Mart, I believe it's imperative for every salesperson, no matter who they work for, to push themselves to the value / benefit equation.
 
The value / benefit equation is very simple.  It is built entirely on understanding the benefits that the customer is going to realize from using your product or service.  To discover these needs, a salesperson is required to not only ask them questions during the sales process, but also to really ascertain how their product or service will be used for the long-term.  Do not equate value to low-price.  On the contrary, the best value is many times the highest price (or at least what appears to be the highest price initially). Take, for example, the price to fly from New York to Los Angeles.  I'm sure a person could take a bus across the country for a lot less money, but the value / benefit equation would be low for the bus trip because of the time it would take.  Conversely, flying would cost more initially, but provide you with far more time once you reached your destination.
 

As a salesperson, you should never allow yourself to get steamrolled into a price increase discussion with a customer that is centered solely on raw costs.  Whenever you present a price increase, always begin by asking them questions about the benefits they receive from what you're providing them.  This allows the customer to better understand the importance of you and your company to them.  Encourage them to explain how you fit into their supply-chain model or how you impact their overall business process.  The key is to get the customer to share with you something specific and unique about how you help them.   Then, to further drive this point home, ask them follow-up questions based on what they tell you.  Their specific responses will reiterate the fact that you and your company are an important asset to them.  Once you have achieved this level of dialogue, you can then share your price increase.  Because they realize how crucial you are to their success, they will be less likely to raise any objections.  At this point, you will have achieved the value / benefit equation you're looking for and the higher price you deserve.
 
Despite the grim economy that seems to be driving many price increases, the outlook doesn't have to be hopeless for salespeople.  By focusing your customer's attention on the value / benefits your products or services offer, you can help them see that it is imperative that they continue in business with you because of how you and your company contribute to their overall success.