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Value Vis-à-vis Price – and Vice Versa: What's Your Service or Product Worth?
By Mark W. Sheffert
July 2004

How important is price to your customers? Is it the most important thing? Second most? Maybe third most? I’ll set the record straight once and for all: The answer is...it depends.

Business textbooks simply say that the importance of price depends on what you’re selling. Commodities compete on price, but with a value-added product or service, one can command a higher price. It’s that simple.

Well, let’s examine that theory with real products. What exactly is a commodity anyway? At the risk of spoiling your lunchtime reading, isn’t toilet paper a commodity? It’s something that everybody uses every day (we hope), without paying much attention to it. But we all know that there’s a difference between cheap toilet paper and the nice fluffy stuff.

While it’s not a subject that gets discussed often, I believe most people value the fluffy stuff and are willing to pay more for it. Personally, I prefer Charmin. But here’s the conundrum: There are several types of Charmin. There’s regular Charmin, then there’s Charmin Ultra (soft, thick and so absorbent, the company says, that one uses less of it per trip to the bathroom), Charmin Plus (with a soothing lotion containing chamomile, aloe and vitamin E for gentle care of one’s skin), and Charmin Scents (with a fresh wildflower scent that the whole family will love).

I can quickly deduce that I don’t want a fresh wildflower scent; too girly for me. And, as for as soothing lotion, it’s toilet paper, for crying out loud! However, the choice between good old plain Charmin and Charmin Ultra is not an easy one. Is it true that I will use less of the Charmin Ultra, therefore justifying a higher up-front price and ultimately paying less in the long run? Hmmmm, not so black and white anymore, is it?

Could it be that the Charmin folks don’t view toilet paper as a commodity? Have they instead realized that value is an emotional combination of price, quality, and service? Have they positioned their toilet paper so that the benefits in the cost-benefit ratio outweigh the cost? And exactly how much do I value the really soft, fluffy stuff?

Leading With Value

To help me in my toilet paper decision, I looked up “value” in my trusty American Heritage Dictionary: “An amount, as of goods, services, of money, considered to be a fair and suitable equivalent for something else; a fair price or return.” That’s not bad, but I need to expand on that a bit for the business folks out there. My own definition is: An amount that businesspeople often confuse with “price”, but can only truly understand if they know what their customers perceive as valuable.

Now, as much as some of you would like to stay on the subject of toilet paper, let me switch to other products. Consider Nordstrom, which describes itself as one of the nation’s leading retailers built upon “the principles of quality, value, selection and service”, and committed to “earning the trust of our customers, one at a time.”  Nordstrom has a 103-year history of providing exceptional selection, quality, and service. That’s why consumers shop there, not for low prices. Nordstrom is a good example of building an entrenched corporate culture of leading with perceived value.

Let’s also examine Minneapolis’ best-known high-value furniture retailer, Gabberts.  This is the place to go if you want professional design help and unique, handmade furniture that will last a lifetime. For more than 50 years, Gabberts has provided superb quality and service, those intangibles that add up to high perceived value for customers – and the ability to set higher prices. Gabberts definitely serves a smaller portion of the furniture market than some of its competitors do, but that portion is willing to pay more for high value.

But now there’s a new kid coming into the Minneapolis furniture scene. This month, IKEA, a Swedish retailer, will open across from the Mall of America. IKEA advertises “good design and function at low prices” and that, frankly, seems to make some of its competitors uneasy. (Have you noticed the new Gabberts ads focusing on lower prices?)

Let’s compare that situation to the position of Hubert White Clothiers. This men’s clothing boutique has been around since 1916, outlasting most other stores in the Minneapolis men’s clothing market. Its goods are expensive: suits for up to $2,500, shirts for as much as $155. However, the clothes are made of high-quality, unique fabrics, and customers get exceptional service. And you don’t have to worry about running into 10 other people downtown who are wearing the same threads. (See, ladies, men are vain as well!) Hubert White has stuck with its high-value – albeit high-cost – strategy for years and succeeded regardless of competitive threats from mass merchandisers.

Leading with Price

Now back to my toilet paper dilemma: Do I really want to pay more for Ultra? Does the higher price justify itself? Well, I consulted my American Heritage Dictionary again, which describes price as “The amount, as of money or goods, asked for or given in exchange for something else.” Not too different from their definition of value, is it? But, again consulting my own Business Folks Dictionary, I find that price is: What one charges the customer for goods or services; a sum usually arrived at by an analysis of business costs, the target market, and desired profit margin.

Isn’t that usually how it goes?  Setting prices is at best a confusing, difficult process during which the financial and production folks argue over the cost of goods sold, while the sales and marketing folks argue (with or without research) over what they think the market wants, while senior management and the board of directors argue over what the profit goal is. Not a pretty picture, and the end result is not usually very scientific.

One company that seems to be quite clear about price is Wal-Mart. “Always Low Prices, Always” is the retailer’s slogan. But Sam Walton was a genius in understanding that perceived value is the relationship between price, quality, and service, so Wal-Mart also promotes its “Three Basic Beliefs”: respect for the individual, service to customers, and striving for excellence. Although its first emphasis is low prices, Wal-Mart also promotes its outstanding service; think about those friendly Wal-Mart greeters. There is an emotional element to purchasing even the most mundane things (as in my toilet paper example), but if you want to serve the mass market, focus on price.

Sticking With It

If you’re still with me, my point is this: Reaffirm what your customers want and what your company is good at providing, then pick a strategy based on that and stick to it.  “You can’t dance at two weddings,” as the old Jewish saying goes, and neither can your business. Successful companies seem to either lead with perceived value or lead with price, and focus on that one thing.

I understand that the world doesn’t stand still, and that we all need to change. But it’s really difficult to change your fundamental business model. I’ve worked with many distressed companies that have tried to design and implement a significant new business model inside an existing, established company, and that’s a tough act to pull off.  As I like pointing out when I talk to companies and business organizations, businesses generally do not fail because of bad strategy; rather, they fail from bad execution. Even a bad strategy, if well executed, will typically result in acceptable performance.

Here I am at the end of my article, and I still haven’t decided between Charmin and Charmin Ultra. I guess I’ll just have to go to Target, kick that wimp Mr. Whipple to the side, and squeeze the Charmin.


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