Quantifying and Pricing Product Value

July 31, 2024
5 min read

By Mark Stiving – Founder at Impact Pricing LLC

The key to successful product pricing lies in a profound understanding of how customers perceive value. It’s not just about setting a price that covers costs and generates profit, but about comprehending and articulating the unique benefits your product offers and how these benefits translate into financial value for your customers. This blog explores the innovative concept of Sizing Value Tables and practical market research tools that will equip you with the insights needed to strategically price your products, ensuring they resonate with your market and maximize profitability.

Key Takeaways:

Understanding customer value is crucial for effective pricing.
Sizing Value Tables helps articulate the value of your product in terms of problem, solution, result, and value.
Van Westendorp’s Price Sensitivity Meter is an effective tool for gauging optimal price ranges.
Asking customers what they think others would pay can yield more honest pricing insights.
Combining qualitative insights with quantitative research ensures a comprehensive pricing strategy.

In this article

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How Much Should You Charge for Your Product? It's More Than Just Math

One of the most common questions entrepreneurs and business owners face is: how much should I charge for my product? At first glance, it seems like a straightforward math problem. After all, isn’t price just a number? We’re simply trying to determine the dollar value to place on a product after it’s been created. However, pricing is far more complex than a mere series of calculations.

The Real Challenges Behind Pricing

When we delve deeper into the concept of pricing, we uncover significant problems that businesses encounter, all of which relate back to pricing. Let’s explore some of these key issues:

Insufficient Compensation for Value Created Despite the immense value that your products provide to customers, it often feels like the compensation received is not proportionate. You know your products have high value, yet the payment doesn’t reflect that worth.
Unpopular or Unused Products and Features Many companies invest time and resources into building products or features that ultimately don’t sell or are rarely used. A survey by Pragmatic Marketing revealed that 37% of companies admitted to creating products or features that nobody uses. Anecdotally, some suggest this figure might be even higher.
Ineffective Marketing Messages Businesses frequently create impressive marketing materials and web pages that fail to resonate with potential buyers. Despite detailed descriptions and attractive presentations, buyers often don’t feel the same excitement or connection to the products.
Frequent Discounting by Sales Teams How often do your salespeople resort to discounting your products? This is a common issue across many companies, indicating a deeper problem with pricing strategies.
Uncertainty in Pricing Strategy The fundamental question remains: how do we price our products effectively? This uncertainty underscores many of the challenges mentioned above.

The Core Problem: Understanding Value

All these issues stem from a common problem: a lack of understanding of our own value. Specifically, businesses often do not comprehend how much their buyers value their products. Even worse, they don’t understand how buyers perceive this value.

Aligning Price with Perceived Value

Pricing a product is not just about setting a number at the end of a production process. It’s intrinsically linked to understanding how buyers think about and value your product. This understanding should influence every aspect of your business, including:

Marketing Messages: Crafting messages that genuinely resonate with buyers based on their perception of your product’s value.
Sales Strategies: Selling products in a way that aligns with the buyer’s value perception, reducing the need for frequent discounting.
Product Development: Choosing which products or features to develop based on what buyers value the most.

Quantifying Perceived Value

The goal is to understand and quantify how buyers perceive the value of your products. By doing so, you can establish a pricing strategy that reflects this value, ensuring fair compensation for the value provided, reducing the development of unused features, and creating more effective marketing and sales strategies.

Understanding Value: A New Perspective on Pricing

Let’s dive into the concept of value, which is a crucial yet often misunderstood aspect of pricing. Value is a complex and multifaceted idea, and today, I’ll present a new perspective that will enlighten your approach to pricing and product development.

Two Key Types of Value

When discussing value, we must differentiate between two main types: value in use and value in choice.

Value in Use: This refers to the inherent value derived from using a product. For example, think about the value of air. The value of having air to breathe is infinite because it’s essential for life.
Value in Choice: This is the value of a product relative to its alternatives. For instance, if you value air infinitely, how much would you pay for a jar of air? Likely close to zero because free air is available all around you. Thus, the value of the jar of air relative to the alternative (free air) is negligible.

The Importance of Understanding Value

Grasping these concepts of value is crucial because it aligns us with the mindset of our buyers. It shapes how we market, price, and develop our products.

Willingness to Pay and the Buyer’s Value Journey

Value equates to the buyer’s willingness to pay. Buyers who base their decisions on value in use are willing to pay more than those making decisions based on value in choice. This leads us to the concept of the Buyer’s Value Journey, which consists of two main phases:

Will I Buy in This Category?
Which One Will I Buy?

The “Will I” Decision

In the initial phase, buyers decide if they want to solve a problem or fulfill a need. This decision is driven by the value in use. For example, if someone wants to learn to play the piano, they decide whether to invest in a piano based on the perceived value of learning and playing music.

The “Which One” Decision

Once a buyer decides to make a purchase, they enter the second phase, where they choose among alternatives. Here, value in choice becomes critical as they seek the best option for their money. During this phase, buyers are more price-sensitive because they are comparing different products.

Examples to Illustrate the Concept

Let’s consider a few examples to understand the distinction between “will I” and “which one” decisions.

Buying a Car

Imagine you’re in the market for a new car, considering luxury brands like Mercedes, Lexus, and Porsche. Initially, you decide if you need a new car (value in use). Once you decide to buy, you compare different brands and models (value in choice). A 10% discount from Lexus might influence your decision at this stage, but it wouldn’t matter if you hadn’t already decided to buy a car.

Popcorn at the Movies

When you go to a movie theater, you might decide whether to buy popcorn (a “will I” decision). The price of popcorn doesn’t influence your decision much because there are no alternatives within the theater. This explains why theater popcorn is expensive; buyers have already committed to being there and making a “will I” decision without considering alternatives.

Gasoline in Remote Areas

In a remote area with a “last gas for 75 miles” sign, you have no alternatives. The decision to buy gas here is a “will I” decision, and the lack of competition allows the station to charge a higher price.

Practical Application: Setting Prices

Understanding whether buyers are making a “will I” or “which one” decision helps in setting the right prices. Let’s consider a few products:

Coke at McDonald’s: Buyers typically make a “will I” decision, deciding if they want a drink with their meal. They don’t compare prices with other fast-food outlets at this point, allowing McDonald’s to charge a premium.
Apple Watch: Often a “will I” decision for iPhone users, who are less likely to consider alternative smartwatches.
Garmin Smartwatch: More likely a “which one” decision, as buyers compare it with other brands like Samsung or Fitbit.
Podcasting Microphone: Typically a “which one” decision, as buyers compare different models to find the best fit for their needs.
Tattoo: Though it seems like a “will I” decision, it’s often a “which one” decision. Once someone decides to get a tattoo, they compare different artists and shops for the best value.

Sizing Value Tables: A Strategic Tool for Understanding Value

A Sizing Value Table is a powerful framework that helps businesses understand and articulate the value of their products from the customer’s perspective. This tool is especially useful for pricing and product positioning, ensuring that you effectively communicate the benefits and worth of your offerings.

Components of a Sizing Value Table

A Sizing Value Table comprises four key columns: Problem, Solution, Result, and Value. Let’s explore each component in detail:

Problem
- Definition: The specific issue or pain point that the customer experiences, which your product aims to address.
- Format: Articulate the problem in a first-person statement to resonate with the customer.
- Example: “I spend too much time looking for potential sales leads.”
Solution
- Definition: The feature or aspect of your product that addresses the identified problem.
- Format: Clearly describe the feature in terms of its functionality.
- Example: “LinkedIn Sales Navigator provides recommendations for potential cold calls.”
Result
- Definition: The quantifiable outcome or benefit that the customer experiences from using the solution.
- Format: Use measurable terms to describe the improvement or change.
- Example: “Reduce the time spent searching for leads from two hours per week to zero.”
Value
- Definition: The economic or business impact of the result, often expressed in monetary terms.
- Format: Translate the result into a dollar value, considering both cost savings and revenue generation.
- Example: “Saving two hours per week translates to $200 saved in labor costs or $1,000 in additional sales revenue.”

Creating a Sizing Value Table: Step-by-Step

Step 1: Identify the Solution

Begin by listing the features of your product. Choose a feature that you want to evaluate for its value.

Example: LinkedIn Sales Navigator’s recommendation engine for potential cold calls.

Step 2: Define the Problem

Think from the customer’s perspective and identify the problem that the feature solves. Use a first-person perspective to make it relatable.

Example: “I spend too much time looking for potential sales leads.”

Step 3: Quantify the Result

Determine the direct impact of your solution on the customer’s problem. This should be a measurable outcome.

Example: “Reduce the time spent searching for leads from two hours per week to zero.”

Step 4: Calculate the Value

Translate the result into economic terms. Consider both cost savings and potential revenue gains.

Example:

Cost Savings: If the customer values their time at $100 per hour, saving two hours per week is worth $200.
Revenue Generation: If the customer can use the saved time to generate $500 in additional sales, the value is $500.

Applying the Sizing Value Table: Practical Examples

Example 1: B2B Software Solution

Problem: “Our team spends too much time manually entering data into the CRM.”
Solution: “Automated data entry feature.”
Result: “Reduce data entry time from five hours per week to one hour.”
Value:
- Cost Savings: 4 hours saved x $50/hour = $200 saved per week.
- Revenue Generation: Additional sales activities worth $300 per week.
- Total Value: $500 per week.

Example 2: E-Commerce Platform

Problem: “I have a high cart abandonment rate.”
Solution: “Improved checkout process.”
Result: “Decrease cart abandonment rate by 20%.”
Value:
- Increased Sales: If the average cart value is $100 and 1000 carts are recovered monthly, a 20% improvement equals 200 additional sales.
- Total Value: 200 sales x $100 = $20,000 increase in monthly revenue.

Benefits of Using a Sizing Value Table

Customer-Centric: Helps you understand and articulate value from the customer’s perspective.
Clear Communication: Provides a structured way to communicate the benefits and economic impact of your product.
Pricing Strategy: Assists in setting prices based on the perceived value rather than just costs.
Sales Enablement: Equips sales teams with compelling value propositions to address customer pain points.

Quantifying Value: Simple Market Research Tools

Understanding and quantifying the value of your product is crucial for effective pricing and positioning. While tools like the Styving Value Table provide a robust framework for understanding value, practical market research techniques can help you quantify it. Here, we’ll explore two straightforward methods: Van Westendorp’s Price Sensitivity Meter and a quick, conversational technique for getting pricing insights from potential customers.

Van Westendorp’s Price Sensitivity Meter

Van Westendorp’s Price Sensitivity Meter is a tried-and-true method for gauging the price perceptions of your target market. By asking potential buyers four specific questions, you can gather valuable data on their price sensitivity.

The Four Questions:

Too Expensive: At what price would you consider the product too expensive to consider?
Too Cheap: At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good?
Expensive but Considerable: At what price is the product starting to get expensive, but you still might consider it?
Bargain: At what price would you consider the product to be a bargain, a great buy for the money?

These questions should be asked in the order presented. Questions one and two set the boundaries, while question three provides the most desirable price point. Question four ensures you’re not underpricing your product.

Why It Works:

No Anchoring: Respondents aren’t influenced by pre-set price points.
Minimized Gaming: By framing the questions this way, you reduce the likelihood that respondents will try to manipulate their answers to get a lower price.

Best Use Cases:

Will I Products: Particularly effective for products where the main question is whether the customer will buy at all.
Small Sample Sizes: Works well in B2B situations where you might not have a large pool of respondents. Reliable insights can be gained from as few as 15 responses, though aiming for 50 is recommended.

Quick and Dirty Method: Peer Pricing Insight

When you’re in a conversation with potential customers and want a quick sense of how much they might be willing to pay, there’s a simple but effective question you can ask:

Question: “How much do you think other people would pay for this?”

Why It Works:

Avoids Direct Bias: People are more likely to give a reasonable answer when they’re not thinking about their own wallet directly.
Reflective of Self-Perception: Most respondents will project their own willingness to pay onto others, providing you with a more honest estimate.

Usage Tips:

Contextual Insight: Use this method to gather initial impressions and gut feelings about pricing.
Supplementary Data: While this shouldn’t be your sole pricing strategy, it offers a useful cross-check against more formal methods like Van Westendorp’s.

Practical Example: Applying the Tools

Let’s apply these methods to a hypothetical product: a new project management software.

Van Westendorp’s Price Sensitivity Meter:

Too Expensive: “At what price would you consider this project management software too expensive to consider?”
- Respondent might say: $200/month
Too Cheap: “At what price would you consider the software priced so low that you would doubt its quality?”
- Respondent might say: $20/month
Expensive but Considerable: “At what price does the software start to get expensive, but you still might consider it?”
- Respondent might say: $100/month
Bargain: “At what price would you consider the software to be a bargain?”
- Respondent might say: $50/month

From these responses, you get a pricing range that informs your strategy: between $50 and $100 is ideal, with a caution against going below $20 or above $200.

Peer Pricing Insight:

After a product demo, you might ask, “How much do you think other project managers would pay for this software?”

Respondent might say: “I think others would be willing to pay around $80 per month.”

This response supports the data from the Van Westendorp method, suggesting that $80 is a reasonable target price.

Quantifying the value of your product and strategically determining its price is essential for business success. By leveraging Sizing Value Tables to understand and articulate your product’s value and using market research tools like Van Westendorp’s Price Sensitivity Meter and Peer Pricing Insight, you can develop a pricing strategy that resonates with your customers and drives profitability. Understanding and communicating value in this structured way ensures that you not only meet your customers’ needs but also achieve your business objectives.

About the Author:

Mark Stiving – Founder at Impact Pricing LLC

Frequently Asked Questions

1. How to estimate the value of a product?

To estimate the value of a product, use the Sizing Value Table by identifying the problem your product solves, the solution it offers, the quantifiable result, and the monetary value of that result to the customer. Complement this with Van Westendorp’s Price Sensitivity Meter to gauge customer price perceptions, and ask customers what they think others would pay for more honest insights. This combination of qualitative and quantitative methods ensures a comprehensive valuation.

2. Who determines the value of a product?

The value of a product is determined by the buyer, who evaluates it based on the problems it solves, the results it delivers, and the monetary impact it has on their business. By understanding the buyer’s perspective through tools like the Sizing Value Table and Van Westendorp’s Price Sensitivity Meter, sellers can align their pricing strategies to meet customer expectations and perceived value.

3. What is product value analysis?

Product value analysis involves dissecting a product’s features and benefits to understand how they solve specific customer problems and deliver measurable results. It includes using tools like the Sizing Value Table and Van Westendorp’s Price Sensitivity Meter to quantify the perceived value and optimal pricing range from the customer’s perspective. This analysis helps businesses articulate and justify their product’s value proposition effectively in the market.

4. What is the product value ratio?

The product value ratio compares the perceived benefits or value of a product to its cost or price. It assesses whether the benefits and outcomes delivered by the product justify its price tag from the customer’s perspective. This ratio is crucial for businesses to ensure they offer competitive pricing that aligns with the perceived value customers expect from their products or services.

5. What is a good valuation ratio?

A good valuation ratio typically indicates that a product’s perceived benefits or value outweigh its cost or price, as judged by customers. It suggests that customers view the product as offering a favorable balance between what they receive in return for what they pay. This ratio is subjective and varies depending on the market, competition, and customer perception, but generally, a higher valuation ratio indicates better alignment between price and perceived value.

6. What are valuation metrics?

Valuation metrics are quantitative measures used to assess the financial worth or value of a product, company, or investment. These metrics help investors, analysts, and businesses evaluate the attractiveness of an asset based on various factors such as earnings, sales, cash flow, growth potential, and market position. Common valuation metrics include price-to-earnings ratio (P/E ratio), price-to-sales ratio (P/S ratio), earnings per share (EPS), and return on investment (ROI), among others. They provide insights into the financial health, performance, and potential of an entity, guiding decisions on investment, pricing strategies, and overall business strategy.