Price Premiums: How Much Is Too Much?

You know that value buyers are willing to pay higher prices to get value.

The question is “How much more?”

If you were able to get 5% more than you’re currently getting for your offering, what would that do for your bottom line?  How about 10%?  25%?

I’m sure some of you are feeling your throat constrict and your chest tighten as you contemplate charging 25% more for your offerings.  The reality is that these are modest percentages in light of the premiums buyers pay for what they truly want.  How much will they pay?

Regardless of what benefits your offering possesses – quality, dependability, convenience, image, innovation, knowledgeable salespeople, etc., you’re basically selling one of three things, image, innovation or time- savings.  What kind of premium does each command?  Let’s take a look.

If image is your value proposition, how much is a buyer willing to pay for that image?  Let’s compare the Chevy Aveo sedan which retails about $12,500 and the Mercedes smallest S-class sedan which rings the register at $90,000+.  The Mercedes is more than 7 times as much as the Aveo.  That’s on a big ticket item; a sweater at Nordstrom’s will cost you about 12 times as much as at WalMart.

How much will innovation buyers pay?  Both VCRs and DVDs give us a clear picture of the innovation pricing cycle.  Early adopters paid about $1,200 for the early players (not recorders, just players).  Dependability buyers got into the market when a player/recorder was about $400, a third of what the early adopters paid for less capability.  The late adopters paid between $85 and $100 dollars, a twelfth or less than the early adopters.

Time-savings premiums depend on whether you’re selling retail or business to business.  Retail buyers use time savings for recreation and it’s not unusual for them to spend 3 times or more of their hourly compensation on recreation.

Business customers, at least the more savvy business people, look at time savings as a way to increase revenues without adding resources.  The gross profit from these additional sales falls directly to the bottom line because the most significant overhead cost, labor, is being held constant.  This additional revenue generating capability has 2 to 3 times more value than the cost savings associated with not having to add staff.

Those modest increases suggested in the first paragraph don’t seem so outlandish now, do they?

It’s counter-intuitive, but you also limit your investment when you’re able to command these higher premiums.  Using the Nordstrom/WalMart sweater example above, WalMart needs 12 times as many customers to generate the same sales volume as Nordstrom.  That means that WalMart needs more facilities, more distribution centers, larger staffs and greater inventories than Nordstrom.  The same is true any time you sell value over low price.

Don’t hesitate to charge a premium price for value – the buying public is willing to pay.

Author – Dale Furtwengler