High Value Does Not Mean Expensive

What has a high value to your users isn't necessarily expensive to build

We all have this unshakeable correlation between value and cost. If it’s valuable it must cost more. And we carry that onward with us when we consider our clients. We think the only way to provide value is to build something that would be expensive. How can we charge for something that costs us close to nothing to build?

“I think all bullets should cost five thousand dollars, cause if a bullet costs five thousand dollars there would be no more innocent bystanders.” ― Chris Rock.

I find myself repeatedly saying that empathy is a superpower. It allows you to fully understand your client from their point of view. One of the things empathy grants you is the understanding of perceived value from your client’s point of view.

Your client doesn’t care how much it costs you

If you start looking around you, you’ll lose your mind. A soft drink costs cents to make, deliver, and sell. An agent makes 15-20% for making a phone call. A pair of Beats headphones cost about $18 to manufacture (really? really!).

So why do people pay $200-$700 for those headphones?

The short answer, because it’s worth it.

Value is subjective (or perceived)

In the famous “endowment effect” experiment, Kahneman and his colleagues gave one group of participants a mug and then offered them the chance to sell it while the other group was asked to buy it. The group that was given the mug and asked to “sell” it, priced it twice as high as the group that was asked to “buy” the mug.

This is mind-boggling. The same mug. The exact same mug.

Such experiments, pioneered by Daniel Kahneman and Amos Tversky and termed prospect theory, prove something very perplexing - value is subjective and perceived.

So anything can be worth anything?

Not really.

But two things really affect the price tag - the framing and the utility value.

When approaching the pricing question, one should really have to ask an empathetic question - how much is this worth for them?

The operative word is them and not you.

You and your blood, sweat, and tears are insignificant. You don’t get a prize for trying. And you don’t give discounts because it was easy for you. You offer a service, at the price that your client is willing to pay for the value they perceive in the deal. It’s that simple.

Do they need it?

In economics, a utility function describes the ability to assign a numerical value to the choices a person is facing. While prospect theory has complicated things, there is still value (no pun intended) in the utility framework.

A product does not have absolute value, even if it has a price tag. An ice cube is worth next to nothing in the arctic circle. Yet when you’re on a long hike and come by someone selling an ice-cold drink, you’ll pay 10 times what it costs at your local supermarket.

So the first question you should ask yourself when providing a service is - do they need it?

If you meet the right customers at the right place and right time, you can charge more.

So instead of looking at what it costs you to produce the result, ask yourself what is the utility for your customers - what’s in it for them.

Framing is everything

You’ve heard the phrase “timing is everything”, actually framing is everything.

The way you frame the utility can really affect the perceived value.

We’ve already seen the “endowment effect” and there are many examples of such framing effects. One of my favorites is the “decoy effect” shown by Joel Huber and his colleagues back in 1982.

One group was asked to chose whether to dine at a five-star restaurant 25 minutes drive away (option A) or a three-star restaurant 5 minutes away (option B). As you probably guessed, the responses were split in the middle depending on your individual preference for comfort vs quality.

The second group was offered a third option - a decoy. Besides the two restaurants the previous group had seen, a third choice was added - a four-star restaurant, 35 minutes away (option C). Suddenly we see an asymmetrical decision pattern. While an expected 0% choose the third option, which is clearly inferior to the original options, suddenly 70% are choosing the five-star restaurant. WHY?

It’s simple, we’ve added information, a decoy. This third option is clearly inferior to option A - it’s further away and not rated as high. Options A and B are apples and oranges, but when C is introduced, well now we have a basis of comparison, nudging us towards A. And yes, there was a third group that had option D that pushed us to option B (two-star rating, 15 minutes away).

Something so simple as adding an irrelevant choice can manipulate us unconsciously to make a decision. Psychology is scary!

Final thoughts

Psychologists and economists around the world are proving on a daily basis how irrational we are. We make decisions based on an array of gut-feelings and heuristic. But this is good news for you. Your clients are not rational. They will not deconstruct your product and try to discern if you’re pricing fairly. They’ll ask themselves one thing and one thing only - how much do I need/want this?

Pricing and demand are based on that question alone. If you can tap into that, you can find ways to deliver value without building an expensive solution.

Have you ever paid a lot for something that wasn’t expensive?

Have you ever gotten paid for something that was easy for you?

I’d love to hear more about it!

Photo by Jp Valery on Unsplash