Pricing and Profitability Management: A Practical Guide for Business Leaders

How to Make Value Your Focus—and Why

As Warren Buffett said, “Price is what you pay. Value is what you get.” Value refers to the importance or usefulness of a product or service to a specific customer or group of customers. Price, on the other hand, is the way to capture the value of a product or service offering in the market through the mechanism of exchange. Understanding these two separate, but related, concepts is critical to creating a strong pricing strategy.

Let's look at value more closely. Generally speaking, it correlates closely with the various benefits a buyer receives from a specific offering and its features. In some cases, though, value can reflect an emotional or irrational response to an intangible element, such as a brand name that has a special cachet. For example, the value of a handbag for many people lies in its utility; it allows its owner to carry many necessary items easily throughout the day. Ordinary handbags differ by size, color, and quality of construction and material, but they don't vary much in their overall utility. Luxury handbags, however, can distinguish themselves further with a segment of customers that believes style, design, or the elite status conveyed by a high-end brand name offer added value. And these buyers are willing to pay for the added value. While consumers may typically spend $20 to $100 on a standard handbag, a luxury one can sell for thousands or even tens of thousands of dollars.

Perceived value can be influenced by a host ...