The Value Paradox

The Value Paradox - by Greg Alder

Value. It’s a wonderful thing. We all like to receive value. We like getting bonuses and discounts. We like receiving more than we paid for and paying less than we anticipated.

Most of us in business like to give value.

So here’s the problem. The more value we give, the less it is valued.

I’ll explain.

Say you have a service for which you normally charge $500. Business might be quiet, so you discount your service to $250 to encourage more customers. Customers will buy your service at its discounted rate. They will congratulate themselves in getting a bargain.

However, they now regard your service as a $250 service, not a $500 service. In their minds, your service is the equivalent of the made-in-China TV that’s half the price of the name brands. Your service now comes loaded with subconscious implications of less reliable components and poor quality control.

Some of us go further than discounting. We occasionally give away our service or product as a way to entice new customers – or as a favour to friends or contacts.

Well here’s what happens when we do this. We expect the customer or friend to be deeply grateful for this gift. However, the customer subconsciously sees it as a give-away. It’s junk mail.

Unlike regular junk mail, this is a service we have spent years perfecting. All of the professional knowledge we’ve accrued in our career is expressed in that service.

By giving away this one service, we have effectively reduced not just its value, but the value of our other services.

An example: An Australian web developer created a 500-product ecommerce website for a friend. The developer photographed and retouched the product shots, and hosted, maintained and updated the site. All for free. The owner then gave away the website as a free bonus to the purchaser of the business. $20,000 of the developer’s time was now a set of steak knives. The same friend subsequently asked the developer to build two more websites – also done for free.

There are other ways we undermine our own worth, our true value.

As we become expert in our field, we do our job faster and apparently easier. We get ideas seemingly on the spot. We identify and fix a faulty widget in minutes, not hours. Customers inexperienced in what we do see this and think, subconsciously, “well, that was easy”. They silently do the maths. One idea = fifteen minutes at, say, $200 an hour = $50 for each idea.

Sometimes we give our time freely. Customers ask favours. They ask if we can perform a small task. We do it for free. They ask another favour. We do this for free. Now, subconsciously, our time has no value to these customers or friends.

When we give our time freely to customers or friends, they often demand more of our time. They call more often for advice. They ask for help more frequently. They don’t think about how much of our time they are taking up.

Conversely, people who are paying big bucks for our expertise and time know how much it is worth. They don’t make as many requests because they know it will cost them more.

So look what we have done by giving our customers value.

We have spent careers gaining the knowledge that we put into a product that we’ve just given away. It is now valueless.

We have given our time freely, time that is no longer available for paying customers. Because we have given it away, it too is now valueless.

The psychology of pricing is a complex field.

Marlene Jensen makes her living as a pricing strategist. On her website she gives an example of why pricing isn’t as simple as Persian rug shops make us think it is (mark something up 100% and advertise it at 50% off and everybody’s happy). In 1992 Marlene launched a publication called Ancillary Profits. She set the price of subscription at a little under US$100. Some time later she tested a 31% higher price. Common pricing theory says that a 10% price increase will result in a 10% drop in orders.

Much to Marlene’s surprise, instead of orders falling off, orders went up 11%. Why? Simple. Marlene’s newsletter was seen as more valuable.

There was a similar story in the New York Times in December 2006. At Pennsylvania’s Ursinus College, the Board of Trustees determined that the college was missing out on applicants because the tuition fees were too low. The college raised tuition by 17.6% in 2000 and then waited to see what would happen. That year the college received about 200 more applications than the previous year. Within 4 years, first year enrolments were up 35%. The conclusion? As far as students were concerned, if the college costs more then it must be better.

So what’s the lesson here? Before giving away our products, services, expertise and time, we should stop and think about how it will impact our perceived value.

By wishing to give value, we have undermined our own.

Once lost, value cannot be restored.

2 replies on “The Value Paradox”
    1. says: Greg Alder

      Thanks Bill. I have had an interesting few comments on the LinkedIn link to this – one from an NY director bemoaning the negative impact of smart phone videography, free editing software, digital photography and piracy websites for creating a culture of expecting stuff for free – and settling for average.

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