Introduction To The Value Inequality

This episode is about a new way of thinking about pricing, value, and the customer’s perception of risk. I call it the Value Inequality.

Of course, the first rule of pricing is:

Your product must cost less than the problem costs the customer. No customer will pay more to solve a problem than the problem is costing them.

Corollary: If your product doesn’t solve a problem the customer needs to solve, it cannot be successful.

But the customer has other concerns, not just about the price of your product:

  • Your product represents a big risk to them. Does your solution solve their problem? It looks like it does, but until they put it into production, they won’t know for sure. That risk makes your product worth less, until they are confident it solves their problem.
  • Your product represents a big change management cost. Their current solution or lack of solution to the business problem is costly. Your product may completely solve that business problem. But the cost of moving from their legacy solution to your solution will be significant. In some cases the cost of putting a new solution in place can outweigh the benefits of the new solution, irrespective of its price.
  • Your product represents an opportunity cost. The business problem you solve is not their only business problem. By buying your solution they won’t be able to buy a solution to some other business problem.

The Value Inequality

If you put all these customer concerns together into kind of some math, you get the following inequality:

V > P + R + M + C

The customer will only buy your solution if:

The value (V) the customer gets from your solution is greater than the price (P) of the solution plus the risk factor (R) that the solution will or will not work plus the cost of migrating (M) to your solution plus the opportunity cost (C) of not using that money to solve some other problem.

This is called the “Value Inequality.”

To buy your solution, the value the customer gets (solving the business problem) must be greater than all these costs combined.

And to make your sales easier, strive to ensure the value the customer gets from your solution is much greater than the price of the solution. (In math terms:

V >> P + R + M + C

Links and articles mentioned in the podcast

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