Value Pricing: Understanding Pricing and Value (Part 2)
Profit is not usually taught as a consequence of taking risks. Without risk, all the subsequent steps that lead to profit would not exist.
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The way we think about profit is generally revenue minus cost.
But that’s only part of the story. The real value is what you can get out of a customer in the long run, beyond the initial transaction. That’s where value pricing comes in.
Value pricing is a way to get more out of customers by offering them services that are tailored to their needs and preferences. It also ensures that you’re receiving a fair price for what you’re offering.
So how do we know then that we are being profitable when delivering value?
Often we talk about profit in the business context as the net value we gain from an activity. Even though this might seem like a fair representation of profit, it does not take into account other important factors.
Looking at what led to profit might give us a good start in the attempt of defining what profit really is.
As such, we can redefine profit as not the value we get after deciding everything that has led us to the said profit.
This can be cost related to production or perceived value.
Let's take the case where you are selling coconut at the beach.
Let’s say you managed to sell for $100 dollar cocoa which cost you about $75 When you deduct those expenses you would in an ideal world say that you are left with $25 in profit.
However, the $25 is simply the material profit. The actual profit comes from taking the risk of actually selling the coconut.
In this case, we can define profit here as taking risks. Taking risks has a positive economic outcome which can lead to profit. But it also means that we can get a negative profit.
In such case, your product would have produced negative value to the customer, by not satisfying their need or worse having the opposite effect that they expected even though you might record the transition as profitable.
When confronted with risk, there are five possible responses: avoid it, reduce it, transfer it, accept it, or increase it. So as a business avoiding risk is not and should not be your primary goal because the process of making a profit involves taking risks.
Additionally, taking risks could contribute to innovation if we define innovation as a new way of doing things that disrupt the common ways by making things better and perhaps faster.
Think about it this way: You are operating the business with your regular standard practices, everything is going as smoothly as possible and profit is flowing in as expected because the current systems and processes in place work.
What is even more interesting, you make your projections on these very systems for incoming revenue on which you based your future growth decisions.
That would mean that you would not expect exponential growth but rather a linear and predictable one.
Naturally, that would mean that you would be missing out on the opportunities presented by the risks you could have taken.
It is the risks taken that allow businesses to not only expand but also to provide value by outdoing their competition.
So, it is obvious that if you want to increase your profits you need to take on more risks and exploit the advantages that come with them.
Risk avoidance is the antithesis of success in entrepreneurship because entrepreneurship itself involves risk.
Not only that but avoiding risk will doom the business to fail because of a lack of innovation, which in itself can be defined as risk.
Furthermore, no theory in economics or finance can measure the cost of not taking a risk.
This is to say that taking risks is required to achieve a higher level of profit.
What matters, in the long run, is to correctly identify the right risks to take and the ones to avoid in order to minimize losses. Through taking risks, businesses can expect to get returns that are higher than what they would otherwise have gained.
So in order to generate the so-called profit, we must take risks in the first place because that's how we build the road to profit.
At the end of the day, customers do not care much about the internal cost and disorder a company is going through if they get value from what they are purchasing.
You could have an excellent corporate structure but if the end customers are not satisfied, it becomes hard or almost impossible to stay in business.
The marketing concept posits that a firm exists to create value outside of itself. It should solely focus on delivering what the customer needs and values and not merely looking inward on such things as how to reduce cost, increase the budget and so forth.
Companies or individuals for that matter should also know that their only existence depends on serving well their customers and in doing this they have to be outward looking not inwards.
The fact that your competition exists does not mean you are not going go to survive in the long term. Having a competitor could mean that not only you are doing something worth doing but also that there is an opportunity for growth and change.
Business is not about war it is about creating value for the customers
When creating value for customers, risk management and value pricing go hand-in-hand. Taking risks can lead to success, and correctly identifying the right risks can help ensure that you remain profitable.
With value pricing, you can ensure that you are not just profiting from transactions but also offering a value that your customers are willing to pay for.
In short, being profitable goes beyond just the immediate financial value. It also involves taking risks, creating value, and pricing accordingly.
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