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Innovation Insights
by Stephen Shapiro

price blog

Price Drives the Perception of Value

Price drives the perception of value, and unfortunately most customers don’t understand value…

Do you know what your customers really value? When I first started my business as a professional speaker, I realized that I didn’t have a clue.

In order to find out, I did an experiment called PW3 – “Pay What We’re Worth.

Instead of using the traditional model to determine speaking fees (where the speaker sets the rate before the work is done), with PW3, as an experiment, I turned this model upside down. Instead of quoting a standard rate, the client would determine my fee after the work was done.

The plan was to send the client a blank invoice after I gave a speech, and they would pay “what they thought it was worth.”

The only stipulation was that we would have a conversation about value up front. I wanted to learn the value they got from previous speakers. How were the concepts reinforced after the presentation? How were ideas implemented? How was value measured?

What did I learn? Surprisingly, none of the companies I worked with were able to define value, at least in terms of tangible results. In fact, in nearly every situation, when I asked them how they would determine what to pay me after an event, they said, “Um, I guess we’ll pay you what we paid the last speaker.” In fact, with 90 percent of my speeches, the client asked me for my standard fee and just paid that.

If our customers aren’t the ones defining value, what drives the perception of value?

Pricing Can Determine Perception

One week after starting my speaking business back in 2001, I met with the owner of a speaker’s bureau in London to discuss representation. Bureaus are agents who place speakers with events. In the meeting he expressed serious interest. So much so that a few days later he called me about a potential gig.

The call came to my mobile phone as I waited for a train. It was difficult to hear him due to the noise on the platform. However, through the ruckus I could hear “What is your speaking fee?” I was ill prepared. I honestly had never thought about it. I did some quick calculations and pulled a number out of the air. “Thirty Five Hundred” was my response. He thanked me and hung up.

Later that day he called back. I quickly realized that he too must have had a hard time hearing me during our previous conversation, because he asked me, “Was that Thirty Five THOUSAND dollars or Thirty Five THOUSAND pounds (at the time about $60,000)?”

I stumbled for a moment, debating how to answer. I then sheepishly responded, “Thirty Five HUNDRED DOLLARS.” Again, he thanked me and hung up.

A few weeks later I learned that I did not get the gig. When I asked why, he explained that my fee of $3,500 clearly indicated I was not the caliber of speaker he thought I was. The person that was hired received $35,000.

I learned a powerful lesson that day. Price often determines the PERCEPTION of credibility. Underpricing can imply low value.

But if underpricing reduces the perception of value, does overpricing enhance it?

Price Actually Drives Pleasure

In one study, subjects were given a number of wines for tasting and were told their price. Some of the wines were given to tasters more than once, with a different price tag each time.

What did they find?

The same wine, when given a higher price tag, tasted better.

Surprisingly, according to fMRI scans, the pleasure centers of their brains lit up more when a wine was more expensive, even though the “taste” centers did not. The body knows the wine tastes the same, but it is enjoyed more when it is deemed to be more expensive.

Your Customers Are Cynics

Oscar Wilde once said, “A cynic knows the cost of everything and the value of nothing.” Using this definition, assume that your customers are cynics. Cost drives buying decisions, but not always in the way you think. Of course, don’t charge more just because you can. And of course, some companies compete on price. But unless you are striving to be known as a low cost provider, underpricing may turn you into a commodity in the minds of your customers.

This article originally appeared on the Inc. website