The Difference Between Value and Cost — and How It Will Crush Your Sales if You Get It Wrong

  •    digital marketer and writer in New York. She specializes in social media, web development, and publishing. Say hello in 140 characters @melissajohill.

If you're new to the entrepreneurship game, you might be confusing the cost of your products with the value they provide — and thus underselling yourself! This does a huge disservice to your business, and as a result, your customers.

What do your products cost? No, not the price you've set on your website or the number you put down when you invoice a customer. How much does it cost you to produce your products or provide your services?

Now, what is the value your products and services provide?

The magic number for pricing perfection is that sweet spot in the middle.

Let's break it down.

Cost can be variable. It can depend on the price of raw materials or time it takes to complete a task. Costs can increase or decrease — and while increasing costs may affect price, decreasing costs (but maintaining or raising prices) should be a goal for any savvy entrepreneur. In other words, you should never price by cost.

The price you set is based on cost plus perceived value. Value is what the customer believes the service or product is worth. For example, a hair stylist may charge $125 for a cut and color. That number is based on the rent paid for the salon space and the cost of equipment and chemicals. Ideally, it does not cost the stylist anywhere near $125 per hour to run her business, but if the customer leaves her studio feeling like a million bucks, that's a good value.

​Consider the Apple suite of products. An iPad is the most expensive tablet on the market. It probably doesn't cost Apple much more than any other tablet manufacturer to build and ship their products, but they've done such a good job communicating the value of their products, that customers are happy to pay a premium—and believe it's a good deal to do so.

Steve Jobs once said that design was more than how a thing looked—it's how it works. Despite that, Apple has still managed to masterfully design and style their products so that their dedicated customers feel good about using them based on brand prestige alone. When you're using an iPad, you feel productive, cutting edge, like a member of the Apple tribe—and that's worth something to many people.

So how do you evaluate and communicate the value of your business?

The first step is to determine what your customers are really after when they buy your product or book your services. For example, the customer who needs a weekly lawn service may not really care whether the grass is mowed—they just want their lawn to look better than their neighbors' lawn. A parent ordering a custom cake for their child's birthday not only wants a tasty treat, but they want to surprise and delight their kid. Think about the feelings behind what you do—what emotions do your products stir? What's the real motivation behind your customer's purchases?

And then, what is that experience worth?

Understanding your customer's deep needs and solving their bigger problems inevitably becomes the challenge for any entrepreneur. But how do you find this out? Talk to every customer you can. Engage them with surveys, send them emails, get them on a call, go have coffee—any opportunity you have to chat with your customers is an opportunity to better understand the value you can potentially provide.

Pricing between cost and value gives you the opportunity to sell your goods for what they are worth—for what you're worth. This is the only sustainable strategy for a entrepreneur in today's market.

​​So how do you communicate value?

A beautiful website, carefully crafted copy, and beautifully designed marketing materials, including packaging, gives your customers the sense that you're providing valuable services. But the best way to communicate value is to share stories of other customers who already get it.

Testimonials, reviews and customer stories convey the experience your product provides better than any call to action can. For instance, GrooveHQ shared that a good testimonial on their homepage was responsible for increasing conversions on their site by 15%. The perfect testimonial should give a prospective customer some insight into the experience and feeling your products and services impart. In other words, they convey the value of your product, in the language a customer would use themselves.

Products come and go, costs raise and drop, markets boom then evaporate. But if you can provide a valuable service or product, tap into to your customer's true needs and desires, and learn how to communicate and build on that value, you can establish a strong business that makes the the kinds of profits you deserve.