Think about the following in the context of Senior Living
Dr. Ahmet Kuyumcu, Prorize LLC
Think about the following in the context of Senior Living:
- Due to state and federal regulations, all gasoline is essentially the same. Yet customers of Chevron gladly pay around 30 cents a gallon more (in my vicinity) than they would, for example, at a Costco or a BP station. They do this because to them, the brand name Chevron imparts additional value for their products and services.
- When buying jewelry, given the choice between two essentially identical pieces, consumers will pay 50 to 100 percent more if it comes in a blue Tiffany box. The brand name Tiffany has a higher perceived value.
- Most everyone has suffered from a headache at one time or another. When this occurs, most people prefer to pay premium prices for a known pain reliever (e.g., Bayer, Bufferin, Tylenol) rather than an “off brand” generic. Even when the generic pain reliever has the same medical effectiveness, many are unsure whether these less expensive brands are chemically identical to the premium brands.
- We will pay 2 dollars (or more) at Starbucks for essentially the same cup of coffee we can get at McDonalds for 99 cents. Even when we are going to drink the coffee in our car, the Starbucks brand is perceived as the “gold standard” for coffee.
What if your community was the Starbucks or even better, the Tiffany of senior living in your marketplace? Are you capturing the value of your product with your current pricing process?
Value-based pricing is necessary to maximize revenue since it focuses on the customer. The idea is simple on the surface: identify the value customers put on your product or service given available alternatives, and price at that level. However, complexity is introduced as the vast majority of your target consumers have vague conceptions and often disproportionate expectations concerning your product’s value. In addition, each customer is different. A given customer’s perceived value varies over time as your own business conditions continuously fluctuate. You have to do the hard work to understand or estimate that value which, in turn, requires using sophisticated analyses, predictive modeling and optimization procedures.
To state the idea more formally, the value-based pricing method is defined by setting the price of your product or service based on the relative benefits it provides to customers. Note the word relative in this definition. We all die without air and value it infinitely; however, if someone tries to sell you a bottle of air, you would not pay for it as the alternative is available for free; it has no “relative value.” On the other hand, if a product is a monopoly or has no alternatives, it has huge pricing leverage since the relative value it delivers equals the actual perceived value of the product.
By contrast, the cost-plus pricing method is based on the amount of money it takes to produce the product. Cost-plus pricing is a lot easier to calculate and thus common, but it is not the best strategy for maximizing revenue. The reality is that when customers go shopping for anything, they care very little about what the costs are to provide the service or make the product. In the case of senior living, they don’t really care (or even know) what it cost to build or operate the building. Rather, what they care most about is that they are getting value for their money compared to their alternatives.
The 5 Steps
Although value estimation is complex, it is very useful to think about the following framework to grasp this concept. Here are five steps you can take to consider the value a resident receives (perceives) in his or her eyes and perhaps even put a price on that value. See, for example, Nagle, Holden, Zale (2011) and Stiving (2011) for detailed discussions about this topic.
- Identify your customer’s second best option. If a prospect does not choose your community, what will they do instead? Stay home; use in-home care; go to a competitor; choose a different level of care?
- Determine the price of the second best option. In the case of senior living, there could be a variety of pricing based on options. Realistically, the key here is to look at the next best option for senior living.
- List all of the ways that your community is better than the second best option. Estimate how much you think these differences are worth to your residents and prospects.
- List all of the ways that the second best offering is better than yours. Be very honest here. How much do you think these are worth to your prospects and residents?
- To calculate the best price, take the price of the second best option (step 2) plus the value of your advantages (step 3) minus the value of the second best option’s advantages (step 4).
These steps can be repeated to compare any two units within your community and identify the value differences between them. The topic will be covered in a subsequent article.
Nagle T. T, Hogan J. E., Zale, J. (2011). The Strategy and Tactics of Pricing, 5th Edition. Prentice Hall, New Jersey
Stiving, M. A (2011). Impact Pricing. CWL Publishing Enterprises, Inc. Wisconsin.