Positioning and why customers choose: value to the customer and willingness to pay
Why a customer picks you over the next best option, and how to work out the most they should pay.
Key takeaways
- A customer chooses you when you leave them better off than their next best option.
- A shopper does not calculate EVC, but the same logic holds. The next best option sets the reference price (the store brand, the rival app, doing it yourself).
- Common mistakes: Setting price from your own cost plus a markup, which ignores what the customer gains.
Key idea
A customer chooses you when you leave them better off than their next best option. The most they should pay is the price of that option plus the extra value you create, minus any extra cost or hassle you add. Your cost sets the floor for your price; the customer's value sets the ceiling.
Positioning is the answer to one question: for this segment, why us and not the alternative? A clear position names who it is for, the need it meets, what it is compared with, and the one reason to pick it. "For truck fleets that spend heavily on fuel, our route software cuts fuel use more than any rival" is a position. "High quality and great service" is not, because every rival says it.
Willingness to pay, built from the customer side
- Find the next best alternative: what the customer would buy or do if you did not exist, and what it costs them.
- Add the extra value you create over that alternative: money saved, money earned, time saved, risk removed.
- Subtract the extra costs you bring: switching, training, waiting, risk of trying something new.
- The result is the economic value to the customer (EVC): the highest price a rational customer would pay. Price below it so the customer keeps part of the gain, or they have no reason to switch.
Worked case
What should fleet software charge in Saudi Arabia?
The prompt
A fictional software company sells route planning software to truck fleets in Saudi Arabia. The next best option is a rival product at SAR 150 per truck per month. A truck uses SAR 8,000 of fuel a month, and our software cuts fuel by 3 percent more than the rival does. Switching needs training and set-up that cost the fleet the equivalent of SAR 30 per truck per month in the first year. Our cost to serve one truck is SAR 40 a month. What is the most a fleet should pay, and what price makes sense? (Figures are illustrative.)
The structure
- EVC = price of the next best option + extra value created minus extra costs to the customer
- Next best option: rival at SAR 150
- Key: Extra value: fuel saved beyond the rival
- Extra costs: training and set-up
- Price between our cost and EVC
Working it through
1. Extra fuel saved
3 percent of SAR 8,000 a month.
Extra fuel saved per truck (SAR per month):8,000 × 0.03 = 2402. Net extra value
Fuel saved minus the switching cost.
Net extra value per truck (SAR per month):240 - 30 = 2103. Economic value to the customer
The rival price plus the net extra value.
EVC per truck (SAR per month):150 + 210 = 3604. Customer gain at SAR 250
If we price at SAR 250, how much better off is the fleet than with the rival?
Customer gain at SAR 250 (SAR per truck per month):360 - 250 = 1105. Our margin at SAR 250
Price minus our cost to serve.
Our contribution at SAR 250 (SAR per truck per month):250 - 40 = 210
The recommendation
The company should price at about SAR 250 per truck per month, well above the rival's SAR 150 and well below the SAR 360 ceiling. First, at SAR 250 the fleet is still SAR 110 a month better off than with the rival, a clear reason to switch. Second, the company keeps SAR 210 of contribution per truck. Pricing at its cost plus a markup, say SAR 60, would leave almost all of the value with the customer. The risk is that fleets doubt the 3 percent fuel claim, so as a next step offer a three-month trial on part of the fleet that measures fuel use before and after.
A shopper does not calculate EVC, but the same logic holds. The next best option sets the reference price (the store brand, the rival app, doing it yourself). What you add over it (taste, status, convenience, trust) sets how far above it you can go. Asking customers "what would you pay?" tends to give answers that differ from what they actually pay, so where you can, test real prices on real buyers.
A cleaning robot for offices in Dubai replaces a contract that costs a client AED 2,000 a month. The robot also saves AED 600 a month of staff time, but adds AED 100 a month in power and upkeep for the client. What is the most the client should pay per month, in AED?
Setting price from your own cost plus a markup, which ignores what the customer gains. Comparing with the wrong alternative (for many customers it is doing nothing, or a spreadsheet). Counting value the customer does not believe in or cannot measure. Pricing at the full EVC, which leaves the customer no reason to switch.
Our cost is USD 20. The next best option costs the customer USD 50, and we save them a further USD 30. Which range makes sense for our price?
Which statement is a positioning?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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