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Your Customer's PIR: Price Investment Ratio

Guest post by: Mark Hunter

Article Overview: If your customer can't see the return on investment, they won't invest - they won't pay the price you want to get... help frame their expectations...

Your Customer's PIR: Price Investment Ratio

Have you ever really considered how price affects your customer with regard to their perceived benefit? Too often, we use a simplistic approach to determining a price – figure the cost to produce a product or service, tack on some arbitrary percentage, and call it good, right?

Price, though, is consequential in ways we may not initially consider. The price a person pays for something goes a long way in determining the perceived benefit they expect to get from it. The perceived benefit cuts two ways. First, the expectation of service goes up the more a person pays for something. Second, the perception of what they're gaining also goes up with the amount they pay. The two are not opposites; they work in tandem and in nearly all businesses, this tandem relationship can and does work to your advantage.

Many companies, hopefully including yours, are known for delivering incredible service. This quality service may be what your customers comment upon and why they are willing to refer you to other customers. This level of service comes at a price. One of the things you always should be doing is explaining to and showing your customers how your level of service helps them.

The more you share this type of information with your customers, the more comfortable you become in seeing the value of what you offer. Having confidence in your service allows you to increase your "Price Investment Ratio" (PIR). This all has to do with what you expect customers to pay.

For the customer, the PIR is revealed when you help frame their expectations. To help explain this best, let me refer to what I call the "IBM paradox." This is the belief people have that although you will pay more for anything you buy from IBM, you will never be fired for using IBM. What this means is there are plenty of companies that sell the exact same items and services as IBM, but at a less expensive price. Although other vendors will be less money, there is a level of safety and confidence in using IBM – so much so that it translates to a premium price that customers will pay.

The "Price Investment Ratio" (PIR) is the amount over the minimum amount a person would have to pay for something. They are willing to pay it to feel confident in what they are buying. You might say the PIR should really be the CP – the "Confidence Premium."

There are no two ways about it – when you have great service but do not reflect it in your PIR, then you are underselling. If you are underselling, you are not making the profits you could be making.

I can hear some of you at this point thinking, "What if we don't have a solid sense of how good our customer service really is?" In other words, maybe your company receives very few complaints, but at the same time, you are not sure if your service is at a higher caliber than what your competitors bring to the table.

In order to find out your "Price Investment Ratio" (PIR), you must do a deep dive with your existing customers to get them to tell you what your service means to them. Once you do this, you can then match up what existing customers are telling you with what prospective customers are asking you to do. When you grasp this, you begin to understand what the PIR really should be. How much "investment" is the customer willing to make in going with you instead of your competitor?

As I have often said, in the B2B arena, companies don't buy anything, they only invest. If your customer can't see the return on investment, they won't invest – they won't pay the price you want to get. When they do see the value, though, then you can feel very confident in charging a price above what your competitors charge. Don't settle for a lower price when doing so is detrimental to your bottom line.

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Article Tags: competitor, customer, customer service, investment, price, Price Investment Ratio, profit, service, underselling



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