Why would anyone pay $4 for a cup of Starbucks coffee, $320 for an Hermès scarf or $59,000 for a Mercedes-Benz E550 when many alternatives cost far less? The answer: Despite the profit margins, customers believe these luxury goods are worth it.

That’s why business consultant Lorraine Ball of Roundpeg insists it’s a mistake to confuse your production costs with the value of your product or service. The customer’s assessment of value may be much more than the cost of the parts. Just because your company’s software costs only $10 to produce and package, for instance, that doesn’t mean customers won’t pay $300 or $500 if you demonstrate the value of the software.

How do you determine what to charge? Ball recommends asking yourself these three questions about your product's impact:

1. How much will it save my customer? Sometimes—like when you undercut a rival’s price—you can arrive at a specific dollar figure. But don’t forget about saved time and effort.
2. How much can it earn for my customer? Consider the direct and indirect ways you can increase your customer’s income.
3. What intangible benefits might the customer realize? Don’t underestimate the value derived from increased confidence, improved appearance or peace of mind.

The Po!nt: By associating a dollar value with specific benefits, you can create a solid foundation for charging a premium price.

To read business planning tips from consultant and coach Lorraine Ball, visit her Web site, roundpeg.biz.

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