I published an article yesterday in my column in MY CUSTOMER in Expansion about Price Strategies. To me, the key is to follow 7 simple rules in which the key is to segment the price.
"Nothing is more useful than water, but very rarely is what we receive in exchange for it. On the other hand, a diamond has little usefulness, but it can be exchanged for an infinite amount of assets”. It was the master Adam Smith who pointed out this paradox in his classic The Wealth of Nations. Since then, rivers of ink have been spilled concerning the best method of fixing the price of products and services. Currently, price is the subject of a hot debate. While it is still a key factor in a product or service’s success, it is no longer by any means the only one. Today more than ever, price is a subjective element; it doesn’t lie as much in the provider’s more or less accurate calculations as much as in the value the customer establishes in his or her head, according to extremely complex mechanisms.
It is clear that costs and competition – how much it costs me to develop a product or service and what my competitors ask for it on the market – continue to be two basic elements in carrying out a good pricing strategy, but there are new rules of the game that every company must be clear on:
For a long time, many companies have blindly believed this. Companies that offer good service and low prices have come along to debunk this theory. Take a look, for example, at Virgin, easyJet, Vueling, Ikea, H&M, Zara, Mango...
There is no better example than the fierce battle that all telecommunications operators are involved in, who see increasingly higher rates of customer abandonment. Golden rule: whoever enters because of price leaves because of price.
Only the so-called “category killers” can maintain over time a strategy based on pulverizing prices. Only giants like the American distribution colossus Wal-Mart can afford such a luxury, because of its capacity to apply pressure on the supply chains.
If a company is cheap, it is always cheap. Lurching from one stance to the other confuses and “de-positions”. For example, American Express has developed a long-term strategy of relatively high prices, in exchange for impeccable quality. The company transmits exclusivity and its customers would not allow a “status drop”.
In a market where the consumers are capable of combining luxury purchases with cheap purchases, without fear of being judged, whosoever would sell at competitive prices must clearly explain why, lest they be associated with “poor quality”. Look at Ikea’s catalogues. They explain why buying at their large store end up being more affordable: it’s self-service; transport and assembly are up to the customer, etc… Thus, Ikea shows that it isn’t cheap because it offers poor quality or bad service, but rather because it offers a different and intelligent proposal.
When the competition aggressively cuts prices, it is not always necessary to imitate them. If everyone acts similarly, it is the “whole pie” that deteriorates.
"The right price" is that which most adjusts to the value the customer mentally attributes to a product or service. The key of all keys lies in transmitting, in knowing how to deliver, in communicating that value to the customer. He who wins will be he who knows how to marry what we want our offer to cost with what the customer thinks our offer is worth. It’s not as much about being cheap or expensive as it is seeming it.
Now that the rules of the game are established, I invite you to play: How much would they pay for the products or services your company sells?