In 2005 I was sitting on an airplane next to a regional general manager for one of the major US auto manufacturers. He noticed I was reading an article from the Wall Street Journal titled “Detroit Finds a Bandwagon in ‘Employee Discounts.’” Written by Karen Lundegaard and Joseph B. White (if you have a subscription, you can still find it by clicking here), the piece’s basic premise was after 0% financing, the new buzz phrase was “employee discounts for everyone.”
In other words, they kept lowering their prices. And kept lowering them.
We all know what has happened since then with lowest price thinking.
The executive sitting next to me got my attention and said after a brief conversation, “I told them not to follow GM, but…we’ll never recover from this promotion. Never.”
He was right.
What made them – and others – go off the cliff? Everyone knows if you lower your price, you can’t really raise it again easily, if ever.
Even though the world was different back then it’s not difficult to understand what happens to pricing when you lower it, or for that matter, raise it. You get a reaction.
John F. Kennedy said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.” In business, if you don’t look at the past or present, you’ll have no future. You’ll make the same mistakes – mistakes that can cost you business.
One of the quotes I underlined in that WSJ piece was “consumers, thanks largely to the Internet, increasingly believe that only ill-informed or hurried shoppers pay list prices for all sort of goods.”Another important statement was: “the gambit [promotion] was supposed to last about a month. Instead, GM and its Detroit rivals found that consumers stayed home when the promotions lapsed.”
That was in 2005. Imagine that.
Theories of Pricing Abound
There is no shortage of theories on pricing. Just Google and your head will swim with theories.
Thanks to Amazon, however, the theory of pricing boils down to: how low can you go? Amazon actually changed pricing theory forever.How low will you go? How low should you go? But, the question is: should you in fact go low to begin with?
The price of anything is always tied to perceived value. Going low (or high) is a matter of perceived value – always. The inherent value of anything is not in the thing: it’s in the perception of the buyer.
Bob Stone once said that people buy anything for one of two reasons: to protect what they have or to gain something. In both answers, value is imbedded in the decision. If value is perceived, the purchase is made. If not, it’s not.
The Internet Changes our Perceptions
I recently interviewed several distributor showrooms. Their biggest complaint was that people come in, see something they like, ask a price and buy it somewhere else. That “somewhere else” is the Internet. Many come back weeks later with horror stories after the Internet purchase.
Some never return, perhaps out of shame. Or happiness.
But, the showroom thinks it is helpless against such behavior around pricing.
Lots of time is wasted this way.
If pricing is about the perceived value of the item or service, the underlying question should be: What is your perceived value of time? Because that’s really what is at stake: time.
Sometimes the shopper tells the showroom flat out because they already did their research, “I can get it for such-and-such a price on the Internet.” They are daring the showroom to lower the price.
Many do. And they end up bemoaning their fate. This is what one showroom consultant told me.
I find that I am constantly competing with the Internet for availability and pricing. We are a small family business and have a great reputation. But, we are losing sales to the Internet. Even when customers come in, they say, “look, I can get it at so-and-so tomorrow for this and free shipping.” I find it very rude to do that. We cannot compete with all the online retailers. How do I compete with a larger “supply” (aka the Internet) business? How do I politely say “please stop showing me where you can get it because that is rude.” I’ve been in sales/retail for 30 years and even with my education on products and professionalism, I find I am losing these customers. I will do a bid and NEVER hear from them again. Why should I do all this work, give them model numbers, pricing if they are simply using me to order it online. I think we are all experiencing this no matter your knowledge, experience or workplace. How can I secure them?
In my blog, “Getting People to Pull the Trigger,” I referred to our friend John Caslione. Author, speaker, and business leader, John’s course in pricing I took many years ago confirmed my own suspicions: that price will hardly matter if the value is there. It’s not that price never matters; it’s that the product or service is incidental to what is really being sold: value.
So the question isn’t what you are selling. The question is always what is the value you put around what you are selling? More importantly, does your customer perceive it? And, how DO you communicate your value to create the right perception?
All complex questions. But, as Caslione put it in a wonderful paper, “Value-Added Strategies: How to Compete Against Price:”
True Value-Added Strategy goes above and beyond the product level to create a true strategic relationship between the two companies. The product itself does not change, and in fact, it sometimes becomes almost incidental to the customer-supplier relationship.
WW Grainger makes a fortune with their pricing model, which is items priced high. How can they get away with that? Availability. They have the product when the buyer needs it.
And their brand name. You can buy the same product in many other places, yet people pay more to Grainger. Why?
Can you guess what Amazon’s model is?
The Price Is Right
The Price is Right is probably the longest running game show on TV. It revolves around contestants competing by identifying accurate pricing of merchandise to win cash and prizes.
But, how is that possible in today’s pricing environment when fluctuations are rampant? In fact, Google’s AdWords don’t have a set price: it’s an auction-based/bidding platform.
I gave a pricing workshop last year and told people that there are only three responses to any price: 1)it’s too high. 2)it’s just right or 3)is that all?
Most people today are programmed to think whatever price they hear is too high. We had a client who regardless of the price we quoted for a service asked for 20% less. They were comparing our service to component parts. After the second time, we added 20% to our quotes for the service and lowered it to what we wanted and needed to make a profit. After a year, when the client recognized what we were doing, we had a meeting. They stopped asking for the 20% and we began quoting real numbers. An understanding took place. A relationship. That client is one of our most trusted partners today.
Now, no one is going to shout responses to your price out loud. But, you will be able to tell from their facial expressions or the tone in their voice, if you are on the phone.
This is why more than ever, you should never let a price get in the way of a deal. You must concentrate on communicating your value.
And value is a perception on the part of the buyer – not the seller.
The real secret of pricing is: the customer determines the price based on perceived value. If you are selling commodities, it will always be the lowest price. If you are selling value, then the price will be what the buyer is willing to pay you for the perception.
Which is why you want to build value around anything you sell.
Value is intangible. A product is tangible. Products come and go. Value can last a long time after the product goes.
How Much is a Relationship Worth?
Like pricing, there are abundant studies on what they call life-time value of a customer. But, what do such studies all mean?
What did Sears do with all their customers’ life-time value?
What is going on with Apple and its customers’ life-time value?
Ten years ago, there were people who never purchased on Amazon. Today, not buying on Amazon is an exception. What is Amazon doing building relationships?
Things change – and they change more quickly because the Internet puts pricing in constant motion.
But, value doesn’t follow the laws of physics or motion. Because it’s perception, one person can see a baseball card (a 1952 Topps Mickey Mantle rookie card in near-mint condition sold for $89,626 in 2016) or something to be used to keep a door closed if you fold it over a few times.
In physics, the shortest distance between two points is a straight line. In value, it’s more like a zig zag between points as not the shortest, but the most valuable. See the difference?
A relationship is like that. Like pricing, it fluctuates. But unlike pricing, a relationship is based on value, on perceptions. And anyone in advertising will tell you, perceptions are about the hardest thing to figure out.
I recently watched a Digiday podcast, an interview between Brian Marcy with Conde Nast International’s Wolfgang Blau. Fantastic. It was so good, I found Blau on Twitter after Marcy referred to Blau’s constant tweeting. I tweeted my satisfaction to Blau about the content of the podcast and how valuable it was to help us understand what’s going on with print magazines. He replied almost immediately, “well, thanks.”
What’s the perceived value of that? It’s just a tweet.
But, it was invaluable to me like the Mickey Mantle baseball card because it proved one of the points I’ve been making about social media for a long time: you can reach or be reached by anyone. Anyone!
Value doesn’t always have a price attached to it. Value is emotional. Pricing makes you get emotional. But, so does superior service. So does an expression when someone asks you, “Is that your best price?” There is a big difference between lowering your price immediately, or pulling out a paper and doing a point-by-point comparison of what a price includes and excludes.
It’s called educating the customer.
In Latin, I learned to say it this way: “De gustibus non estdisputandum.” Or, you can’t argue about taste.
But you can acquire taste. You can teach taste.
The argument goes for value. The argument is always won by the customer.
Thanks for reading. And let us hear from you.