02 Sep The Origin of Value and the End of Pricing Strategy
Marketers and pricing strategists beware. The world is changing. In a couple of years the discipline of pricing strategy will be a vague remembrance of the past.
Putting who first?
80% of all companies speak about ‘putting their customers first’, a quote that will ignite a weak feeling in the stomachs of many. Apart from the question if they really should, the question is whether they really do live up to this promise or if they just use it as a neat catch phrase to try to realize a mind shift amongst their employees? It is time for a perspective on the true origin of value and its effects on pricing strategy.
Pricing: the traditional methods
Basically, pricing strategies are yet another method that is designed to reaping as much dollars ($) from your customers by adopting smart tactics that will seduce them into buying a product or service. Economic theory will explain it is about ‘creating and capturing value’: strategies to increase demand, or strategies to lower supply through war tactics: excluding completion from entering the market. Roughly, these pricing strategies can be divided into three methods;
1. Cost based pricing
The most basic and easiest, this method is about putting a mark-up to the cost of products (i.e. Cost-plus, BEP+target profit)
2. Value based pricing
A nifty invention of the 20th century, this uses our perception as fundament to pricing. ‘Price is considered along with the other marketing-mix variables before the marketing programme is set’, dr. Kotler explains us.
3. Competition based pricing
This is basically about: “Hey, let us all look at the prices of competitors to determine our own price!”
An abundance of toys come along with these methods, keeping a whole industry of pricing strategists and marketers busy. I will mention a few, but please take a deep breath first. Ok? Here we go: Product-line pricing, optional product pricing, captive product pricing, product-bundle, discount allowance pricing, segmented pricing, psychological pricing, promotional pricing, value pricing, geographical pricing and international pricing. Pheww…..
Who are we kidding?
All of the above-mentioned methods still are based on the same premise: seller-centricity. Well, like we said, we all want to put the customer at the very core, right? Well then, let’s take some time to consider the consequences thereof and have the courage to live up to this promise.
The true origin of value
Gary Hamel, back in 2000, already posed what he called the greatest pricing challenge for businesses: ‘ How can we closely align what you charge for with what customers actually value?’. Well, sticking to the very core of things, the answer to this question is actually quite simple. It builds on the insight that there is only one person that can determine the actual value of a product or service. That same person is you. Nobody else can determine the actual and personal value of a product or service. Following this very essence, our 21st century will be dominated by donation-based business models. In this business model, businesses will ‘give’ away their product or service and will give people an opportunity to express their gratitude.
Taking it even a step further, businesses will have to give the opportunity to clients to express their gratitude not only in monetary sense but also in other means. Although we are tempted to think so, businesses do not merely need money. Think about their need of housing, technological support, consultancy, office furniture and whatever more you can think of. It is kind of strange that nowadays we use monetary means, extracted from ‘customers’ to buy these things. It could equally be true that a particular individual or a company that these ‘sellers’ are doing business with have these things on offer as well. So why not trade? In fact, this is already happening mostly at SME level, but is not yet institutionalised in our thinking. We have agreed upon using money as an intermediary instrument, right?
Taking a step toward this 21st century economy requires from businesses that they;
- Know what needs exists within the organisation, on an aggregate level
- Openly express these needs towards clients
‘What?!? Openly express our needs? No way! Our customers don’t have to know what our organisation needs!’ , I hear you think. Yes. It is scary indeed. Opening up while we have grown so accustomed to living behind this safe intermediary curtain of money. It created a nice black box in which nobody really knows what is going on. In fact, the whole quest for transparency over the past decades is basically the counter-reaction to reveal these black-box mysteries. Nobody knows what is happening behind the numbers in annual reports, how things are intertwined, yet we want to get a grasp on the reality behind the abstract numbers.
This donation-based mechanism has the power to separate the chaff from wheat in business. If your product or service doesn’t add any value to the lives of people, they will not want to express their gratitude and your business will seize to exist. People only express gratitude in support of the businesses, products and services that have a pure intent. Does yours?
Sources
Brickley, Smith, Zimmerman, Managerial Economics and Organizational Architecture. McGraw-Hill, 2001.
Kotler, Armstrong, Saunders,Wong. Principles of Marketing. Prentice-Hall, 2002.
Hamel, Leading the Revolution. Harvard business School Press, 2000.