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High Quality vs Low-Cost Bargain: The Current Dichotomy! (XIII) Pricing scenarios matrix.

On my last publication I promised to disclose the meaning of alternative pricing strategies and value implications as it was defined originally. At first, when Philip Kotler was updating its “Marketing Management” textbook, the pricing scenarios matrix was persuasively outlined. Peter Doyle also included it in his marketing and management book. I think since the 2010 decade we don’t see this matrix anymore in our marketing textbooks, but it is extremely helpful. Indeed it is why I will dedicate this publication to it. The pricing scenarios matrix has been, in the first instance, very illustrative and meaningful when it comes to understand the pricing strategy developing process.

“Ducky duck”. This is one of my first exercises when trying to paint a bird. I wasn´t successful with it. I share it because mistakes happen when we learn. To push the whole world towards cost-based pricing is a mistake, and we must correct it.

Before proceeding to explain the step number 6, “Measuring the economic value to the customer (EVC). How do customers value products and services?”, please take a look at the following figure:

Nine Price-Quality Scenarios Matrix. Based on Philip Kotler “Marketing Management” 11th Edition, Chapter 16th, On purpose I changed the axis in relation to the original figure. On the horizontal axis, I have set the variable quality. and on the vertical axis, I have set prices.

Pricing Scenarios from the point of view of the EVC. This figure illustrates 9 scenarios of possible pricing. Each of these 9 scenarios offer a unique combination of quality and price which represent an economic value to customers (EVC). You can visualize two colors: At the right of the diagonal there are green scenarios which are feasible for the long run, or which create value for societies. And at your left, with red color, there are red scenarios which are not sustainable for the long run. On the X axis, the variable is quality from low (left) to high (right). On the Y axis, the variable is price, from low (bottom) to high (up).

Both variables, quality and price, are integrated and correlated. I have categorized each scenario from the point of view of the client, or EVC (economic value to the customer). The pricing scenarios that make our clients happy show a happy face. The scenarios that make our clients sad, have a sad face. So the following analysis is based on the client, not the firm. Take notice of it.

High price Scenarios: High price strategies are viable only when our product or service is associated with high quality. And this applies to every single product you can imagine. For example: a zucchini that has been cultivated with organic methods, with seeds from extreme good flavor can be charged two or three times than a zucchini that is cultivated under an industrial plant that utilizes artificial and chemical fertilizers, with genetic modified seeds. A client from the middle-upper class that is educated and values the quality of food, will not hesitate to consume and pay a dollar for each zucchini, compared with someone who doesn´t appreciate the organic tag, or someone from the low-class who doesn´t have enough money, will privilege to buy the cheaper zucchinis, paying 1 dollars in exchange for 4 of them.

High price strategies can be of three different scenarios:

  1. Rip-off Scenario: this is the case in which the EVC is perceived as high, but in reality the quality corresponds to a low level one. In the case of some contemporary abstract art (not the case of Picasso of course). Have you have seen some abstract paintings, in which the quality of the art is brutally basic and horrendous, with no technique or any implicit or explicit effort shown at the conceptual, drawing and execution of the painting? Some of these oeuvres are practically comparable to the drawings made by my nieces and nephews when they were kindergarten students. And then you find out these oeuvres price is above US$150,000.00 dollars? For a size of 1.50 mt x 1.50 mt?.
  2. Overcharging Scenario: This is the case in which the EVC is high, but the quality of the product or service is medium, or kind of OK or in our buzzword: A “meehh” product, not good but not bad either. For example, usually new gadgets or versions of Smartphones that are entering first into the high-end market tend to compete under a “first mover” strategy. Samsung, Apple, Huawei and LG are constantly competing to innovate new models every year, not just with the most modern features, but also with something that differentiates them from the rest of competitors. In their competition gallop race, like runaway horses, some of their upgrade versions are basically the same one than the latter year, with some basic color or shape adjustments, but their skimming entrance strategy, pours an overcharging price, for not a superb excellent new version of it.
  3. Premium Scenario: This is the case of products and services with such a distinction tiptop world quality. The degree of exquisiteness, delicacy and attention to all the details is extremely high. The whole process for this scenario is accompanied not just with high standards of inputs, but the manufacturing or production process, packaging, delivery and perfection in everything is over the top. Usually luxury goods, like jewelry, watches, cars of lavish brands and expensive items are trying to use this position to sell their products or services, but of course, the segment of customers is extremely exclusive too. Customer satisfaction is 100% and more. For example: this is the case of beautiful well-located restaurants, with incredible set-ups, ambiance, music, top quality personnel interaction, experienced Michelin chef stars who prepare each of the dishes with excellent procedures and standards. A dinner for two in these places easily can be priced above 300 to 400 dollars or even up to 10,000 dollars per person!

Medium Price Strategies Scenarios are described below:

  1. Poor Value Strategy: The quality of this position is low. But it is sold with a medium price that leaves the client dissatisfied. For example, this scenario happens when a customer pays for a doctor physician appointment and treatment, a price amount that is relevant (not too expensive either) but the service and the procedures are terribly bad. Many women travel from rich countries to developing economies in search for plastic surgery, paying mid level prices, but end up receiving a mediocre low quality service.
  2. Medium Value Strategy: This is an average ok meeh product and/or service. It is not categorized as a premium but it is also not a cheap low-cost.  For example, the gourmet hamburgers from McDonalds. Another example is the clothing from Banana Republic or Ann Taylor or the Gap. In Latin America, there are many items of Medium quality value international standards that are sold to us under the premium quality scenario. The medium value quality companies are the very definition of “you get what you pay for”.
  3. High-Value Strategy: This is the top best scenario for the long haul. Companies that have been successful over more than a century, are those which have taken this road. Believe it or not, these are the companies with strong financial performance which have been able to be counted from one generation to another one (at least 6 generations by now). The high value strategy is per its own nature, not only the one with best EVC, but also they have been able to define their business boundaries in terms of pricing. They clearly have identified the sources of differentiation in high quality that helps them to create market power and influence over their customers, competitors and the industry profit pool. And finally since they do not harm themselves by  reducing quality standards, they know how to operate towards their full economic potential. In this level of products and services we can name several examples, in every single industry. Let’s pick the maintenance and repair car industry. Each country around the world can identify the car maintenance garage chains that usually provide premium quality customer service and top autoparts for a moderate price. In exchange, the word of mouth of their excellent quality, makes them the favorite when it comes to customers clientele. Another example is the bread industry. In Santiago de Chile, there is one bakery named Las Rosas Chicas, which started operations 110 years ago. It is considered a premium quality bread, under a medium-average price. For those New Yorkers who read me with attention, here there is a list of high value strategy companies that have been sustainable during at least a century: Rambusch Lighting Company (1898), Ferrara Bakery and Cafe, which has been serving cannoli since 1892, Mager and Gougelman, an american ocularist company since 1851 and The New York Times since 1896.

Low Price Strategies are also segmented in three groups:

  1. Economy Low cost/Low Quality Scenario:This is the group of the catchpenny cheapskates. The majority of dollar stores all over the world have gained popularity, particularly since the economic financial downturn in 2008. Each country has its dollar store franchise name, but in the United States, we can find Dollar General, Family Dollar, Big Lots and Dollar Tree. Even though these ultra-discounters are not dollar stores in a strict sense, they sell items between $1 to $5 dollars each. And in some countries up to US$ 10/per item. Other examples of low cost items have inundated the informal markets in many capital cities of developing nations, where street vendors sell everything coming from China at low prices (these informal retailers don’t pay retail fixed costs, in consequence, they can sell with a very low margin too). Airline companies such as EasyJet and Ryanair, have also tested this pricing strategy since the 90s, particularly in Europe.
  2. Good Value Scenario: Clients are always searching for affordable items with a decent quality. This pricing is utilized particularly when companies want to use the penetration strategy. This is the case of the majority of companies that work under the EDLP motto (Everyday Low ¨Pricing).  A retailer that holds to an EDLP charges a constant low price for medium quality items. The king of Good Value are companies such as Walmart, or the chain store Trader Joe´s. Another example of good value pricing is Subway sandwiches, which offer a lower or reduced price lunch specific sandwich per day, which invites customers to return back over the week.
  3. Superb Value Scenario: This is the most interesting position. The one that deserves a strategic reflection of benefits and disadvantages. On purpose I left this position as the last one, because on my next publication, we will make an interesting analysis of it. Please remember that this matrix is from the point of view of the client interests, which are extremely happy to get good quality for a low price. In consequence, from the point of view of the firm or the company, this scenario may not be sustainable for the long run.
Subway pricing scenario is a good value one.

See you tomorrow for the completion of the step 6: Measure value to Customer, in our journey about developing a pricing strategy. Thanks and blessings.

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