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High Quality vs Low-Cost Bargain: The Current Dichotomy! (XIV). Let’s begin to understand EVC in pricing.

Economic Value to the Customer (EVC). Understanding the concept of EVC is the key when we wish to do correct pricing, which happens when we utilize the value-based approach. It is not the cost-based pricing that brings long-term value creation. It may momentarily make you believe that things are going well, but the long-haul cost-based pricing is incorrect.

“Avellanas benditas”, A petit aquarelle handmade with love by Eleonora Escalante. Size: 5 inches x 7 inches. Paper: CM Fabriano 100/100 Cotton. 250 GSM.

As I mentioned previously, the world has chosen to pursue cost-based pricing since the advent of Chinese success during the last past decades at expense of the right-correct theory that was originally taught to us in business schools. Cost-based pricing has been privileged because it is easier to do (it doesn´t require experienced professionals in pricing). Nowadays, it only requires that we calculate our costs, then we add a profit mark up and voila! C´est tout!. With the new technologies, data is pulled to fill automatically the super quantum computers, specialized dynamic programs make the calculations, and if with luck there is a human involved, someone is hired to push the buttons of the computer and send the information to the points of sales.

Cost-Based pricing is based on the supply value chain efficiency model (the product manufacturing analysis that searches to reduce costs) but it neglects the customers’ needs and wants, and particularly it denies that there are different customers that hold different perspectives when it comes to EVC. Cost-based pricing is the wrong choice to pursue in the long term because it is based on the premise “the costs determine the selling price”, which is killing the margins for enough profit reinvestments and the long haul of businesses.

The concept of EVC allows a differential advantage by type of customer, so it considers not only the economic but also the psychological perception of each client about the product. This is crucial because buyers are motivated by the aim of fulfilling their whole list of requirements, not only the cost plus profit markup of it. During the weekend I will finish the example about what is the EVC and how can we, as business owners can target those market segments where the EVC is the highest?.

The Superb-Value Scenario makes our clients happy, but not the firms. Yesterday, I left the Superb Value Scenario of the nine-pricing scenarios matrix as the last one to explain. This pricing position is the one located at the bottom corner at your right. Can you see the happy green face there? Well, this happy face corresponds to the mood of happiness of clients when they get AMAZING quality at ultra-low prices. So many firms could be tempted to believe that this is the way to go. Particularly those who only see the relation between Price and Volume of goods sold. And the reason why the whole world is moving towards low-cost strategies is certainly based only on a calculation of price x volume. But not in a value-based perspective.

Source: Instagram The Foundr.

A few weeks ago, when I was assessing the posts on my Instagram, a post from the Foundr appeared in a bright red color. You can see it above. Can you try to analyze with me the meaning of this post?

  • The title is How to make $1 million in one year. From the beginning the title is attractive. And it invites us to continue reading it.
  • The image is basically a comparison of 5 different products (as of the cheaper price $200 to the most expensive one $3,333.33).
  • At your left it shows the volume of units to be bought by people (assuming that each client only buys one product), at  each specific price. If you multiply the Volume of units x Price in US$, then each of the categories brings us a total of US$1,000,000.
Concept FormulaVolume of units sold (each)Price (US$)Total Revenues (US$)
15000$200US$ 1,000,000
22000$500US$ 1,000,000
31000$1,000US$ 1,000,000
4500$2,000US$ 1,000,000
5300$3,333.33US$ 1,000,000
  • At your right the red image also provides the alternative of the purchase in 12 installments (assuming it is one year, and the payment is every month). This illustrates to us that to pay in installments opens a world of opportunities to attract more clients. In theory, it is a convenient solution to clients that can’t pay a whole amount at once, but they can do it by paying small sums of money at regular intervals. Nevertheless,  paying through this system implies an interesting rate, so it may be expensive if the interest rate is high. There is no free lunch, so every installment plan includes an average interest rate that can range between 17% up to 60% (in certain credit cards at developing economies).

When we focus only on the Volume x Price calculation, we can wrongly believe that the Superb-value Scenario is the right way to go. A good pricing strategy has nothing to do with a Volume x Price calculus, but with the Economic Value of the Customer or EVC.

Companies that know how to price do not base their pricing strategy by trying to find out how can we make 1 million per year at different formulas of Volume x Price. But they ask themselves: how can we target the market segments where the EVC is the highest? By pursuing the superb-pricing scenario, companies are simply leaving so much money on the table. Trying to expand in Volume of clients, instead of asking how to expand the EVC. And the EVC means for the customers economic and psychological benefits. The company strategically focuses on what can the product or service do to improve the customer´s performance, quality of life, his or her community, not in the purchase price, only.

On my next publication (next Tuesday) we will continue to clarify this with an example. Have a beautiful weekend. Blessings for reading to me. ‘

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