High Quality vs Low-Cost Bargain: The Current Dichotomy! (XVI). Product Mix Pricing
Have a lovely weekend. Let’s continue understanding our lively concept when it comes to pricing: Economic Value to the Customer (EVC). Afterwards we will cover the Product Mix Pricing theme.
Vindicating the correct way to interpret the original EVC concept. Again, I will repeat it. For Eleonora Escalante Strategy the term EVC in pricing includes the perceived value. I wish to clarify it, because in some textbooks, the method for pricing appears under value-based pricing, in other textbooks it is named customer value pricing, and in another textbooks is known as as perceived-value pricing. Please take this into consideration. Don´t confuse the EVC that I am explaining with the strategy of charging a fairly low price for a high-quality offering. THe EVC that we are currently exploring includes low-medium-high that are located around the Value Equivalent Line or VEL, and along the VEL line we have segments of customers that care only about the economy or bargain pricing, meanwhile others care about “meeh” quality and others are extremely worried about high quality. So the EVC that we are vindicating includes the perception value of the client based not only in attributes of the product or service but also in other factors such as:
- The image that the buyer has about the company.
- The word of mouth or reputation of the product/service from other clients.
- The distribution channels quality service: same day delivery, pick-up at the nearest store location, the delivery conditions and delivery time.
- The quality of the customer support service: some buyers hate to communicate with chat-bots, and they are demanding real people to attend them through real-time communication tools.
- The warranty quality, term and conditions.
- The company reputation and engagement with the environment, recycling, art support, or other social-community projects.
- The trustworthiness of the company and degree of esteem that each corporation invest in their employees as humans.
- The schedule for attention or opening hours
- The financing options: many clients may request not a one and unique initial payment, but financing is extremely valued nowadays: This can be flexible from at least three or 6, or even 12 monthly payments. Others would like to pay installments per day, per week, or bi-weekly.
- The training/quality of teaching when products require to be learned by the customers,
- The return policies.
- The possibility to offer price reductions to repeating buyers or to those who pay the financing plans before the due time. For example a typical example is “3/15, net 30”: which means that payment is due within 30 days, and the buyer can deduct 3% by paying the installment within 15 days max.
- The one-stop shopping facility and team that includes technical assistance, installation and maintenance, logistic beyond delivery.
- The seller’s experience and background. This is a key differentiation indicator which represents a more and more treasured benefit. Particularly in products in which the client requires the seller´s companion during the initial learning curve and beyond. A buyer wants the seller to be reliable, transparent, honest and available, and trusted.
- The certification or corroboration that companies are not displacing employees with any new technology or automation-robot devices. This is a factor that more and more will be considered by buyers. A good business owner with a heart full of solidarity won´t replace his factory with robots to dismantle his loyal workforce in exchange for profits. I am sure about it, because I have seen many customers that are refusing to buy to companies that have disposed workers to buy automated robots.
- In the case of high-quality/high price or premium proposals or solutions, the price should not leave the client with any doubt. There is no room for mistakes at the premium segment, neither any space for a little piece of mediocrity when a client pays a price higher than the market average. So if your company is engaged to offer a premium (creme of the creme solution) the promise of a higher value must be spectacular, not just “wow” but notoriously above anything else you can imagine. And this is recognized by all the customers since the beginning of the sales experience to end.
- Possibility for auctions to set the final price: The auction offers an EVC that could be or not accepted by buyers, depending on the type of goods. There are three type of auctions: (1) English auctions or ascending bids featured by one seller and many buyers, where the highest bidder gets the item. This is the case of Ebay.com. English auctions are used to sell antiques, ancient money or coins, cattle, real-estate (in leasing or buy option), used equipment, art-music-concert tickets and vehicles. (2) Dutch Auctions or descending bids, in which you can have one buyer and many sellers, or one seller and many buyers. The transaction happens when the pact price is reached according the buyer desire to pay for the lowest price. (3) Sealed-Bid Auctions: this is a type of auction in which each seller (usually suppliers) offer their economic-technical proposals and they cannot know the other competitor´ bids. This alternative is used by public bureaus. Auctions can be added as a value differential depending on the type of service/product, and with the on-line platforms, it is possible to make them efficient opening it to a large number of bidders.
The sky is the limit when it comes to offer value added to customers. There are many aspects and conditions that can be utilized as value differentials to help your client not just to buy you once, but several times, and come back for more. The key to the perceived EVC concept is consistency for each segment of clients, commitment to deliver a more unique value than the competitors and engagement of every staff member to demonstrate this to prospective buyers on and on and on. When buyers PERCEIVE that a company is charging a bit more or a premium for a product, but this extra charge has a justification perceived on several value added elements, clients are able to pay that extra value, without any hesitation.
With that in mind, we will proceed with the step number 7 in our pricing developing strategy. The product mix pricing.
Step 7. Product Mix Pricing. From step number 6, in which we have evaluated the value of our product/service to the clients, and we have segmented different EVC for various clients properly, then it is time to gather different alternative paths. Every single product that you have can be marketed for different segments, if you are able to add or reduce the list of value differentials. Several common situations are identified.
Product line pricing. For example a veterinary hospital that has been able to establish a large successful trajectory to serve the middle-class segment at reasonable prices for about 10 years. The owner wants to expand in several areas (He is considering to invest in a new pet hospital located in the suburbs of the city, or offer personalized visits to the clients residences, or buy better tech equipment for in-house diagnosis, etc). The vet owner has been able to capture a database of clients that come from different economic segments, and he realizes that the 40% of his pets clientele live in the suburbs of the working class. By exploring the client segments, he also realizes that the majority of his clients visit his vet hospital for basic clinical and preventive services. Veterinary services fall into four main categories: clinical services (treatment of diseased animals and control of gastric diseases or accident disorders); preventive services (yearly vaccines to avoiding the outbreak of diseases); provision of drugs vaccines and other pet products; and human health protection (inspection of marketed animal products). This vet practice core business is the preventive services. The doctor decides to expand his growth, not by investing in a new clinic store location, but by offering a distinctive new mobile veterinary practice van, in which three staff members will move to the location where the 40% of his clients live.
The life cycle total investments (EVC price + startup costs + post-purchase costs) of an ambulant new veterinary clinic is 4 times less expensive than to open a fixed new medical bureau. This “on the go” van type of vet service can add multiple valued differentials in comparison with the traditional private practice. Read the slide below.
With the mobile veterinary clinic, the veterinary can open new product lines of services in parallel to the existing practice that he is fully operating. He also can segment different type of consumers, not just for the low working class neighborhoods, but also he can attend emergencies at the high-end economic group with additional value added features, and encourage clients to trade up for the benefits of the mobile option.
Follow-on products: Some products require subsequent purchases. For example, there is no way to buy a computer alone. Specialized software has to be downloaded, that is the case of Microsoft or Adobe Licenses. The same happens with other products that require additional features. For example, if you buy a new digital TV, it is impossible to watch anything unless you have internet access, or you pay a monthly subscription to a cable TV provider, or you pay a fee per plus channel such as Disney+ or Netflix. The same happens when you plan to expand your terrace on your garden. You will need to buy extra-furniture and decorations.
Blocking Products: Sometimes, it pays off for a company to sell at expensive uneconomic prices, to block competitive new entries. For example: This happens a lot in the case of new technologies which are not ubiquitous. Do you remember when the first Ipad started to be sold 10 years ago… Even though the lowest original Ipad price was US$499 dollars then, no one bought that option but at least the $599 dollars one. That specific technology blocked new competitors for at least 2 years, until a new technology Android disrupted the market. Today anyone can buy a tablet (from other brands) for US$50 up to US$100 dollars.
Bundled and Option Pricing: This pricing mix is a good option particularly for vehicles. For example, the majority of car models (regardless the brand) establish a basic price without full-extras, and at the point of purchase the buyer is encouraged to add other features or additional characteristics, that increase the company’s margin. Another example, physicians can add value with the medicines. There is no doctor appointment without a prescription. Doctors can offer a value card of discounts for the prescription at a specific pharmacy chain, in which the captured client will remain loyal to the pharmacy afterwards. The bundled product is offered at the prescription point of sale with the doctor.
Parallel Imports: Pricing is an international problem that is affecting every single economy on earth because there are different living standards and income distribution levels. This sets up dissimilar or unequal prices to the same items. For example to buy a Starbucks in New York city is different than the price that you get in any Starbucks store all over the world.
The same applies to food: To buy a 2 pounds golden pineapple in San Salvador implies to spend US$2.50 each, meanwhile the same item pineapple imported by the US groceries markets is between US$4.50 up to US$13.00 plus VAT taxes.
Several times I have stated in this blog that meanwhile there are economic disparities between countries, then prices will differ, not just in terms of EVC, but therefore, it would be more profitable to set a higher price in those countries in which are able to pay more. Companies then, may have to price higher in some markets, meanwhile in others will charge low prices.
Parallel imports happen, when genuine goods imported to low pricing countries, by unlicensed distributors, sell those items at less than the manufacturer’s official lowest retail price. When we land into parallel imports, there is a trouble for trade, which is illegal in many countries and it can be penalized. For example, it is common to find good clothing and shoes brands imported to developing economies under a parallel imports operation. In the shoes industry, you can find genuine brand imported sport shoes (such as Reebok, Sketchers, Nike, FILA, Adidas) sold to you for less than 20 dollars per pair. These shoes are sold under a discount reseller or dealer “black market” curtain, without the manufacturer´s consent.
Step 8: Set the final price. When we set the final price it is important to consider the impact of your brand, your high or medium or popular reputation given your degree of relative quality and your degree of market share leadership. In addition, it is clever to consider the impact on price on the dealers, distributors, other intermediaries or re-sellers (your retail network). The internet marketplaces trigger EVC disparity, because the distance between the supplier (seller) and the client affect the cost of shipping, to a point in which many items are not feasible to be sold directly to the end consumers. That is why intermediary retailers can´t be dismissed, given their import-export expertise and economies of scale baton purchase power. For example, the shipping price that I must pay for a package of less than 2.2 pounds from Europe (by DHL or Fedex) to my home is between US$65 to US$120 dollars. But a retailer in town, can buy 200 items, import them from Europe in a container, and pay a shipping expense of 10 dollars per item. The higher the shipping cost triggers non-profitable reasons to sell internationally. The local importer-retailers (or distributors) are then needed, or customers are forced to get equivalent options manufactured in their local markets.
Be sure that after setting the price, all sellers have to learn how to adapt it, and we will enjoy to learn about this later (as of the 12th of March) under the outline subject number 11. Pricing Strategies Dilemmas, and 12. Contemporary pricing adjustments.
Next Tuesday March 9th, we will continue with the subject number (9). Psychology of pricing and the subject number (10). Perceptions of pricing by the consumers. Just that you know, this saga will finish on March 31st, the day that our Easter holiday week begins. Thank you for reading to me. Blessings.
Sources of reference utilized for the examples today:
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