High Quality vs Low-Cost Bargain: The Current Dichotomy! (XVIII). Pricing Strategies Dilemmas.
Have a deserved and lovely weekend. Today is Friday, and as usual, I am always devoted to post a new article for you. Today is the turn of the subject “Pricing Strategies Dilemmas”. And up to this day we have already covered this topic. Basically without your awareness, we covered at least 9 pricing dilemmas when we were exploring the alternative pricing strategies and their value implications. Each of the following scenarios implies a pricing dilemma. For each pricing scenario, there is a pricing dilemma for the client and for the manufacturer or seller.
For example, the quadrant at the bottom right, Superb-value Strategy implies a dilemma: Clients are extremely happy by choosing to buy quality products for a cheap value. But for the sellers, this pricing strategy is not sustainable for the long run, because producers are sacrificing profits or margins so needed for capital expenditures, human capital and reinvestments. By pursuing this pricing strategy, China and other multinational companies that utilize value chain segments from Asia manufacturers, are killing themselves because the chosen strategic path is not profitable for the companies (even though clients are happy). What is the dilemma here? For companies: do we continue selling our high-quality products for pennies (cheapskate value) , expanding our volume of sales into the world at expenses of killing the artisan industries in other countries? Or do we pursue another pricing scenario that is closer to the Value Equivalent Line? This is a dilemma that low-cost strategies have to consider.
What is a dilemma? . A dilemma is a situation or a perceived situation that requires a choice between equally “same attributes that could be favorable or unfavorable” or between mutually exclusive options. Some academics poise the word dilemma under a frame of reference that relates to a “usage problem”, or a problem that seems to defy or to challenge us to be brave enough to find a satisfactory solution.
According to the American Heritage Dictionary, a dilemma denotes a situation in which a choice must be made between alternative courses of action or arguments. Although a dilemma happens not only when in the case of showing and comparing different solutions to problems or predicaments; but for Eleonora Escalante Strategy, the term “dilemma” has to be used when the process of comparing the different alternatives ends in making a choice.
In other words, a dilemma happens, when an argument introduces a choice in between two or more alternatives, each of which contradicts the original contention and by choosing one alternative, we end to make it conclusive.
When we translate the term dilemma to pricing, here we land in the middle of our current trade and commerce issues which are causing so much pain to families in poor countries that depend on economic sectors that traditionally have been categorized as crafts. These are the families that have been making a living through artisan handmade industries or through traditional crafting. The same applies to those who are involved in the business of the experiences: restaurants, entertainment and the arts.
I promised at the beginning of this saga, that I was going to use plenty of examples. So to honor this publication, I will explain why am I constantly repeating that the issue of disbalance in trade and commerce in the world is conceptual. And the solution to a wrong concept is not to fix it using palliative measures, or acting under protectionism or restricting global trade by using instruments of trade policy as tariffs. This problem has to be solved at the theoretical level first, and then once the good theory has been assimilated, then China and its Asian partners have to make price adjustments and balance the offer of products and services in quantity and quality to serve different segments in different country contexts. Different pricing scenarios around or along the Value Equivalent Line, using the value based customer approach is the solution, and not the cost based pricing.
Let me explain what is a pricing dilemma that wasn´t solved with an integral strategic approach at the beginning of Asia´s plans for economic prosperity. Please be aware that I am not against China´s heart desire to build a society free of poverty. I mean it. China and its Asian nation neighbors or associates were simply committed to find an economic model that could help them to eradicate poverty, and when they were planning ahead about how to attract Foreign Direct Investments, when they were defining themselves as the “factory of the world”, they were doing it under the competitive advantage of the nations theory. China wanted to become the new Singapore for its 1.4 billion of inhabitants, as much as the United Arab Emirates has positioned Dubai´s success of high price/high quality pricing scenario as a role model example for the Middle-East. China´s leaders choice was for the low-cost, under cost pricing methodology, and formally or indirectly that is the way they have tried to solve a pricing dilemma of their manufacturing value proposition. China was arising from a Communist legacy of decades, and they concentrated their efforts in the “manufacturing” what was needed and wanted in the world, in the context of producing in massive volumes at a low cost. Fair enough their test into commerce was based in a wrong theory of pricing, and not even strategists and economists realized it. China took the strategic path that we all know, and the low-cost (including cost based pricing) was privileged.
It is never too late to adopt the good pricing theory strategies. When China was building its value proposition of businesses as a nation to the world, their strategists should have solved a corporate and business strategy dilemma considering the value-based approach to provide products and services along or around the Value Equivalent Line (VEL) at every segment of the population, instead of following the low-cost or cheap manufacturing of products, to a point of making everything a “commodity”.
Let’s see the example of a pricing dilemma that suits perfectly for today. There was upon a time by the decade of the 1970s and 1980s, in which every person on earth was trained at school (K-12) either to pursue a university degree once finishing high school, and also, the same school was keen to develop awareness to manual skills in traditional crafts. Here we are not talking about fine art (as music, paintings, dancing, theater, singing or playing music). We are speaking of traditional crafts.
What is a traditional craft?
- A traditional craft product is used mainly in all of us quotidian everyday life. Crafts are carried out to be utilized in our ordinary family life-style.
- A traditional craft is manufactured mainly by hand. The key manufacturing process is artisan (with limited amount of equipment). The manual labor of a traditional craft can be 100% hand made, or if using a machine, this is traditional equipment that preserves a traditional technique from our ancestors.
- A traditional craft is manufactured using a traditional technique or skill that started at least 100 years ago, or it has more centuries of existence, in which generation by generation, the process of manufacturing has been kept unchanged.
- A traditional craft is made from traditional materials, materials that have been around or for more than a century.
- A traditional craft is manufactured in a certain designated area or geographic region of origin and within a certain number of manufacturers that are engaged in the industry.
- A traditional craft implies a legacy from past generations and/or enough practice towards excellence that is formally or informally supervised by the specific craft industry of craft artisans that represent it.
- A traditional craft requires a tradition stamp of approval from the masters of each industry. This stamp of approval or certification based on quality, gives the client a sense of trust. Each artisan that is recognized in its respective craft industry (craft by type of product) has to hold a strictly inspected stamp of approval before designation, so as not to disappointing consumers. This tradition stamp of each craft product is similar to a license of high standards, provided formally or by contests recognition, by the specific craft association of manufacturers. To get this tradition stamp requires hard work and a superior certification that states that the artisan has reached the required quality standards to stamp its signature on his/her products and services with the tradition stamp of its industry.
- A traditional craft can´t be sold under a low-cost strategy. Depending on the design, the quality, the hours of work dedication, the conditions of the atelier or workshop, originality, brand-recognition, etc.; any traditional craft artisan with a traditional stamp has the right of a value differential in pricing. Accordingly, a traditional craft can be positioned along or around the value equivalent line (VEL) and it can serve the economy, the medium and the premium segments, depending on the quality.
Now that we know what is a traditional craft, many private and public schools had formal craft courses for students when I was growing up. I was lucky to get this type of education. I was educated with a ESTEAM (Ethics, Science, Technology, Engineering, Arts and Mathematics). But, when it comes to crafts, I grew up taking a craft-class per week at school. Handmade crafts were of so many types and flavors: we learned not only how to make handmade ceramics, embroideries, crochet, quilting, cross-stitch, knitting, jewelry beadwork, cloth dyeing, basket weaving, leather carving, leather bags making, flower crafting, macramé, innumerable paper crafts, scrap-booking, calligraphy, wood and furniture crafting, stone mosaics, metals crafting and even rug making. The spectrum of our craft courses was so ample as there are materials on earth. Additionally to our craft courses at school, we also had a visual art course (directly linked to painting) and music (singing at the choir or playing an instrument).
What I am trying to tell you is that each of us had the opportunity to learn the basics of traditional crafts. At school, we were taught crafting: any of us who wanted to embroider a blouse or a towel, was able to do it. Any of us who wanted to make a rug for our bathroom or bedroom, was also able to do it. And because we learned how difficult was to make it by hand, we also were enlightened to appreciate the artisan traditional craft, regardless if after high-school we took the university path, leaving the crafting behind. For example, whenever I see a traditional craft such as a hand-made floor carpet of good quality, I know by heart, that the process to do it by hand is difficult. It is time consuming. It requires long hours to make the rug. And this is enough rational motive to accept to pay an expensive price for a handmade rug (If I have the money of course) to the person who produces it.
When schools started to take out crafting and arts from their Courses, privileging technological or technical courses, then we started to lose ground of esteeming with respect those who dedicate their lives to crafting. If we don´t know how difficult is to do hand-made products, then it is obvious that we don´t care for these crafts industries. Also, we sadly, can understand why do leaders accept to manufacture craft items at a low-cost or under a bargain scenario, destroying centuries of our history as traditional craft-makers.
Those who designed the China-Asia low-cost strategy for the world, and promoted the manufacturing of millions of items (of every industry) under the low-cost strategy value proposition, probably never took a craft course at school. This incoherent value proposition of selling cheap products not located on or around the Value Equivalent Line, has left China without economic margins that should have been valued on the first place a long time ago. When the big Asian nation that is around 3.7 times the population of the United States was determined to produce all the hand-made quotidian crafts, machines and electronic components through their factories for Multinational Corporations (MNCs), that simple industrial transformation, created a shift from hand-made high-quality to low-cost bargain, barring or wiping the domestic traditional crafts industries that couldn´t compete in price with the Asian imported products.
Where is the pricing strategy dilemma here? Let´s pick one sub-sector of crafts here: The hand-made rugs or carpets. The pricing dilemma is: how to price a traditional craft handmade-rug in comparison to an imported Asian rug manufactured in China that is sold for less than 3 dollars in one Dollar Store at your home-town?
The process to make a handmade rug or carpet (using a latch hook method) is well explained below.
Once we understand the process that takes to make a rug by hand, then and only then we are capable and qualified to understand why a segmentation between high prices, medium prices and economy prices should have been respected in the first place, respecting the prices of those traditional craft manufacturers. This would have been necessary to take into account when Asian manufacturers were conceiving the low-cost strategy to sell such items for less than 3 dollars.
It is not only unfair for the rug artisans but also for the same rug Asian factories that have left so much money on the table for decades, by selling it for cheapskate prices all over the planet. The ethical integral choice to solve the pricing dilemma for the rugs example should have been: To sell a rug carpet respecting the traditional stamp craft value of those who made it FIRST by hand, or not ignore these crafters prices, by selling rugs (manufactured with machines) at a low-bargain price (calculating the price using the cost pricing approach).
When the Asian manufacturers decided to pursue the choice of selling cheap no matter what, affecting not only the same standard quality rug-makers in their town, but the whole rug industry in the world that served different segments; that was not the correct pricing strategy alternative. If an integral strategy framework would have existed 30 years ago, I am sure that the strategy to follow by the Chinese or any other company, would have been different. Particularly, respectful for the rug-traditional makers in the world.
This same example of pricing dilemmas can be applied to multiple industries and economic sectors that have been miserably hit by the low-cost strategies in a massive deployment all over the world, which are creating social inequalities that are impossible to bear for the long run. An UBI (Universal Basic Income) is not the solution to a wrong pricing theoretical conceptual framework adopted for the sake of efficiency and cheap value chains. An UBI is not sustainable for the long run either because it triggers inflation and other economic/social issues.
There is a little homework for you. Can you make a list (number and name) classifying crafts by type of material utilized (ceramics, glass, fiber and textile, flower, leather, fibers for weaving basketry, fashion dyeing, jewelry, needlework, paper, wood and furniture, stone, metals (as tin, silver, gopper, pewter, casting) etc. List all the types of crafts that have existed since centuries ago to our days? Just a hint, there are more than 150 relevant traditional hand-made craft industries that need to be saved. What matters here, is that not only visual arts, sculpture and music are on risk to perish. But we are sacrificing more than 150 handmade industries that helped craft-specialists to provide not just food and shelter for families for centuries, but these craft specialists were not living as extreme poor either. Many of these families were middle-class. With the NAIQIs technologies advent and the cheap manufacturing coming from Asia, many of these craft families have gone into poverty, and will never be able to make a living of at least a global low-middle class, getting income of at least US$28,800 dollars per year (US2,400 dollars per month for a household of 4). What can happen in the US where the average standard annual income for a middle class is much superior (around US$75,000/per year)?
This is it for today. Our next strategic reflections saga will begin soon. “The Hare and the Tortoise: The race is not to the speedy”: Blessings, see you again next Tuesday. With the theme: Contemporary pricing adjustments.
Source of reference that helped to define the term traditional craft: http://www.aiweb.or.jp/english/dento/html/howto1.html#:~:text=Manufactured%20mainly%20by%20hand,the%20craft%20will%20be%20lost.
Disclaimer: Illustrations in Watercolor are painted by Eleonora Escalante. Other types of illustrations or videos (which are not mine) are used for educational purposes ONLY. Nevertheless, the majority of the pictures, images, or videos shown on this blog are not mine. I do not own any of the lovely photos or images posted unless otherwise stated.
3 Comments »