High Quality vs Low Cost Bargain: The Current Dichotomy! (XXVI). The epexegesis epilogue.
Have a happy beginning of April after Easter week. I hope you are now refreshed and much more positive to continue with the rest of the year 2021.
The beginning of the fairytale of high quality vs low-cost bargain. As with any fairytale, all our current issues with pricing have a historic foundation. And the problem between the high quality and low-cost bargain of today has its origin 200 years ago. Once upon a time by the year 1817, David Ricardo (a legacy heir from Adam Smith) gave born to the theory of Comparative Advantage. Ricardo´s theory has been outstanding for 200 years as the major flag foundation theory for our economists. The economists of the XX century, including industrial strategists, simply updated Ricardo’s heritage and installed the theory of comparative advantage (with its further reviews). The coined phrase: “The potential world production is greater with unrestricted free trade than it is with restricted trade” has been the motto for globalization and the global supply chains. But at the time of David Ricardo´s theory, our science and low technological advancements (compared to what we have now) were the real restrictions that helped to keep the assumptions of free trade with some natural regulation and control.
Factors that have altered the trade and commerce of local vs. global scale goods. At the moment, 2 centuries later, we have to recognize that the current factors grouped under (1) NAIQIs technologies (Nanotechnology, Artificial Intelligence, Quantum Supremacy, and the Internet); (2) the economies of scale reached in manufacturing and logistics; (3) the implementation of the supply global chain up to perfection by cutting costs and squeezing our budgets to a minimum; (4) the advent of the Smartphone and our viral lifestyle and addiction to it; (5) the social media instant messaging and its powerful boom box epidemiologic communications stratosphere; and (6) our lack of regulation to all the latter factors, have disrupted not just a single industry but the whole global economy. We can’t blame China’s economic model for our problems in trade and commerce. They were following a strategy that is based on an incorrect theory that has been rolled up in business schools for more than 40 years. But we have to correct the theory if we wish to rise from the bottom.
Living in and for the cheap is not the way. Our trade world is imbalanced because the digital and the cheap are killing the artisans’ works and the hand-made quality. The current digital wave of doing things, the latter explained 6 factors; and the viral marketing of products and services, regardless of what we conceive as benefits, is pushing the mix of pricing quality to lower prices. This mix of low price and quality is not the way to solve our economic dis-adjustments.
To go digital “only” is also not the unique way. Back in January, we also promised that by the end of this saga we were going to understand why to emigrate to the digital e-commerce model (leaving out our artisan hand-made precious business models) is triggering the wrong theory and application of pricing strategies. To emigrate to manufacture everything digital or fully is like providing a painkiller to someone who has cancer. The painkiller acts as a palliative, meanwhile, cancer will continue to grow behind scenes, just to show up later, with a terminal condition. In addition, when our professional brains rely on too much technological dependency (information or gadgets or devices), the fruits of years of preparation and experience are put down under or below to a second priority. This fact is triggering fatal errors in the new generations’ decision making, which are unable to answer questions without technological applications, or without mobile and the Internet. The youngest brains are becoming more and more unable to discern with their own track-record skills, or common sense or previous know-how expertise because they are extremely codependent on the technologies to provide solutions. And this is scary not just in terms of price-quality mix, but also for the human future.
About the purpose, the rationale, and the philosophy of this saga. Our purpose was to discover and unveil key elements of the current philosophy of international trade that are triggering the wealth and prosperity imbalance in the global economies. Additionally, we stuck to our usual philosophy, under the strategic innovation framework of inquiring questions. The current misbalance and problems of international trade, based on our reasoning and analysis, relies on the wrong application of the theory of competitive advantage strategy, that has chosen and privileged the low-cost bargain and its respective pricing. We simply used the dichotomy of high-quality vs low-cost bargain pricing to shake our thoughts in relation to these matters.
NCAT has been applied. And we are living the consequences of it. We dedicated at least three episodes about the historic background of the National Competitive Advantage Theory. Eleonora Escalante Strategy has taught you to always go back in time to understand the causes. It is inhospitable to analyze the unsolved issues of the current outstanding free-trade theories before understanding the past. We walked our journey starting from mercantilism, then to Smith Absolute Advantage Theory, next Ricardo’s Competitive Advantage, afterward the Heckscher and Ohlin Theory, followed by the Product Life-cycle theory. Then we visited the new-trade theory (including the first-mover advantage), to end up with Porter’s National Competitive Advantage Theory (NCAT) that has been installed all over this planet since the end of the 1980s decade.
Given Porter’s NCAT theory relevance for our days, we visited Michael Porter’s diamond framework. We explained the 4 mutually reinforcing key determinants of a nation’s success advantage when a country´s companies are doing business domestically and internationally. These determinants are (1) Factor Endowments; (2) Demand Conditions; (3) Relating and Supporting Industries, and (4) Firm Strategy, Structure and Industry Competition or rivalry (plus two additional influencing factors: government and chance).
Porter framed the term “nation”, and he stated (and this has been the motto of NCAT since then): “the only meaningful definition of competitiveness at the national level is national productivity”. And national productivity means to be able to produce “well”, “more”, “cheaper” through “high competitiveness”. Porter´s philosophy of products and services was to help companies to make them quickly, economically, efficiently, and massively in volume or numbers. The more the merrier. By now, the NCAT strategy (NCAT means National Competitive Advantage Theory) has evolved to become a “low-cost” philosophy of life. And that is why at the moment, everyone dismisses the high-quality long-term view (which means expensive), in exchange for a disposable “low-cost” copy or generic short-term view (which means bargain). Eleonora Escalante Strategy shared a critical analysis of the 10 most outstanding issues of the NCAT framework. And additionally listed the last NCAT limitations here.
Following our outline, we reflected a bit when it comes to understanding how our patterns of industry evolution are leading us to a unique spot in time in which we have no other choice than to pause or stop, fix all our social inequalities and business/corporate strategy frameworks, decide for an ecological or sustainable environmental society and create a new method to regulate our inventions, before proceeding further.
Definition of Price. When it comes to this price-quality expedition, how can we proceed without defining our terms of reference? We also defined the term price. According to my heavy “American Heritage College Dictionary”, price is nothing else than the amount of money or goods, asked for or given in exchange for something else. Philosophically this definition throws us 6 key elements when it comes to the word price:
- A buyer of a product or service. Someone who needs or wants that product and is able to pay for it using something in return (usually money).
- A seller of a product or service: Someone who is the owner of the product and offers it (the product belongs to him or her or it is an intermediary), and is able to exchange this product or deliver it for money or its equivalent.
- A perceived value settlement amount: This is the amount (number in money currency) of the product or service and it is negotiated and agreed between the buyer and the seller.
- An existing competitive context (of other sellers and buyers) that affects the perceived value of the product and services.
- A degree of a dynamic variation and/or change: The definition of price is linked to its variation. Today a product can be priced at 20 dollars, and tomorrow at 16.50 dollars and the next month at 22 dollars.
- A profit: There is no price without a mark-up or profit. Otherwise if we sell it below costs, that is considered a loss.
Next, we took our time to study the eight steps when setting the correct classic pricing policy. If you wish to refresh all the material that we developed for you, click the link in each of the steps below.
Step 1. Assess Price Competitiveness
Step 2. Set Pricing Objectives
Step 3. Strategic Price Focus
Step 4. Target Market Segments
Step 5. Evaluate Competitive Pricing Strategies
Step 6. Measure EVC to Customer
Step 7. Product Mix Pricing
Step 8. Set the final price
We then stopped with the Nine Price-Quality Quadrant Pricing Scenarios Matrix from the point of view of the client. This lesson is the prelude to understand the concept of Economic Value to the Customer.
Our goal wasn’t only to grasp from the point of view of the customer mood happiness, but also set the table for your understanding of the EVC concept. Precisely, EVC equals: Client perceived benefits based on certain attributes of quality, which are not only economic but also psychological (minus) the customer perceived price. So we are speaking of a difference between a level of perception of benefits and the perceived price. We illustrated the concept of EVC with an example of a machine to manufacture marmalades.
When we landed in Step 7. Product mix pricing, we provided several examples when it comes to being creative about offering value-added differentials to clients. From an ambulant veterinary mobile clinic to the IPad pricing when it was launched, the case of Starbucks coffee and the imported pineapples in the USA; there is always room to be original with our products, instead of going down with price cuts.
The psychological aspects of our perception when it comes to pricing were fully developed with a good magnificent number of examples. We explained why emotions in motion are generally what makes us accept and take certain prices. Regardless of the economic situation of each of us, we all have emotions. And emotions make us buy something at a particular price if we can afford it. We all (from the extreme poor up to the high-end rich) have the same basic essential needs and wants. But as soon as we scale up in our income and motives, emotions play a crucial role when it comes to accepting or not a specific price based on value differentials.
When we covered the theme pricing strategies dilemmas, we honored it, by explaining why I am constantly repeating that the issue of misbalance in trade and commerce in the world is conceptual, and a legacy from the NCAT (National Competitive Advantage Theory). 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. That is why we spent so many publications explaining pricing scenarios around or along the Value Equivalent Line, using the value-based customer approach is the solution and not the cost-based pricing. The prices of the main Asian manufacturer nation in the world have to be adjusted, to leave room for each nation’s local artisans to compete. If that implies raising the prices of Chinese cheap imported things, this has to be done. Otherwise, we are living an unequal pricing strategy. This is Eleonora Escalante Strategy solution to the pain of current trade and commerce issues which are destroying the artisan handmade industries, like crafts, entertainment, and the arts. Otherwise expect pricing wars, cannibalization of industries, and the barren of our human existence that is leading to privilege the robots and automation NAIQIs (Nanotech, Artificial Intelligence, Quantum Supremacy, and the Internet) technologies. If we don’t rescue and rise our artisan handmade industries enough, to a point in which an artisan (this includes crafts, fine arts, entertainment, hospitality, etc.) is able and capable to earn (an annual income for a household of 4 members) a range between US$ 28,800 to US$ 75,000 dollars per year, then the world will continue to be imbalanced.
We then proceeded to explain the topic, Contemporary Pricing Adjustments. This is a core episode of this epic. Re-read twice or more, please. The same with the next chapters meaning of high quality vs the meaning of low-cost bargain.
Finally, we spent our last week with the example of pricing contradictions in the context of the COVID19 Vaccines and we provided a detailed application of the theory to the practice when it comes to the way in which pricing wars occur.
To conclude our work of this first quarter of the year: This saga has been one of the most flourished ones in terms of unveiling the wrong and setting the good pricing academic theory into practice. It has navigated the good concepts that the next generations have to put into perspective and place. All of us, need urgently to fix the outstanding issues of the global supply chains and global trade/commerce. Only by applying the good classic theory of pricing, many of the traditional artisan handmade industries will be able to rise again. The high-quality must be privileged always because we are called to perform with high-exquisite levels in everything we do, not with cheapskate products and services. Not with cutting costs. Not with lowering salaries and forcing people to buy low-cost products. Not without rising the poor to be at least middle-class to fight inequality. Not without taking measures to care for our environment, our animal species, and plants.
Thank you for reading to me. Gracias again. You are the reason for this publishing boat to float, and I promise to deliver better content based on the good strategic integral theory for you.
See you next Friday, April 16th with our next strategic reflections saga: “The Hare and the Tortoise: The race is not to the speedy”. Fraternal hugs for you.
Our next strategic reflections saga will begin soon. “The Hare and the Tortoise: The race is not to the speedy”.
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