Thursday, November 13, 2008
Today, companies all over the world face stiff challenges from their competition in an overcrowded marketplace. More often than not, there is pressure to under-price the product or service to remain competitive. The question is, can organizations survive by constantly under-pricing? No! is the emphatic answer. Companies that try to compete on the basis of price with the object of selling in high volumes (which they don’t necessarily achieve) see their margins erode and eventually, they simply implode.
Traditionally, companies follow cost-plus pricing or pricing based on their competitors’ comparable product or service. Often this pricing structure does not work out satisfactorily. Or alternatively, they withdraw features from a product to keep it low priced without understanding that they might be key features that the customer looks for. What is the right way to battle it out in the marketplace? A strategy should be able to provide a “value proposition” to the customer for the product or service, and a way to price it according to the value rendered.
If we look at product histories, brands that have value positioned themselves have generally succeeded regardless of pricing. Why does Rolex score over Timex? Why do people prefer a Montblanc to a Cross pen? And why does Sony sell more than Sanyo? Surely, Rolex, Montblanc and Sony cost more than their counterparts, but each brand name connotes products of higher quality. Of course it goes without saying that the product or service must have a perk or other genuine difference to justify the higher price.
Almost without exception, customers are willing to pay significantly more for value-added services than vendors might expect. When there is an economic pullback, people think that the answer is simply to reduce the price. But often, the alleged pricing problem has nothing to do with dollars and cents — it is just as often the result of sales or manufacturing problems.
At one time “value” implied “inexpensive.” However, that definition has fallen by the wayside. Today, brands that provide value in terms of a price-to-performance yardstick are gathering increased customer acceptance. In the present day, “value” has a connotation closer to “quality,” which in turn implies longevity, convenience, reliability and the ability to deliver the expected functionality.
Having said that, providing value to customers is more complex than it appears at first glance. There are many market segments requiring a product or service in which the customers might have different ideas about the concept of value. Organizations must focus on understanding their customer’s perception of value, as opposed to a definition arrived at by the organization in house. It must secure the customer’s stated and unstated expectations about the product or service.
An increasing number of companies use Customer Relationship Management or CRM-based solutions to get them closer to the customer’s mindset. Organizations need to clearly identify the niche in which they want to operate, instead of trying to cater to every segment. If yours is an organization that would like to have “high quality” be the differentiator for obtaining a premium, it makes sense to operate in a well-defined segment, otherwise the customer will not believe a diluted high quality message.
We can see a global trend in organizations as they invest in quality assurance in terms of tools, tests and systems. The return is a reduction in what can be a phenomenal cost of rework, product failure and warranty satisfaction. The benefits that accrue due to a reduction in Cost of Poor Quality (COPQ) are being used to plug more value-added features into products.
Finally, it is the lower priced market that is crowded and where the differentiators are few. Companies pushing out cheaper products find that they have hidden costs and are prone to excessive maintenance and defects, among others. Those who provide value-added services survive and flourish. Dr. Deming emphasizes: “Price has no meaning without a measure of the quality being purchased.”
The author is project manager at Intelligroup Asia Private Ltd, Hyderabad. He can be reached at sudhakar@corp.siliconindia.com
