Blog

A tale of two pricing strategies

Imagine two companies. One touts the results the customer can expect and charges premium prices, the other touts its low prices. Which one wins?

June 6, 2014 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

Imagine two companies. One touts the results the customer can expect and charges premium prices, the other touts its low prices. Which one wins?

The two companies are Verizon and Sprint. Verizon’s premium prices allowed it to build one of the broadest, most reliable networks in telecommunications history. In addition to its customer-centric network, Verizon continues to show solid growth in revenues, profits, cash flow and shareholder value.

Contrast that with Sprint which, despite rising revenues, has seen its net loss almost double in the past four years, its debt increased by 20 percent and its cash from operations dropped by 40 percent. Other than spikes in stock price associated with potential mergers, Sprint’s shareholders have seen little, if any, growth in the stock’s value.

Troubling times in the kingdom

What’s troubling to me is that:

• Over the years I’ve offered countless examples of companies that enjoy great success with premium price strategies.
• It takes me less than 5 minutes to identify and compare results of Verizon and Sprint or the myriad other companies I’ve cited in my blog posts.

Yet business "leaders" continue to pursue low-price strategies.

Why?

Behaviors that fly in the face of evidence to the contrary beg the questions:

• Are they simply not paying attention to what’s going on in the business world?
• Are they so lost in the microcosm of their industry that they can’t see what’s working for others?
• Is their intellectual arrogance so great that they won’t consider alternatives?
• Is their fear so great that they’re hobbled by it?
• Do they perceive it to be easier to compete on price than to find new, exciting ways to serve their customers?
• Do they view others’ success as something unavailable to them?

Whatever the rationale, the effects are devastating. Not just for the company itself, but for the economy as a whole. I’ve gone into greater detail about this in my white paper, "Low Price Strategies Subvert Growth and Employment," but for now it’s sufficient to know that low-price strategies being employed today are based more on cost shifting than on innovation.

When a large organization declares that it is going to pay its vendors in 120 days, it shifted its financing costs to vendors who have a more difficult time obtaining financing and, consequently, will pay higher prices for that financing. This results in less efficient use of resources in the economy and hampers economic growth which limits employment.

Stop ignoring the evidence. Reposition your offerings for premium prices and you, too, can enjoy the success of companies like Verizon. 

(Photo by Mike Mozart.)

About Dale Furtwengler

---

None

Connect with Dale: