Blog

The high price of being too clever

October 17, 2012 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

"Any intelligent fool can make things bigger and more complex ... It takes a touch of genius — and a lot of courage to move in the opposite direction." So said Albert Einstein. As we tinker with pricing we, inevitably, make things more complex. What does this do us? More importantly, what does it do to our customers?

If you look at the most successful companies you'll discover that their pricing models are very simple. Indeed, their pricing models almost always have an implicit "take it or leave it" feel to them. Apple is one example.

Apple sets its prices on the high end of the scale and holds them even when "competitors" enter the market. The only time in recent history when Apple strayed from that model it cost them roughly $100 million dollars. That was when Apple, within 60 days of introducing the original iPhone, lowered the price by $100 to gain market share. The hue and cry of it's earliest iPhone customers was assuaged by the hefty rebate mentioned above.

There are rumors that Apple may be about to stray once again. It's being rumored that Apple is considering a lower-priced alternative to compete with Google's Nexus 7 tablet, which, by the way is purported to be sold at cost. Why is this likely to be a mistake?

First, this product could cheapen the brand. Apple's products are known for being first class, top of the line, amazing in all aspects from aesthetics to functionality. Some of these will almost certainly have to be sacrificed to achieve the cost savings necessary to offer a lower-priced alternative. The result will be lower margins for Apple and less brand value for the consumer.

Second, this strategy will make Apple look like an 'also ran' instead of the industry leader it has been. Again, customers' perception are that the lead has shifted and they're ill-inclined to pay a premium for something that already exists. They don't mind paying a premium to the leader, but not to those who enter the game late.

Third, Apple runs the risk of cannibalizing its own offerings. This is a fairly common mistake. Companies create less expensive offerings, then watch sales of their higher-priced alternatives languish. One of the most vivid examples was in the canned food industry where the premium brands agreed to produce their same offerings to be sold under the store brand only to find that customers were shifting to the lower-priced brand.

Usually when companies begin to tinker with their pricing it's because they want to penetrate new markets. For example, L'Oreal is lowering prices on its hair care products to reach a new market in India. The problems with this approach are the same as outlined above for Apple - cheapening of the brand, losing industry leader status and cannibalizing your own offerings.

In addition, geographic pricing (pricing according to region) creates its own set of complexities. We lose sight of the rationale we used in creating those prices in the first place. We also run the risk that some ambitious entrepreneur will undercut our prices in the higher priced markets.

It doesn't take much imagination to envision someone in a rural community who can buy your product for 20% to 50% less than customers in a nearby city, buying locally and setting up a booth at the local mall to sell your products for less.

From these few examples it's easy to see how the number of factors to be considered when tinkering with prices grows exponentially and increases the odds that you'll make mistakes that adversely affect your profits and your customers' satisfaction.

So how do we avoid these complexities? How can we employ the genius of which Einstein speaks? Here are some questions to ask yourself before adjusting your prices:

1. Will these price adjustments make it easier for customers and prospects make informed buying decisions?
2. Do the new prices reflect the value the customer will receive?
3. Will the price increases generate the profits I need to fund new ways to serve my customers?
4. Are the new prices congruent with the brand I've created so that I don't confuse my customers?

Hopefully you've noticed that all of the above are focused on the customer. One of the things that drives price tinkering are corporate goals that don't consider the customer. Goals like increasing profits, increasing market share, expanding geographically, adding new product lines or pricing competitively. All of these shift the focus away from the customer and that's when we get into trouble.

Does it get any easier than that? A single point of focus - the customer. That's where the genius in pricing lies. Everything else just adds complexity.

About Dale Furtwengler

---

None

Connect with Dale: