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Two Pricing "Constants"
Alan Perlis, the first head of the Computer Science Department at Carnegie-Mellon University, often told his students that “One man’s constant is another man’s variable”. Pricing is one area in which understanding how constants can become variables can help businesses be successful.
The first pricing constant is that “Price is always on the table”. Every customer in every purchase setting is aware of price. It’s always one of the factors that enter into their decision. And if the other factors – product attributes, service, location, etc. – are seen as equal, price becomes the factor. We can all cite a few examples that we’ve observed where that wasn’t true, but most of them fall into the realm of “You can fool some of the people all of the time and all of the people some of the time”. Depending on fooling customers is rarely a business model that leads to sustained success, particularly in today’s era of price transparency via the Internet. It’s far better to believe in this first constant, recognize that price is always a factor, and to react accordingly by following the standard prescription of getting your costs low enough to make money at market prices and to excel at whatever the customers see as the tie-breaker among equally-priced offerings.
The second pricing constant is more uplifting: “In every market, there are segments that will reward a differentiated offer with a premium price”. Most businesses aspire to be in this environment. The basis of differentiation can vary widely from product to product and market to market, but there is always one there if you look hard enough to find it. It may be embedded in the product – a better way of sourcing music via iTunes or a better-tasting hamburger from Five Guys. It may be associated with surrounding services – short lead time delivery, expert support for the customer, on-site warranty repairs. The examples of how one business differentiates itself from its competitors are incredibly varied, often provoking amazement as to how someone thought of that (or why others hadn’t). The secret of success in reacting to this constant is quite different from that associated with the first constant. The prescription here is to thoroughly understand the segments of your market, know what drives purchase decisions (and what doesn’t matter), and to become best-in-class at delivering on those decision drivers.
What Perlis’ quote tells us is that there is a fine line between these two constants, and that a business can suddenly find that its differentiated offer has become a commodity available everywhere, with their business world shifting to one in which price is the factor that matters. Many successful businesses have failed when such a transition occurs.
Sustained success for businesses that are differentiated requires very proactive planning, for the day will inevitably come when the first pricing constant comes into play. There are only two real options. Either you have to be prepared to compete and prosper in an environment where price dominates customers’ decisions, or you have to constantly a step ahead of the game in learning what will keep your offer differentiated. Either is hard work, but the payoff from close-to-the-customer strategies that allow you to remain a lap ahead of the competition can be highly rewarding.
Pricing, like every other element of business strategy, is demanding and an arena in which innovation and creativity often pay off. The advice above about the two approaches to sustained success brings to mind another quote from Perlis: “There are two ways to write error-free programs; only the third one works.” Remember the two pricing constants, but always look for opportunities to inject a dose of innovation.
Author: George F. Brown, Jr.