Vendors and customers work toward opposite purposes. Customers want to acquire the most at the best quality for the lowest price–or free if they can eliminate the obstacle of money. Vendors want to deliver the least at the highest price. To see this dichotomy at work, head to any automotive dealership, refueling station, or supermarket where price-based competition reigns.
Price-based competition reduces services to commodities. Pricing on services may be more difficult to explain. Vendors must establish their brands and position themselves in the market. In short, vendors must know their value and confirm it. Mark Ritson, writing for Branding Strategy Insider, states, “If your quality is good and your targeting and positioning are right, have confidence in the price you have set and do not consider dropping it.… Something cannot be good and cheap. Don’t be afraid of a premium price or maintaining it in the face of market pressure.”
Tim Cummins’ article “What Price Integrity?” states, “The data consistently shows that politicians and business executives are struggling when it comes to the issue of integrity.” Those executives lose integrity–trust–when they underbid projects for prices they cannot honor. The argument that undercutting the price is necessary to win the project due to unreasonable customer expectations certainly has validity. In such an argument, however, both the customer and the vendor display a lack of integrity.
All other things being equal, value may not depend so much upon the type or quality of service, but upon other intangible aspects such as proximity (“buy local”) or affiliation (membership in a certain organization). Regardless, something must distinguish the chosen vendor from the rest of the competition.
That something is value. Customers who value a service or commodity will pay the vendor’s price. This ties into managing customer expectations. Gurus who advise businesses to under-promise and over-deliver miss the point. That tactic adds often excessive value to the service delivered to the customer who then quickly grows to expect more than what he pays for, which then morphs into the vendor becoming the low-bid provider when competitors’ prices rise.
By establishing one’s value, one sets a price on the service and holds firm, promising only what can be delivered. Says Tom Reilly, author of Value-Added Selling, “Buyers want equity—they want to feel that they get at least as good as they give. Equity strikes a balance between expectations and performance.”
This means stopping customers from fixating on price. Writing for the Harvard Business Review, Marco Bertini and Luc Wathieu state, “Constant price undercutting can damage brand equity and erode profit margins. Meanwhile, customers develop low expectations and become disengaged.” In their article, they cite four strategies to establish value and avoid underpricing.
Entrepreneur magazine says, “Thinking about price and value… is at least a two-dimensional problem. That is, you can change the pricing and leave the value alone, or you can change the value and leave the pricing alone. You can also change both value and pricing or leave them both alone.” Each of the three options has an impact upon customer perceptions. Your job is to establish and maintain a perception of good value that balances expectations and performance.