On setting prices (2)

I talked endlessly about setting prices here.

At the very end I mentioned that you needed to change the market price. That of course means that you can flood the market with a superior product and inferior price, while at the same time, avoiding imitators by having an unimitable product.

Think of La Pieta for $5.

No one can sincerelly think that could work. The whole point of buying La Pieta would be to have the real one or one very close to the real one) for a price not many can pay, say $1 million. At the end you are not buying a piece of hardware, you are trying to say "I'm better than you", even if you are just doing it by throwing money at the problem.

The main reason people buy expensive products is because they are expensive in the first place, so people think of them as "exclusive". At least that's what Daimler Benz thought of their Mercedes in the 80's, so the price went up until only very few could buy it, which made more people want it and therefore more people bought it.

Asking for more

I'm going to defend the strategy of asking more of the pie. I mean, what Daimler Benz did was to understand their customers: If you buy our cars not only you will get more prestige, but you are making an investment, because our cars are more expensive every year.

Daimler Benz's strategy worked fine for them, but it wouldn't have worked for Fiat 500, wouldn't it?

Why not?

I guess the mentality of the customer is different. He just needs the car to perform a function and a bigger price would make the car prone be replaced by a larger car with a similar price. In other words, there are replacements of a Fiat 500, but there are not many replacements for a Mercedez Benz.

So thinking long and hard, I bet Daimler Benz realized that every year cars of other makes are trying to imitate more expensive cars. Eventually the Mercedez would have many replacements that would be cheaper, but look similar to the real one, so the brand would have less value and eventually there woudl be no difference.

So perception of the Mercedes being better worked to their advantage, because they knew they could charge more and people would still buy from them. That financial advantage could be used to improve tha car even more and therefore they could charge more every year. It would be harder and harder for other makes to imitate the leader.

Eventually Daimler Benz bought Chrysler and now the company is known as Daimler Chrysler.

So having a financial advantage can be used to buy the competition.

Minimum price

You can use another strategy: the japanese strategy. Bid low. Ask for less money on a cheap product and people will buy. Actually lots of people in underdeveloped countries do not have cars, and therefore the potential market for a very cheap car is enormous.

The strategy worked so well that now Honda has the Lexus which rivals with the Mercedes. As far as I know the Lexus sells even better than the Mercedes, but if you ask me I'm more of a traditional guy so I prefer the Mercedes.

So selling at the very low end means having an even bigger advantage of market penetration.

This is the same strategy done by Microsoft. Their products are in the very cheap end of the spectrum, although lately they are rather expensive when compared with prices of 10 or 20 years ago.

But the main problem with low prices is low margins. Some companies fail to make a profit because they underestimate their costs. Other overestimate them and let their competition grab the whole market.

Then the real problem is how to determine the real cost. And then of course make a profit while at the same time not loosing the market to your competition.

Fiat 500

The Fiat 500 is the little brother of the Fiat 600. Both cars were older than the japanese cars, but they couldn't compete with the japanese cars.

The reason? The japanese cars were in another league.

If you look at the Fiat 500 it looks like a VW bug but slimmed down until it is small enough to fit in your living room or to be put over your dinner table. The problem is that its visual appeal says "I'm from the 1950's", while all japanese cars were modelled after new cars and even looked newer than contemporary cars. So japanese cars were saying "I'm the future", while Fiats said "I'm the past".

The interesting thing is that the cost should be the same, but the price was very different.

Thought experiment

Let us suppose you have a store and sell computers. You have several clerks that have a commision rate on every sell they make. Let us suppose it is 10%. It is much more than the real 2%, but it will make it easier to calculate.

So you don't know really what your consumers will want, so you have inexpensive computers from a $100 to a $1,000.

Your clerks will prefer to "upsell" your customers the most expensive computers instead of selling the bargain $100 computers, because on the top of the line they make $100 per computer instead of the $10 they make on the cheap ones.

How about you? Do you really care? You could go happily with them selling anything, but you also make more on the more expensive ones, so you prefer that they upsell, as much as they can.

Now a new kind of computer comes and your clerks refuse to sell it. You ask them why. They say the new computer costs $10 and they only make $1 each. If you calculate how much you make on selling this new machine, you realize you won't be able to pay the rent of your store if you sell inexpensive stuff like that.

Therefore you have 2 options:

1. Selling it at a premium price.
2. Do not sell it.

Option 2 is the correct one. Selling it at a higher price will make you store a product you won't be able to sell (until all other products are sold, which is unlikely to happen). SO IN THE END YOU ARE GOING TO TO STICK TO OPTION NUMBER 2: Do not stock it and do not offer it.

That happens all the time. Try to buy an Amiga or an Atari or an Spectrum or a PC XT. They are considered garbage in computer stores, so they do not offer them.

Once upon a time a local computer store tried to sell used computers by letting you offer your used computer on the second floor of their store. needless to say, that didn't work, although I did sell my old computer on there. It was a fantastic service (at least for me), but it didn't work.

The main reason it didn't work was that they charged 10% of the price and the store real state value used by my computer during that week was a lot more than the exiguous 10% they charged (not me, but) the buyer.

The Lesson

So, the real lesson: Do not charge less than the value you need for continuous operation of your store.

When it comes to IT professionals: Does your employer pay for your courses and your certifications? If he doesn't, quit immediatly!

Ok, maybe you should get certified first and then quit. Or maybe you should find a better job and then quit. Or you should study for the certification on the company time using http://www.javablackbelt.com/.

Who knows, really?

When it comes to retaliation, the most effective attack is to take the customer from them, because the customer feeds them and without the customer, they perish because of starvation.

Some employees prefer not to do their jobs. I find that tactic too obvious and counter productive in the long run, although in the short term it can be very productive if your boss thinks he really needs your effort (paid overtime is not something so rare). The only problem is that you become overworked, make more mistakes per seccond, which means you are in a vicious cycle... they see the results and ask more of your time, which means you end up being paid more for working longer hours and so on...

Therefore being incompetent is not such a bad move if you come up with something that works at the end.

For something to be appreciated you have to go through a period of hardship to appreciate it. It also applies to your clients and your employers.