In numerous conversations that I have had with business leaders, all too often the business leader will assert to me that his or her biggest quality issue is price. It’s not surprising to me that the organizations these individuals lead are experiencing difficulty getting their customers to pay the price that they are asking for the products or services that they sell since they have erroneously mis-categorized Price.
Contrary to the beliefs of many, Price is not a quality attribute. More appropriately, Price is a reflection of how well (or poorly) the true quality attributes of the company’s offerings are perceived by the company’s market. In other words, the way to improve upon price sensitivity is to focus on and improve the perceived benefit. The market will bear a higher price for the company’s products and services only when this successfully occurs. This concept is very closely related to The Value Equation framework that I laid out in my blog dated January 31, 2012 entitled The Value Equation.
Examples that demonstrate that Price is not Quality—but instead its corollary—are all around us and one does not have to look far for substantiation. Take, for example, the fact that a well-known company can charge a higher price (and get consumers to pay it) for the exact same product or service that is provided by a lesser-known company. Doesn’t this occur because the market perceives that a higher level of quality is associated with the products and services offered by a company that has been in business longer? How about the simple fact that every time you make a purchase, you at least perform some sort of cursory cost comparison? Doesn’t this fact, alone, provide enough evidence that Price and Quality are not the same thing, but, instead, oppose one another?
This dynamic is so pervasive that it even applies within the job market. In the case of the job market, however, the hiring company is the client and the interviewing candidate is the vendor. The interviewing candidate’s price, in this scenario, is his or her asking salary. When a company is considering a new hire, that company will invariably perform some type of cost-benefit analysis to determine whether the new hire will be worth more to the company than what that individual is asking for in salary. If the company deems that the individual will not be worth more to the company than the salary they are demanding, the company will most likely opt to go with a lower-cost or higher-quality alternative. In many cases, companies resort to the lower-cost alternative of outsourcing the function to another country because domestic candidates consistently fail to provide a company-centric value proposition that represents a level of benefit (perceived by the company) sufficiently high enough to justify the higher salaries they demand.
So what’s the big deal with mis-categorizing Price as a quality attribute, anyway? It can’t do any harm…or can it? From an objective standpoint, the only way to improve Price (at least from the customer’s perspective) is to reduce it—an activity that generally runs contrary to the long-term objectives of most businesses. Notwithstanding that, however, the relationship between Price and Quality is akin to a tug-of-war with Price on the left end of the rope, Perceived Quality on the right end, and Value as the marker in the middle. In order to increase the strength of Price, in this scenario, and keep the Value marker in the same spot, one has to increase the strength of Perceived Quality by an equivalent factor. Otherwise, the Value marker will shift to the left. To the contrary, if one increases the strength of Perceived Quality without increasing the strength of Price by an equivalent amount, the Value marker will shift to the right.
In addition to highlighting the relationship between Price and Quality, the above analogy is useful to demonstrate the challenges associated with balancing pricing and quality. Consistent with the analogy, a business best practice would be to maintain the Value marker dead center since there are maladies associated with slippage in either direction. Obviously, slippage to the left would indicate a situation in which consumers simply are not purchasing the company’s products or services because the company’s pricing is defeating the perceived quality of their offerings, resulting in a sub-par value determination. What are not so obvious, however, are the negative repercussions associated with slippage to the right, wherein the perceived quality of the company’s offerings is defeating their pricing, resulting in an above-par value determination. In the “right slippage” situation, the company’s prices are below what the market will bear and, as a result, the company is leaving unclaimed revenues lying on the table by not raising prices.
Price is not Quality and we are surrounded by numerous examples that support this conclusion. This understanding can even assist us to identify and diagnose problems within the job market. If companies mis-categorize Price as Quality, those companies will overlook the fact that Price and Quality oppose one another and will certainly be incapable maintaining any sort of balance within this proverbial tug-of-war. With a lack of balance between Price and Quality, a company will be forced to endure one of two distinct fates. They will either price themselves out of the market or leave unclaimed revenues lying on the table.