Once there were cavemen (and cavewomen),
and barter was the system of exchange de rigor. Labor
specialization was starting to take hold, and people started to expand
their horizons and starting to lay off the brontosaurus steaks every
day and looking for more sophisticated dinners (arugula anyone?)
So the arugula caveman
brings his produce to the market. As soon as the watermelon
caveman arrives, the arugula is priced in terms of watermelons, e.g.:
10 bunches of augula for one watermelon, and the watermelon is priced
in terms of arugula, one watermelon for 10 bunches of augula.
As soon as the 3rd merchants arrives with roquefort cheese the cheese
is priced in terms or watermelons and in terms of arugula, and the
arugula and the watermelon are also priced in terms of roquefort cheese.
Therefore each good in the marketplace must be priced in terms of every
other good in the marketplace, so in a marketplace with 1,000 goods,
each one of them would carry 999 different prices. A very complex
Moreover the merchant offering cows and needing arugula was faced with
- exchange one cow for 1,507 bunches of arugula . . . OR
- exchange one cow for 1,507 bunches of arugula, then
exchange the excess bunches of arugula for additional goods needed . .
- cut a piece of the cow enough to obtain the necessary
arugula, not really . . .
a highly inefficient process.
The solution was
BRILLIANT: introduce one new additional good in the marketplace
that everyone wanted: MONEY!
The fact that salt, shells, and other artifacts or materials were used
as money is not meaningful, since money by definition will always have
the following characteristics:
- highly desirable: money has to be wanted and hence
accpted by everyone in the marketplace;
- storage of value: only non-perishable goods or
artifacts can qualify as money, so the cow vendor could sell one cow at
a time, converting and storing its value in terms of money for later
- rare/valuable: so that a lot of value could be stored
and transported in a small volume;
- easily divisible: so that small exchange could be
accommodated as well as large ones;
We can now see how precious metals, especially gold were soon
selected as money.
Let’s go back to the
barter system. The exchange of one watermelon for 10 bunches of
arugula would occur IF AND ONLY IF the watermelon vendor would
attribute a higher value to the arugula than he would attribute to the
watermelon AND IF the arugula vendor would attribute a higher value to
watermelon than he would attribute to arugula. If one of these
two condition is not valid, no exchange would take place.
As soon as the exchange occurs each vendor would think, “Sucker! I
would have paid 11 bunches of arugula for this great watermelon”;
while the other would think, “Sucker! I would have let go the
watermelon for 9 bunches of arugula” further confirming that
each value the other vendor’s offering higher than their own offering.
Introduce money into the
equation and the shopper would ask, “How much for the watermelon?”,
“10 dollars each” replies the vendor. “No,
thanks” replies the shopper. The exchange did not happen
because while the vendor value the watermelon less than $ 10, the buyer
attributes a higher value to the $ 10 than to the
watermelon. “Hey buddy, how about 8 bucks?”
By lowering the price, without adding any value whatsoever,
the exchange is finally possible because the vendor attributes a higher
value to $ 8, while the shopper attributes a value to the watermelon
higher than his $ 8.
Conversely, other watermelon vendors in the marketplace may decide to
add value to their watermelon offerings:
- organically grown watermelons: $ 15;
- vine-ripe watermelons: $ 12.50;
- watermelons delivered to your door: $ 12.
Note that a free-delivery
of watermelon, or adding freebies to the offering is the equivalent of
lowering prices, with some exceptions for co-branded deal, product
introductions etc. but let’s keep this simple.
How does it apply to
Easily. It is very tempting for companies to drive themselves out
of business by means of continuously lowering prices while adding
freebies to their offerings. In the short term it does produce
results because by lowering the price below the value perceived by the
customer it promotes:
- new customer acquisition,
- higher consumption,
- and competitors’ customers switching to your company.
Unfortunately in the long run it has a few very undesirable
- lower customers value of the product (cheapens it);
- set the customers’ mindset of constantly lower prices;
- set the customers’ mindset that everything is negotiable.
Which leads to a vicious
circle where companies compete with one another on how low they can go
in margins and profits, until companies reorganize under bankruptcy
protection (MCI), or check out totally by going out of business.
Lowering prices indiscriminately as the sole mean of stimulating top
line sales is lazy and it is stupid!
The question that every
company, every marketer, every CEO, CMO, CFO, CXO, entrepreneurs must
ask themselves is:
How can I increase the value to my
audience and monetize on it?
Longer and better warranties or liberal return policies for
instance have costs associates with them, and Hyundai and L.L. Bean
were able to successfully monetize on the increase value offered to
Keep in mind that, as often it’s the case, pure innovation is process
innovation, and once it’s exploited in the marketplace cannot be
duplicated as successfully ad the innovators did: so if you are in the
car business and you offer a 10 years/100,000 miles warranty, your
audience has heard that before, they will yawn bored, and will ask: “So
what?”. Each innovation in an industry or marketplace raises
the bar higher and higher and higher.
There’s room for ONLY ONE
million dollar page, isn’t there?
So, are your efforts
concentrating in lowering prices or are your efforts concentrated in
increasing value to your audience?
Keep in mind, that while
you do all the work and invest all the money, is the audience the final
judge of value, and they vote with their hard earned dollars.
Some examples of companies that are NOT competing on price:
Are your marketing efforts limited to:
- We’ll match competitors’ prices;
- We accept competitors’ coupons;
- We’ll beat any quote;
- The best . . . ;
- Award winning customer service;
- Free with purchase;
- New lower prices;
- The lowest prices;
- Earn miles/points with each purchase;
- We’ll give credit to anyone;
- . . . . . . . . . .
It gets worse. Are you creating win-win propositions
where you are delivering value to your audience, or do you have
initiatives that are good for you as a company at the expense of your
- Bottle returns accepted only between the hours of . . . It
does benefit you, the seller, so you do not have to staff the store as
much, and your people can concentrate on selling, but . . . how does
that add value to your audience? It doesn’t!
- . . . .
. . . to be continued.
P.S.: Read Seth’s May 29, 2007 take on it here.
P.S.S.: Read Accenture on Pricing on here.
Added: 08.13.2007: Top
Ten (10) Most Expensive Paintings of All Time.
Added: 10.25.2007: Seth
Godin’s “I can’t afford it”
Added: 05.09.2009: Seth
Godin’s “Two halves of the value fraction”
Added: 08.03.2009: $5 per
Added: 12.20.2011: How
much should an ebook cost?