Archive for March, 2010

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Price-Value-Cost

March 9, 2010

COST-PRICE-VALUE

Does it exist any relationship?

If you were to ask a room full of 500 salespeople, what do you think is the number one thing consumers want today; what do you think their answer would be? And second? And third?

Probably, the first answer was “lower price”, the second “quality” and third “service”.

But if we switch scenes and we have 500 consumers in front of us and ask them the same question. What do you think the answers would be? Perhaps the order would change: 1- service, 2- quality and 3- lower price.

 So, it seems to have a perceptual difference in what consumers want and what salespeople think they want. But, what’s the reason? It would be a matter of definition.

Price: what we pay for something. Is the financial reward for providing one product or service. It’s a tangible, objective thing. It is the statement, by the owner of a thing, of how much it would cost to purchase that thing (from them).

Cost: for a company is the amount they spend to produce a product or a service. For a consumer is what he pays for what he has bought over time. For example, if you buy a cheap car, it’s probably you will have bigger service bills and inconvenience. You have a higher cost over time than the lower price you paid.

It is a tangible, objective (but different to calculate) thing. It is the accumulation of what had to be spent to create or acquire a thing. In a value chain, the cost of an item will vary as it passes through the chain

Consumers always want lower price and low cost and companies have to define for them what they really want in terms of the difference of our product or service. And this is the value to the customer. And value is always ‘perceived’ value. Every prospect interprets value in his own terms. The job in selling is not to always lower the price, but try to better understand what the perceived value is for each prospect.

So value is an intangible, subjective thing. It is the judgement, by an individual, of what something is worth to them. Market value is an accumulation of individual judgements of value.

 The only way to accomplish this is positioning the product or service appropriately in the mind of the consumers. People not always want cheap but they always want value. People don’t really want things that rust, break, are inconvenient or difficult to understand. They want life to be easier, less complicated, less stressful, happier and more fun.

 To maximise the profitability a company should find out:

▪ What benefits the customers gain from using a product or service

▪ The criteria the customers use for buying decisions – for example, speed of delivery, convenience or reliability

▪ What value the customers place on receiving the benefits the company provide. Wherever possible, set prices that reflect the value the company provide – not just the cost.

Stan Shih “Smile curve”

The Acer’s founder Stan Shih, proposed the concept of the “Smile Curve”. According to this concept, firms which specialize in the beginning part of the value chain (such as in the R&D of core hardware or software, or operation system), and the firms which focus their business on the final part of the value chain (such as in marketing with brand names or in providing customer services), normally enjoy much higher profit margins than those who operate at the middle part of the value chain (such as in the manufacturing and assembling of PCs).

 

With value-added on the Y-axis and the value chain on the X-axis, the resulting curve resembles a smile. This concept has been widely used to describe the distribution of value-adding potential in various industries and justify business strategies aimed at higher value-adding.

Companies that are focused on the extremes of value-added on the Y-axis and/or on the production chain X-axis usually are companies that not merely watch their home market. Usually they are firms that keep innovating to win the global market.

Branding is a very important point to take care if a firm wants to jump from the domestic market to an international market and it is not temporary. It requires a long-term commitment.

Fifteen years ago, Stan Shih proposed the ‘Smile Curve’ to predict the threats that Taiwanese IT (Information Technology Companies) would face if they continued to solely rely on their manufacturing advantages. These problems are now emerging and many of Taiwanese firms have successfully established competitive advantages in R&D, the left side of the ‘Smile Curve’. As for the right side, they have also done well in global logistics, but still need to improve brand marketing, which is the side closest to customers. Because a company that wishes to succeed internationally must strive to build its infrastructure by putting efforts into its R&D, channels, services, and international markets. R&D, production, and marketing are the three most important aspects of an enterprise, and these three departments are closely connected with the enterprise’s sales revenue.

To succeed at international market, the first step is to develop a brand name, and the next step is to achieve localization. Establishing good links with channels is also important: Having recognition, but no sales channels, can make it impossible to reap any benefit from one’s effort.

According to Acer’s founder Stan Shih, the Acer brand is centered on R&D; innovation and superior quality can ensure good products, and can also win consumers’ trust.