A couple of weeks ago there were announcements in the press from BMW and Mercedes that the chip shortage might end up as a blessing in disguise. Car manufacturers have for many years bemoaned their dealers who are quick to discount rather than lose a sale on price. Discounting, as we all should know, is a rapid road to the bottom when it comes to profits.
When products are in short supply the car salesman doesn't need to offer a discount. The customer, desperate for the product, will pay full list. For many years Jaguar played this game balancing the supply of its product against demand. Things go wrong when a company goes for growth. The more you produce, the more it is necessary to shift the product and the easiest way to do this is to reduce prices. A shortage of chips has turned the car manufacturers into marketers. They have recognised that people will pay a premium for their products and may even gain some sort of cachet if they have to wait for them. After all, if you have to wait for something it must be exclusive or special and therefore worth it.
The problem we marketers face in pushing for higher prices is that it can appear a rip-off. Oxygen and water, the basics in life, are free. Well, there may be some price we pay for these but it is generally very low. So it is with education and (at least in the UK) with health services. It is therefore very easy to arrive at a view that we have a goddam right to products and services at a reasonable price. And what is a reasonable price? We tend to think that this is one with a modest profit.
However, the profit margin of the manufacturer may vary considerably depending on its efficiency. The East German Trabant car was made with all sorts of inefficiencies such that there was a waiting list of 13 years at one time. The margins made by the state-owned company were virtually nil. Did this mean the relatively high price that was extracted from an east German buyer was justified? Clearly not. It is telling that after Germany’s reunification, the production of Trabants stopped in 1991. Eastern Germany’s residents were more than happy to choose chose second-hand Western cars over the new Trabant, since the former were more modern, reliable, and cost-efficient.
The price we are prepared to pay for something is a personal bargain between us and the seller. What we deem to be worth it, others might think is far too expensive. This doesn't matter. In the free market we vote with our feet. Chef Tom Kerridge's steak and chips at his The Hand And Flowers pub is around £70. This is considered a rip-off by journalists at the Sun newspaper. However, they are missing the point. It is not a rip-off to people who value the exclusivity of eating at this Michelin starred pub, so much so, you would be lucky to get a table this Friday night or even next Saturday.
In the marketing world, price is the least understood of the 4P's. And yet, it is the only one of the 4P's that captures value. All the rest will cost you. We should pay it more attention. So don't fall for the belief that your price has to be cost +10%. Your price should be positioned to be deemed a bargain by those customers in your target segment. Read up on pricing strategies on: