It’s not our fault, customers demand lower prices !
During a seminar last week, someone asked the following question:
“More industries than ever are experiencing runaway price and margin erosion. Why is that? More importantly, what can we do about it?”
I believe value is being lost as a result of our lack of understanding of shifting paradigms.
Economies naturally progress through value shifts. For example,
from Raw Material Economies (pre-industrial)
Product Economies (Industrial)
Service Economies (post industrial)
Experience Economies. (information)
Although we can still find economies at all four levels throughout the world, most of the higher systems are now Experience Economies. In experience economies, by and large, consumers place lesser value on Raw Materials, Products, or Services. Instead, they place more value and are willing to pay more for the Experience. Products and Services, although required and expected, are no longer the prime field of differentiation. Their expected high quality is simply a minimum business requirement.
Sadly, within our experience economy there are companies and entire verticals that may not have yet noticed the shifted paradigm and still offer products and/or services as their key value proposition. A perfect example is the consumer electronics sector, which continues to assert product features as their key value. Features, however, are easily copied, creating short-lived differentiation. In the absence of other differentiating value, they turn to price. And so, the cycle begins: Lower prices causes reduced margins which causes diminishing profits which creates pressure to reduce costs which causes layoffs which brings reduced purchasing power which prompts the need for lower prices. You get the idea.
A surprisingly large portion of top management I meet believe customers demand and cause lower prices, without considering the possibility we may simply be misaligned with customer values, which ultimately forces us to turn to price. After all, although lowering price is not usually the best course of action, we cannot deny it is an easy and generally effective way of getting attention; if only for a brief moment.
Maybe we should learn from others:
- American auto manufacturer’s have refused to see the new paradigm. They are still selling cars as if it were 1950.
- Nordstrom, on the other hand, sells the same exact merchandise as other department stores, but charges a premium based on the experience.
(I’ll leave more, and perhaps better examples to you – please share through a comment.)
Perhaps it’s time we listen to the voice of the customer and align ourselves accordingly.
If we don’t, our only recourse will be lower prices, outsourcing and ultimately layoffs.
Committed to XCS