Some time ago the author listened to an economist, a colleague, discuss his research concerning luxury products. At one point, he said, “You will not believe this, but in the luxury product industry, prices do not follow costs.” In that one sentence, he captured the key difference between economics and marketing—one of point of view, not theory.
Economics and marketing are both consistent in concept. However, an implicit assumption in economics is the movement of markets toward equilibrium as prices decline and profit margins across industries approach some equivalent levels. That equilibrium, in fact, would be achieved in open markets with free flows of information, resources, and products and services.
However, marketers try to interrupt the forces driving markets to equilibrium through innovation, continual redesign, and communications—a focus on customer value. While economists might declare that prices should follow costs if a market reaches equilibrium, marketers would say that their job is to keep a market from reaching that equilibrium by continually adding value and communicating those value increases to the customer.
All marketers try to keep prices from following costs. The marketing task is to break away from the pack of commodity products and services and distinguish their product or service for their target customers. The CVA® for differentiated products or services will generally be high, while the CVA® for commodity products and services will generally be low (Exhibit 1.9).
Exhibit 1.9 Differentiated products and services versus commodity products and services
Reprinted with permission from “Pricing, Perceived Value, and Communications,” Donald E. Sexton, New York, NY, 2008.
However, a value orientation that translates as value at any cost should not be the objective. Many books on customer satisfaction and customer loyalty often employ the phrase, “Delight your customers.” Yes, one wants to delight customers, but one needs to make a profit while doing so. One should not try to increase continually perceived value without regard to the increases in costs associated with those value changes. At some point the costs of delighting customers may become greater than the value that they are willing to pay for.
There was an industrial supply distributor that held a much higher percentage of parts in their catalog in inventory than did their competitors. Their customers were delighted with the higher chance of finding the parts they needed at this distributor. They were less delighted when the distributor went out of business due to its high inventory costs.
Costs and perceived customer value must be monitored, measured, and managed together.