Rafi Mohammed

Guess What...You Don’t Have as Much Control Over Your Product’s Value as You Think You Do…

Posted on February 20th, 2007 (0 Comments)

You are out there working hard in the business jungle, sweating over financial and career risks…and now I’m telling you that you really don’t have as much control over your product’s value (hence price) as you may think or hope. Sadly…pricing is not as easy as “setting it and forgetting it,” to quote a favored tagline of the infomercial pitchman Ron Popeil (inventor of products like the Showtime Rotisserie and the Pocket Fisherman). The truth is that your product’s value fluctuates frequently. And if you are not constantly reassessing (and capitalizing on) your product’s value, you’ll miss profit opportunities (when you should raise prices) as well as put your product at a competitive disadvantage (in instances when you should lower prices).

Let’s start off by reviewing the key components of the Value Decoder (which I should reemphasize is simply my managerial adaptation of a key principle of microeconomics…the downward sloping demand curve).

  1. Price of Competing Products. If your product is identical to the next best alternative…your price should be equal to or lower than your competitor’s price. At a higher price, it’s hard to justify purchasing your product.
  1. Your Product’s Attributes Relative to Those of the Next Best Alternative. If your product offers additional attributes that customers value, you have the opportunity to charge a premium. Alternatively, if your product offers fewer attributes, you’ll have to price at a discount relative to the next best alternative.
  1. Income. Your target customers’ incomes affect your price. Just recently, large bonuses awarded to employees of New York investment banks drove demand for fancy sports cars and luxury homes…an opportunity to increase prices.
  1. Prices of related (complementary) products. The value customers place on a color laser printer depends in part on the price of ink cartridge refills. Lower priced ink cartridge refills will increase the value consumers place on a color laser printer.
  1. Market Environment Changes. Over the weekend, The Wall Street Journal had an article on skybox luxury suites in stadiums. Years ago, these luxury suites were sold at a premium as a great way to entertain clients. But today, to vary a famous Bob Dylan phrase “the market environment, they are a-changing.” Explaining why she stopped leasing skyboxes, auto parts executive Lin Cummins went straight to the bottom line, “At GM, you can’t even buy them a cup of coffee anymore.” As a result of this market environment change, demand for sky box lease prices is dropping and prices are being lowered.

So when you examine the five components of the Value Decoder, it’s startling to realize that you really only control one Decoder component…your product’s attributes. And if this isn’t enough of a surprise, it’s important to note that the four other components of value (which you have no control over) are constantly changing. This is why you should regularly use the Value Decoder to reevaluate your product’s value…with your product’s value constantly varying, you have to make the corresponding price adjustments.

Here’s an interesting series of market environment changes that I recently experienced. Last night I was watching “The Big Idea with Donny Deutsch” on CNBC. Donny interviewed the CEO of Lexington International, which manufactures the HairMax LaserComb. The LaserComb is an interesting invention that claims to make your hair look thicker and healthier by using light therapy. The company claims that using the LaserComb three times a week for 10 – 15 minutes leads to optimal results. Despite the voluminous customer testimonials and scientific research, I was dubious. But then Lexington’s CEO made a market environment value changing announcement: The United States Food & Drug Administration had cleared the HairMax LaserComb! WOW! Donnie’s eyes bulged with excitement and all I could do was concur with my own “WOW!” With the FDA on board, the $545 LaserComb price seemed like a great value. Of course, I was wondering why didn’t the company hike the LaserComb price once it received FDA clearance?

I’ve recently adopted a new motto in life: listen very closely and don’t make false assumptions. This motto applies to the LaserComb. Today I checked out LaserComb’s web site and they actually list the FDA clearance letter. Now I’m no lawyer…but it appears that while the FDA cleared the product, the FDA did not give its stamp of approval that the LaserComb actually grows hair. As a result, my valuation of the LaserComb took a nose dive. Come to think of it…the only use of lasers and hair that I know of is to REMOVE hair.

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