When companies offer products and services to the public, whether for profit or not, they commonly express the price at which they are willing to exchange in terms of pesos and cents.
In other situations that exchange does not require money, but since it is an exchange, it requires the buyer to give up something in exchange for what he receives from the seller. Some of you may think of the candidate for an elected office who delivers campaign promises in exchange for votes in his favor.
I prefer to think of the person in charge of the public square who gives the community a decent, clean and attractive place so that citizens can allocate a few minutes of their time in exchange.
We pay for many things 'only' with our attention. So, in quotes, because sometimes the implicit value in those transactions is actually huge.
An extension of this way of thinking is constituted by many tourist attractions, as well as the mechanics that the media follow to convert the value of their audience's attention into pesos and cents from their advertisers.
Due to the varied characteristics of what is exchanged, the price receives such diverse names as quota, fee, commission, charge, premium, rent, interest rate, fees, contribution, tax, registration, membership, tuition, monthly payment, salary. They all refer to the value relationship implicit in an exchange.
Conceptually, we can define price as the expression of the value of a product or service, indicated both in monetary terms and through other parameters, such as effort, attention or time.
Since the products or services that are exchanged have value to the extent that they are capable of providing a benefit, solving a problem, satisfying a need or fulfilling a desire, the keyword in this conceptual definition of price is value.
For this reason, the most important purchase decision criteria for the client are those that best ensure the value of their exchange. Particularly the brand, that certificate of origin that ensures a continuity of value in the solution you are acquiring, since the other characteristics of the products and services change over time, including the place where they are bought, their advertising and their price..
On the contrary, for the seller, price appears to be the most important decision variable in the Marketing mix. This is due, in part, to the fact that it is the only variable capable of translating sales volume into revenue. But it is mainly due to the fact that it is the easiest decision to change in the short term, as it is the one that receives the greatest pressure from the competition, the socio-economic - political - technological environment and the company's own management.
From a short-term view, lowering the price can make sense, particularly if the company does it temporarily, as a promotional tool. But in the long term, lowering prices means lower profits more often than not and there is no company that resists it. Except for those that are integrally oriented to make profitable a permanent low-cost structure that supports a continuous strategy of low prices as a competitive advantage.
To compete successfully in the long term, we must clearly understand the meaning of the conceptual definition of price, before making the choice of a strategy, regardless of whether it is high or low prices.
This means understanding that, in order to maintain a continuous business relationship over time, the implicit value in the Customer-Supplier exchanges is required to be a fair value. And the easiest way to visualize this equity is by considering that there is a linear relationship between price and quality.
It is reasonable to expect that a higher quality will correspond to a higher price and vice versa. However, clients sometimes pay a relatively higher price for products or services of relatively lower quality, placing their transactions above the equity line. This means that, for whatever reasons, the seller has greater bargaining power.
When, on the other hand, exchanges are below the equity line, it is the customer who has a bargaining power that allows him to buy, at relatively low prices, products of relatively higher quality.
Perhaps only a small proportion of the transactions take place exactly on the equity line, since by exercising both, customer and supplier, their bargaining power, the result of a particular transaction can be located anywhere on the graph. However, over time, the only thing that guarantees a continuing business relationship between them is that transactions tend to stay along the equity line.
Based on this logic, it is much easier to understand the rationale behind different pricing strategies and more importantly, to understand why only some of them could be considered sustainable and successful in the long term.
The equity relationship between value and price is what should guide the strategy of the company, while the setting of the specific price at a certain point in time should be the result of a careful analysis of fixed costs, variable costs and income.
