The price is (almost) irrelevant
Why do you buy a product? Because the price-performance ratio is best compared to other products? Because it is cheap, hip or cool? Because you’ve wanted it for a long time or it has a nice colour? Perhaps you also trust the manufacturer, you participate in a customer loyalty program or you like to support local manufacturers? The range of reasons why products are bought is huge. “Stop!” – you might say. “It makes a difference whether the products are consumer or investment goods, whether they are standard solutions, individual project developments or services, or whether the purchase is for private or professional reasons!” Is that really so? Does that make a difference? My thesis is: the price is (almost) irrelevant.
The price lie
“We don’t stand a chance against the competition’s prices!” Have you ever heard such statements or even made them yourself? If the competition offers prices that are below your production costs or purchase prices, the chances of success are usually low. From my own experience as a salesperson, however, I would like to claim in a professional context that the price is rarely actually the final reason for a purchase decision. It is often cited as the reason and serves as justification to superiors according to the motto “we do not want to and cannot offer at these prices”. In fact, it often means that no lever has been found to shift the purchase decision in another direction, that the actual decision maker has not been identified or that the most important killer requirement has not been found. With the right levers you can even prevail against dumping offers.
Also on the buyers’ side, price is often mentioned as the primary reason. Of course there can be good reasons to choose the cheapest product – whenever the budget does not allow for alternatives. Whoever decides on the cheapest product does not go wrong in a superficial assessment. It is easy to replace the word “cheap” with “keen” and thus create the impression of a good price-performance ratio and a concrete examination of it during the selection process. Should dissatisfaction with the choice arise at a later point in time, one can always refer to this price-performance ratio and, for safety’s sake, again to the low price: “The price-performance ratio of XYZ was unbeatable and the cheapest! But even with apparently easy to compare products, price does not have to be the decisive criterion. Additional factors such as manufacturer support, reaction speed, update service, goodwill rules, unbureaucratic communication and continuous cooperation should not be underestimated in the long run. These points also exist in the private sphere, they are just labelled differently: Nobody likes to wait 15 minutes for a cup of cappuccino in a café, no matter how good it tastes – that would be a kind of reaction speed. When you’ve finished your cappuccino, you might want a second cup – that would be a kind of update service. The better such aspects work in both the private and professional buying and selling process, the less important the price becomes. Maybe you drink your coffee where it is cheapest, but maybe you drink it where the terrace is in the sun and the service is nice?!
The price-performance ratio
It is called price-performance ratio and not performance-cost ratio or simply performance ratio. The meaning of price or cost can be deduced from this prominent expression alone. The price/cost must correspond to the services. The quantity and quality of the services justify the price. In formalised decisions, criteria are defined and weighted and then compared to a price. Subsequently, there are price negotiations, not service negotiations. Our use of language shows it clearly: the price is essential. “How much was the trip?” “How much does the consultant cost per day?” Money is the currency, money serves as the ultimate assessment basis. In a society that defines wealth by income and property, success by turnover, profit or shareholder value, this cannot come as a surprise. Whether one thinks this is good or bad is a different matter and may of course be judged individually. Are you familiar with the Kano Model? It describes the relation between customer satisfaction and the fulfilment of customer requirements. It is therefore also called the customer satisfaction model. As early as 1978, Noriaki Kano discovered that customer requirements can have five different characteristics that have different effects on customer satisfaction:
- Basic features are taken for granted by customers. They are regarded as mandatory criteria that customers require. If such basic characteristics are missing, they are dissatisfied; if the characteristics are present, however, no additional satisfaction is created.
- Performance features are explicitly required by customers. They have a direct influence on satisfaction. If performance characteristics are not fulfilled, dissatisfaction arises, if performance characteristics are exceeded, satisfaction increases accordingly.
- Enthusiastic features inspire customers. They are not expected by customers and if they are missing, there is no dissatisfaction. However, if an enthusiasm feature is present, even a small increase in performance can lead to a disproportionate benefit.
- Insignificant features lead neither to satisfaction nor dissatisfaction. It makes no difference whether they are present or not.
- Reject features lead to dissatisfaction through mere existence. If they are not present, however, they do not generate satisfaction.
Have you noticed it? In Noriaki Kano’s case, price is not an important factor. It is not mentioned explicitly. This makes it at best one aspect among many. Interesting, isn’t it?
The individual assessment
In business administration, the calculation of the threshold of the price or the calculation of the break-even point is taught. Have you ever tried to determine the break-even point in your environment? It determines the point at which revenue and costs of a production or product meet. The break-even point of the price is rarely encountered in everyday business life. Roughly speaking, it determines up to what price a customer is willing to purchase a product. A thirsty customer who is willing to pay a higher price for his first drink – e.g. a cappuccino – than for the second drink is often given as an example. The more drinks he consumes, the less he would pay for additional drinks. A situation that you can probably easily understand. With the exception of so-called beer exchanges, where supply and demand seem to determine the price, do you know of a café or restaurant that takes such an approach? I do not.
But what is the point of the ideas of break-even point and threshold price? They lead us to an individual, situational assessment. Provided that the budget is not a limiting factor, i.e. there is enough budget to purchase a product, then either a formalised or an individual assessment will apply when purchasing. Would you like to drink a cup of cappuccino in the sun and pay 3.50 euros for it? Is it worth it to you or would you rather have a cup of coffee at home? How far is the way to the café, how full will it be and is there still a piece of carrot cake? Additional factors are quickly included in the assessment. Which ones are depends on the situation and your individual assessment. In addition there are often gut feelings – I don’t mean “thirst” – and also sympathy.
Is it different in a professional context? Not in my opinion. I was once allowed to experience a consultant who charged 2,200 euros a day for online marketing advice. I was sceptical, but my managing director was willing to invest this amount. Maybe he was curious and wanted to know what someone would do for that amount per day? Maybe he wouldn’t have booked it in the first place if he had “only” asked for 800,- Euro? After an hour and a half it was clear to me: air ball. Anyone who explains for 90 minutes that companies should enter their web presence in online catalogues (for the non-online marketing experts among us: the online catalogues themselves do that, it’s the basis of their business model), without having taken a look beforehand to see if this might not already be the case (in fact, it was already the case in 28 out of 30 cases), does not generate enthusiasm à la Kano with me. My managing director, by the way, liked the advice. So an assessment is something individual, it is done after a personal break-even point. Naturally, the more an investment is made, the more formal a decision becomes (in companies, for example, through customer or requirements specifications, through catalogues of requirements or criteria), but the decisions themselves are very often made according to individual factors. And the price becomes a relative factor, not the most important and not the only factor.
Of course, a price is important. The term price-performance ratio says it quite directly: the price provides a basis for a decision and represents an equivalent value. A price of 2.200,- Euro can be a monthly income for a family and for a company it can mean ten additionally sold licenses. Consideration of equivalent values is obvious in the case of tight, limited budgets and leads to purchase or non-purchase decisions. Without budget restrictions, a comparison is also made, but not between 0 and 1 – i.e. between not buying and buying – but between 1 and 2 – and thus the purchase of an alternative. Is it worthwhile investing in a consultant who wants a daily rate of 2,200 euros? I can’t answer that for every consulting situation and every consultant, but I know that I’m asking for more than a basic service for the amount and I hope for enthusiasm. Even over a cup of cappuccino I know what I want: taste, relaxation, friendly service, company, communication. For both the advisor and the drink, the price can only be one factor among several. And the great thing about it: tomorrow the decision can be quite different and the price can take on a different meaning. With this in mind, I’ll just make myself a nice cup of coffee.
Head of Marketing, t2informatik GmbH
Michael Schenkel is a graduate business economist and is passionate about marketing. He has a certificate for excellent hiking characteristics, Odenwaldtour in classes 6a/6b and since 1984 the Seahorse. He likes to blog about requirements engineering, project management, stakeholders and marketing. And he will certainly be delighted if you meet him in the real world for a cup of coffee and a piece of cake or for a virtual get-together.