Why FREE is not the best price
03/11/18 10:08 Categories Flavio Stiffan
Over the last 4 weeks, I had the rude awakening that customer service is no longer a priority for many businesses as they enjoy revenue and customer repeat buys without the need to deliver a great experience.
The numbers reported by many companies and countries in relation to wage increase, record revenues and booming stock market over the last months seem to confirm that one can survive based on the fact that there are enough customers out there willing to live with a new criteria of satisfaction: low pricing.
Low price: the ultimate customer satisfaction?
Pretend you are looking for a car rental for you next trip, a contractor for your house renovation project or the repair of a home utility device under warranty in your house; your first reaction might just be to open your trusted browser and start comparing prices online.
If this is your first move, you have limited yourself to a price based search rather than a value base search. This clearly means that you have changed your priorities and the expectations about the service you are looking for.
Now assume that you are the CEO of your business and you agree on this search philosophy, it will influence your strategic decision making about the priorities of your company.
I have spent quite some time as being part of corporate account management and the rule #1 being told to me was: “price wars are bad for business, you will always find a competitor willing to cut a few more margin points to get the business”.
Indeed, low pricing is a down spiral war that will get you in the difficult position of cutting cost to support making some profit. Eventually, this will also impact your customer service strategy as it is costly to have teams responding to customer queries and provide timely support. Where do you go from here? Either you think that your product or service is so unique that customers won’t have the choice but to use it (back to the monopoly times of state-owned businesses?) or you have to prepare yourself to have a difficult life of cutting costs year round.
But the question still stands: is low pricing the best customer satisfaction rating?
Free is the lowest price but not the best price
Let’s pretend you download a free fitness app on your smartphone or find a company that will fly you for free to your next vacation destination... what are your expectations? Actually, they should be quite low as, after all, you did not give any money in return for the service.
Once you reach the free level of product or service, the lower you could only go is to pay a potential customer to get your product or service.
So, let’s get back to really free products: as a customer, you might just want to have more free of it (pushing it into the consumerism and possibly creating a mountain of unused free product into the nearest landfill) and accept the fact that the quality might be very basic or possibly that the product or service might fail all together to do what it is supposed to do.
Will you, as a consumer, ask for more of that what you get? Most likely! Will you get it? I doubt!
If instead you pay a higher price for your product, your expectations will increase proportionally, and, if the company you are using, responds to your expectations, you might be just become more loyal for renewing your experience. This doesn’t mean that you will buy many times the same product but you might keep it longer (amortization).
Now turn the table around and think as the CEO of your company, which model would you rather use for business sustainability?
You can target volume (market share approach), low price strategy at the risk of losing customer loyalty if your competition can be just a little cheaper or, sell fewer products at a higher price but also enjoy a higher margin by providing a better service and increase customer loyalty (margin improvement approach). Anyone thinking that low price, high margin, high volume model works in a sustainable way is probably in for a difficult reality check.
You get what you pay for
Based on the above, you might agree that free is not the best price, meaning that you have to agree that your customer will have higher expectations if they pay a (higher) price for your product. This means that you have to deliver beyond providing a product that works as intended: you have to develop a strategy of positive customer experience which includes excellent customer service.
In 2013, ZenDesk published a great market analysis about the impact of customer service on the business. Clearly this highlights the KPIs and customer expectations. In October 2018, Inc. went back to ZenDesk and published a great article about customer experience. The main difference here is that customer service is a piece of the customer experience rather than the customer experience itself. And that’s where the rubber meets the road: is low pricing (or even free) able to support a positive customer experience? On my opinion, and regardless of all the marketing campaigns you can build to claim it, there cannot be a sustainable customer experience for low price services.
Focus on profit margin rather than market share
During the passing week, Apple has released their quarterly numbers and their strategy change in communicating their performance to the analysts was a great illustration of the discussion above: Apple has announced that they will no longer provide information related to the volume of iPhone, iPads and Mac sales but instead they will revenue and cost of sale by product category, thus helping to understand their margin rather than their market share. As a result, Apple’s stock valuation dropped 7% but most importantly, it confirms that Apple is more concerned about the fact that they can sell higher priced products to a loyal customer base rather than becoming the #1 tech market share business in the world. To me, that is a direct impact on stating that the customer will pay the price and expect the service rather than getting it for cheap. A leap of faith but also a clear strategy about what’s important about Apple’s customers.
As a consumer, and your possible customer, it is clear that a lower price will set of lower expectation but it also means that my loyalty is at risk to competitor’s products at an equivalent or lower price. If you decide to play the pricing strategy to run your business you have to accept the consequences of high customer turn over and drought spells on revenue as your competition might just the same approach. Eventually, you will need to find some areas of higher revenue to survive (free flight but expensive snacks?).
On the other hand, if you position your product at a higher price, you have to fulfill the customers’ expectations and provide them with the best experience to win their loyalty, thus creating a very sustainable business model (there is no secret sauce: check out Lufthansa, Singapore Airlines, BMW, Apple...).
Do you still think that’s free or low price are the best prices?
Provide your feedback
It is fast-moving times and the flux of business development is like in a white-waters rafting expedition. The ones that will catch the right current and know how to master it will win some points till the next rapids come up. Are you one of those? Let’s talk and define the future.
About the writer: Flavio Stiffan is a business development specialist with focus on creating market expansion strategies supported by academia programs. He has implemented and managed alliance networks and is at the core of academia relationship management with a network of over 130 universities and 300 technology companies and distributors. For more articles, visit www.stiffan.eu or check out his profile on LinkedIn.
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