SERVICE QUALITY, VALUE AND PRICE

newqualityandpriceSERVICE QUALITY, VALUE AND PRICE

It is standard microeconomic theory that customers seek to maximize the utility – that is, the want-satisfaction – of a product or service and the disutility of price. Further, though the measure of value is subjective from individual to individual, and from time to time the value of a product or service still hinges on both its usefulness as well as its scarcity.  A caution to commodity suppliers is that the closer supply comes to soaking up available demand in an industry, the more the value proposition shrinks and the more that price becomes the deciding factor for buyers.

Generally speaking, customers perceive value as a function of the benefit derived from the supplier’s service in relation to the price paid for the service. This means, in principle, that a supplier can enhance value by employing one of three strategies:

1.            Leveraging service (improving or expanding service)

2.            Lowering price

3.            Leveraging service and lowering price

An effective means for a customer-focused supplier to become distanced from the pack of commodity suppliers is by relying first and foremost on the lever of service to enhance value.  This is not, altogether, a strategy without risk. Some buyers are responsive only to price points and thus will fail to see – or choose to ignore – how improved service enhances the supplier’s value proposition to the customer.

DEALING WITH LOW- COST SUPPLIERS

In the absence of price discounting, the customer-focused supplier can see the business go to a competitor who is willing to make concessions on price or who, in fact, operates at a lower cost structure. In the latter case, competing on price against the low-cost provider is tantamount to playing Russian roulette.

A customer-focused supplier under price pressure by a competitive supplier who has mainly the lever of price with which to impact the customer’s perception of value is well advised to defend margins and force the competitor to compete on service. If that isn’t possible, the customer-focused supplier can, of course, respond with its own price lowering actions, but that judgment is best made when all of the factors of the competitive situation (the marketing or strategic value of winning a customer’s business, the anticipated customer life-cycle revenues, etc.) are well understood. As a rule, however, the customer-focused supplier is best served by shifting the competitive focus away from price and toward service.

Most suppliers discount price reflexibly when they find themselves in a competitive situation. Many times, suppliers are creative in disguising discounts as promotions, giveaways, and so on, but in the end it amounts to the same thing: lowering the price to achieve a sale.

The supplier who has only the price card to play had better be the low-cost producer relative to its competition. This is because continuous discounting by a supplier who is not the low cost producer – but who acts like one because it hasn’t figured out how to lever service to enhance its value proposition – is unsustainable and can ultimately prove ruinous.

A customer, for its part, who is dependent on a no-frills, low-cost provider, may find any cost advantage nullified if the supplier’s quality and service are not, at minimum, on a par with the higher-priced competitors. Cases are legion where no-frills providers disrupt an industry only to soon find their strategy unsustainable. The upshot, of course, is a tattered business and a customer scrambling for substitute suppliers.

 

 

Management Advisor

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