The Transaction Lacks ... Righteousness
The transaction lacks….”righteousness”
At most children’s hair stylists, the child sits, has his haircut, and then is given a lollipop and/or sticker afterwards. The child leaves happy, the parent leaves happy, everyone is happy. Last week, I took my son to a hair stylist that offered the opportunity to buy cheap toys for high prices – no lollipop or sticker required. Sitting there I realized that few businesses realize as much potential value from each customer visit as the hybrid stylist/overpriced toy store.
The business model is built on a couple principles.
1. Nature forces the barbershop visit
2. The kids force the toy purchase
3. The parent wants to have a good experience
And it’s all priced accordingly. Judging by the number of parents who walked out with toys, I’m sure it’s a very profitable business, but I realized that its emblematic of a number of other businesses.
Companies everywhere spend time and money creating demand inelasticity for their good or service that allows them to raise prices over time by investing in
1. Brands to anchor an emotional attachment
2. Intellectual property to create a differentiated product
Companies that are successful are said to have “pricing power”.
In the case of the barber, they create a differentiated service through their location proximate to a significant, relatively affluent community. They then use the “undifferentiatedness” of toys to mark-up and sell those toys – after all, the consumer is able to spend and the child makes the parent willing to spend. That’s the genius of the business and why it deserved a post.
The transaction lacks… ”righteousness” though
The “willing and able” is a perversion of pricing power though. Price inelasticity is an output due to the perceived utility of a product. Ideally, a product creates significant value and the company captures some of that value by pricing the good above cost. After successive years of capturing that value for itself, however, the surplus value left for the customer dissipates and the company hits a volume wall. We’re seeing that with increasing regularity as most consumer-packaged goods companies who for years achieved at least 4% revenue growth by though a combination of price and quantity growth, now rely on only price for something less. Overcharging their loyalists while losing the more casual customer. The same has occurred within consumer electronics, perhaps most notably at Apple, whose steep price increases are now met with flattish demand.
In my view, increasing prices of mature products directly conflict with:
1. Outsourced manufacturing has made it easier to build competitive products
2. Retailers are willing to work with small brands to fulfill orders (Most notably Amazon, but increasingly Walmart as well in the consumer space)
3. Private brands offered by retailers, have more room to price below at the same quality level due to vertical integration
4. Emerging brands are willing to forgo margin for growth
5. User review sites (blogs, Amazon) lower the cost of experience marketing (even while awareness marketing is increasingly expensive Google, Facebook)
So called cash cows it turns out are just ordinary cows with limited pasture.
Instead, consider companies whose goods and services create value and are then priced to only capture a fraction of that value in year one, year two, and year three and are in effect building brand loyalty based on earning a return on unmonetized value by charging significantly less than a customer is willing and able to pay. Perhaps this is a different pricing strategy that deserves another look. After all, before everyone loves an Oreo, but everyone had to eat an Oreo to know that.
Basil Alsikafi