The Quagmire of Low Price

A tech giant has just made a huge U-turn.

About a week ago, Dell announced plans to spend hundreds of millions of dollars on a new global advertising campaign.  What makes this new push radical -- for Dell -- is its stated intention to move away from price-focused, transactional advertising to a strategy that is more focused on the brand.

I wonder if it's too late.

Dell became the #1 PC company in the world on the back of its 'direct' model: a revolutionary, 'just-in-time' manufacturing process that dramatically lowered inventory costs, cut out the middle man, and served up huge profits in an industry infamous for its razor-thin margins. The pace of obsolescence in the PC industry is unforgiving -- so inventory management is critical. While other players typically struggled with weeks of supply (WoS), Dell counted its inventory in terms of hours. (At its brutal best, it even boasted 'negative' inventory -- it collected your money before it started to configure your purchase; and stretched out rebate payments.) For the longest time, no one could touch its supply chain efficiency.

Then the competition wised up. HP and other contenders got their act together and reduced their WoS -- but they also offered consumers the choice of buying from the retail channel, the sensory experience of physically interacting with the product (and bonding with the brand) before buying it.

Dell's competitive advantage was no longer so.  The only other residual impression it had registered, was low price.

Source: www.tonystone.com

But price is not a strategy.  It is the quicksand of a brand -- drop your price, and you will almost never be able to claw your way back to a firmer footing.  It is indefensible (sooner or later, someone is going to drop prices lower than you can afford to), and the only connotation that keeps it company is the wrong one -- poor quality.

Dell has finally wised up, too.  But it has a mountain to climb.

Paul-Henri Ferrand, its Chief Marketing Officer, has acknowledged that they "need to invigorate the brand".  It's about time.  But when he says that "there's a real space for us to become the most-loved PC company in the industry", my skeptic antenna starts twitching.

The campaign theme says, "You can tell it's a Dell."  With due respect to its creators, I believe it's the worst possible thing Dell can tell.  If all you've got is a much-eroded competitive advantage, and the double-whammy impression of low price / poor quality, don't wave a red flag in front of a bull. Remember the concept of 'credibility snap'. You need to work your butt off to prove you're a different company, then let your audience ascribe to you that compliment. In other words, don't say it. Just earn it.

I hope Mr Ferrand has deep pockets.  He's going to need them.

Can You Price Yourself Too Low?

Out on the retail battleground, the giant's just blinked.

Wal-Mart, a chain of large discount department stores with annual sales of US$408 billion (no, that's not a typo) that has over the years carved a market position as the bastion for "everyday low prices", this week announced 30% discounts on 22 popular, everyday items.

Er ... hang on. Run that by me again.

You mean to say the home of "everyday low prices" hasn't been offering me the lowest possible price? That all these years, I've been hoodwinked into thinking that Wal-Mart was offering the best possible price, and staying viable by playing the volume game?

"Everyday low price" traditionally means that you can expect a terrific price on any item, so much so that it isn't worth the hassle of shopping around or clipping coupons to get something better.

One gets the impression that an "everyday low price" retailer is figuratively skimming the basement floor, with no room to offer further reductions. Now Wal-Mart's announcement has suggested the presence of a whole subterranean chamber ... jostling room for further price reductions by retailers in a desperate slide to the bottom.

Businesses should avoid this like the plague. There is no happy ending in such a scenario. Even the giant that outlasts its rivals will find it impossible to claw back decent margins. Nothing is quicker than a consumer pouncing on a paradigm shift.

Wal-mart isn't crazy, of course. Its price rollback program allows it to surreptitiously raise the prices on another basket of products. It makes for a lot of work; but if managed efficiently, can make a viable program.

I'm just more concerned about the mindspace it has abdicated, the birthright it has given up. By abandoning its mental lock on "everyday low prices", Wal-Mart is left with the residual image of a bloody big store where you can literally get lost trying to find your favourite cereal -- or your precious kids.

Try putting a price on that.

What Pricing Says About You

Two stories caught my attention this Easter weekend.

The first was an International Herald Tribune article about the plight of the humble Japanese beef bowl. Long considered a staple meal of the journeyman worker, the broiled-beef-and- rice bowls from the big-three bargain restaurant chains Yoshinoya, Sukiya and Matsuya have had their prices slashed from about 400 yen to 280 yen over the past four months -- in response to Japan's faltering economic recovery and as a desperate measure to hang on to their customers.

Granted, price wars were made for this: two or more competitors engaged in a deadly game of 'chicken', eyeballing each other over successive price cuts designed to decimate profits and drive the weak out of business.

But the hard-won gains come at a price. Infuential economist Noriko Hama has warned that "if we all get used to spending just 250 yen for every meal, then meals priced reasonably will soon become too expensive. When you buy something cheap, you lower the value of your own life."

Now I'll confess I've wrestled with that last sentence from the moment I read it -- even posted a question on LinkedIn to seek other viewpoints -- but I suppose that taken in context, it may not seem quite so ridiculous as it initially appeared: One could argue that sustained price wars will spark a deflationary cycle and indirectly lower workers' wages through some trickle-down effect ... which in turn may lower one's perception of contribution to society.

But I'm still straining to wrap my head round the logic of that argument (you can tell I'm no economist). So let me instead think aloud about the subliminal messages a price point can send out about a product or service:

The perception people have of a product is often dependent on the first price they associate with that product -- which in turn exerts a psychological influence on the actual benefit they derive from its use. In his book Predictably Irrational, professor Dan Ariely writes about experiments in which students were better able to complete word puzzles after drinking an energy drink that was regularly priced. When other students consumed the drink after buying it at a discounted price, they were never able to do as well at the word puzzles as those who had paid the full price.

So brand champions: think twice, think three times before you allow your brand to be irrationally (or predictably) depositioned by a price reduction. The move can retain your competitive advantage in certain circumstances. But too many trigger-happy marketers yank the price down, then are surprised when the 'value gap' is stretched and snaps. Instead of thinking, what a great deal, customers start wondering, what's wrong with it?!

So why not focus on delivering value through a standout brand experience. You may be able to sell for more. The difference between the price that you can sell, and the price that you eventually do sell at, is the value of your brand.

This is, in fact, the cornerstone of the second article which caught my attention this weekend. It was a snippet really, in TIME magazine, about restauranteur and chef Shoichi Fujimaki who charges US$110 for a bowl of his ramen (yes, that's US dollars, there are too many zeros in the yen equivalent) which takes three days to prepare. Asked to justify his price, Fujimaki explains that "it's my 25 years of experience distilled into one bowl".

I don't know how Fujimaki-san is doing, with his ramen going at 35 times more than the beef bowls around his restaurant. But I'd love to make it up to Tokyo one day for a slurp. It must be one heckuva (brand) experience.