Technology breaks chain linking price with value

The Encyclopaedia Britannica used to sell for &£1,500 or more. Today, its content is available free on the Internet. Like a twist in the plot at the end of a thriller, it makes you question your previous judgments about value and value for money. It makes you sceptical; it forces you to reassess your beliefs.

As we hurtle helter-skelter into the information age, a tidal wave of such reassessments will confront us, both from consumers and marketers. Much of it will be agonising.

Marketers have always known that price is not the product of a pure, cold, rational economic equation. An item’s price is pregnant with meaning and symbolism. A relatively high price can signify quality and reassurance, for example, whereas low-priced products are often assumed to be shoddy.

High prices can also imply status: “The mere fact that I paid so much for this tells the world how successful I am, or how much I love you.”

The other side of the coin is that people – especially certain segments of the population – love a bargain. For them, there is something tremendously exciting about getting things cheaper.

Signals like these are unlikely to go away soon. But four hugely powerful forces are transforming the context in which they work. The way consumers and marketers think about prices is changing.

The first force is technology-driven price disruption. There is nothing new here. As new technologies transform the cost of making something, so previous price expectations are disrupted. The information age is generating the mother-of-all price disruptions.

When first introduced in 1915, a domestic fridge cost the average worker 3,162 hours labour. By 1997, they could buy it for 66 hours’ work. Thanks to industrial age technologies and economies of scale, the price has fallen by 98 per cent over 80 years. Thanks to information age technologies, however, the price of a cellular phone has fallen more dramatically than that, in just 15 years.

Information processing now accounts for more than 50 per cent of all economic activity in modern societies. And, thanks to Moore’s Law (that the price of computing will halve every 18 months or so), information processing costs will plummet forever. Yesterday we had the known value item, which created a sort of pricing standard for consumers. Today, they are being taught to expect continuing price reductions – or “roll back” as Asda calls it.

Secondly, growing consumer doubts as to what is a “fair” or reasonable price are being compounded by the emergence of new business models that make a point of giving away, or at least selling below cost, what was once an expensive core product.

Britannica.com hopes that by giving away its core product it will attract enough eyeballs to become a major advertising site. Buy.com does the same with physical goods, selling them at zero or negative margins and making its money on ad sales. A message to the consumer: why buy at the “full” price when you can get it at a massive discount?

But – and this is the third point – the information age pricing revolution does not stop there. The notion of a fixed list price is a relic of a fading industrial age which depends on standardised prices to make its system of mass production, distribution and advertising work. Everything about the modern era – from mass customisation and life-time customer value-driven marketing strategies to the emergence of auctions, reverse auctions and buying clubs – points in the opposite direction.

Prices are set by markets, not marketers. When companies issue stock on the stock market, they know the market, rather than the marketer, will control the price at which it trades. Slowly, painfully, we are moving in the same direction in the market for goods and services.

The fourth mega-force is a product of the first three. As old assumptions about price are challenged, so the emotional connotations of different pricing strategies are beginning to change. For example, a certain price not only says something about the quality of the item but also the quality of the relationship between marketer and consumer. Are these people taking me for a ride? Or are they on my side, acting for me, in my interests?

In Germany, many of the cars parked outside deep-discounting Aldi stores are Mercedes and BMWs. These people are not poor and they do not see themselves as mean either. What they hate, however, is anyone treating them like a fool, or a mug. Shopping at Aldi is a sign that you are a smart shopper. Likewise, in the US it is getting to the stage where anyone who buys at list price is seen as a loser. Now, stung by the excesses of the designer label years, British consumers are adopting the same mentality. Hence the great “rip-off Britain” debate.

In partnership sourcing programmes, buyers do not just accept the price offered by their suppliers. They say: “Let’s open the books and look at your cost structures to see how we can work together to make savings.” There is no hiding place. It is accepted that transparency is the basis of a good trading relationship.

A similar sort of attitude is seeping into the consumer mindset. Institute of Grocery Distribution chief executive Joanne Denney recognised this when she told its annual convention that consumers do not just want low prices per se: “What they really want to know is whether they are getting a fair deal. So let’s put our profits in context, explain how they are made and how efficient the industry is.”

On the other hand, when with “Everything we do is driven by you” Ford announced its determination to maintain prices at present levels, no matter what, it demonstrated it is still in denial.

Yes, rip-off Britain is a political football and the subject of many a cynical publicity stunt. But do not let that obscure the fact that it is also the product of deep, deep forces. For marketers, rethinking the pricing strategy is now the number one priority.