Price Management and Proposal Value

Deploying all the analysis capacity to identify and value the differentials of the proposals, so that the customer is aware of the additional value of the products or services they will buy, is key to sell at higher prices.

Friday, April 9, 2021

Ariel Baños, founder of Fijaciondeprecios.com, exemplifies one of the cases in which strategies to sell at higher prices can be applied and explains the factors that influence this type of scenarios.

Case identified and explained by Baños:

Is it worth spending $30 on a mate? Crazy. That was my first impression when I learned about the prices at which the famous Stanley brand gourds, launched in Argentina at the beginning of 2020, were being sold.

No way I'm going to buy that product, I said almost as a declaration of principles. However, for reasons unclear to me, my wife surprised me a short time ago by buying one. Knowing my resistance, she warned (threatened?) me that it would be for her exclusive use. Anyway, in an almost furtive way I managed to get hold of the mate on several occasions, and then the big surprise happened.

The mate, yes the mate itself, attacked the most sensitive organ we economists (and many other people) have: pockets.

In my pricing classes I teach a model called EVE: Economic Value Estimation, which allows measuring the additional value that a certain proposal (product or service) represents with respect to its competitors. It is a very interesting model, because it allows us to verify whether or not the price difference we observe in the market is reasonable in terms of the additional value provided by the more expensive proposal. In short: if something is more expensive, is it justified to pay more, or is the price directly "a robbery". As my Colombian friend, David Gomez, says, the problem is not being more expensive, but that the customer doesn't know why.

Intrigued by some of the initial results I experienced with the sneaky use of Stanley Mate, as a good economist, I decided to go to the numbers, and specifically use the above mentioned model.

To apply the EVE model we must select against which alternative we are going to compare our premium mate. Usually the comparison is made against a cheaper competitor, such as in this case a traditional mate, which is worth a tenth of Stanley's price. However, to make the analysis even more challenging, let's assume a reference value of $0, i.e. not buying any mate, or in other words continuing to use the gourds we already have available at home, an item that is generally not scarce in Argentine households, and which many people even collect. Given this assumption, the full justification for the eye-catching price of the Stanley mate should be based on its merit to add value that conventional gourds do not provide.

For the evaluation I analyzed my own pattern of mate usage, which as we will see later is a major determinant of the results.

-Client: Ariel Banos (regular mate drinker).
-Price of "Stanley" mate: $4,900 (Argentine pesos as of December 2020, approx. 33 dollars).
-Reference value (competitor's price): $0

Differentials of "Stanley" mate versus a conventional mate

-Technical level:
Built in stainless steel and double wall vacuum design.
"-What is it? We have the right to react that way, and make a strange gesture, when they tell us this."

-At the customer benefits level:
Retains hot temperature for up to 30 minutes.
"-Now yes, they are telling me something more interesting, although the price still seems crazy to me."
-At the impact level (monetary and non-monetary):
-Saving on yerba mate and hot water.
-Savings in brewing time for mates.
"-Let's see, that sounds better, but let's do numbers, because maybe the savings are small in relation to the price of mate."

When I drink mate while working, the frequency of each barley is quite irregular. Sometimes half an hour passes since the last mate, and then my palate perceives the unpleasant sensation that it is already cold, and let it be clear that there is nothing uglier than drinking cold mate (with the exception of tereré). This forces me to change the tea and, just in case, also the water in the thermos, to renew the mate and enjoy the hot infusion again, as it should be. All this requires me to get up and dedicate a few minutes to the new preparation.

So during the morning I have to renew the mate at least once, and the same happens during the afternoon barley. In this way, we arrive at 4 preparations of mate per day with their respective thermoses of hot water, in the pre-Stanley era.

Each medium mate requires approximately 50 grams of yerba mate. The price of yerba mate per kilo is, on average, $300.-, that is, we are talking about $15.- per mate.

In addition to this, we have to consider the cost of heating the water for each barley. Here I will resort to a reasonable estimate. Nowadays, hot water dispensers located in service stations charge $20 per thermos. So, let's assume that, by doing it at home most of the time, the cost of filling the thermos with hot water will be half: $10 per thermos.

Mate savings: $15 per mate x 2 preparations of mate that are no longer cooled per day: $30.
Hot water savings: $10 per thermos x 2 mate preparations that are no longer cold per day: $20
Total daily savings: $50.

Dividing the price of mate by the daily savings ($4,900/$50), we get back our investment in 98 days, that is, in less than 3 and a half months. Not bad.

Another way of analyzing it would be to annualize the savings. Multiplying the daily savings of $50 by 365 days (I, as it should be, drink mate every day), we arrive at an annual savings of $18,250 (approx. 124 dollars), which far exceeds the investment made (approx. 33 dollars).

Excellent numbers, but do they apply to everyone? The answer is a resounding "no". The calculations were made considering my usage pattern, as a regular mate drinker. Let's see now for those for whom it would not make economic sense to invest in this mate:

For those who do not drink mate (ha!).
For those who drink mate and don't drink mate for more than 5 minutes between each barley
For those who prepare less than 196 mates in a year, because in this case it would take more than 1 year to recover the investment.
But be careful, this does not mean that in the three previous cases the purchase is not justified. In fact, many do, but I would like to point out that it would not be supported from an economic point of view.

Honestly, economic analysis, using hard data, is quite a rarity for this type of product. The main differentials valued by those who traditionally purchase this product are related to the prestige and image of the brand, and the fact that it is a portable, "showable" and Instagrammable product. In any case, the politically correct justification of saying "an economist recommended it because of the savings it generates" (you're welcome!) is not bad at all.

Now, how do you bring all this down to your business? When a client tells you that your proposal is too expensive, think about this example, and deploy all your analytical skills to identify and value the differentials of your proposal.



More on this topic

Pricing: How to Price Based on the Value Provided?

May 2021

Generating a trusting conversation with clients and identifying and presenting your own success stories is of utmost importance so that at the quotation stage a price is defined based on the value provided by the products and services.

According to Ariel Banos, founder of Fijaciondeprecios.com, exploring the method of defining prices based on the value for the client is a recommendable resource for those who hesitate about how much to charge their clients.

Pricing Strategy: What NOT to say

February 2021

"The cost determines my selling price" and "let's lower prices to win customers and then start raising them" are some of the phrases that should be avoided when designing a pricing strategy.

Ariel Banos, founder of Fijaciondeprecios.com, has identified five phrases that are dangerous and that companies should avoid applying when designing their price management strategy.

Prices: What Discounts Do Consumers Prefer?

July 2019

Discount promotions expressed in percentage terms rather than absolute values are typically those that consumers prefer when analyzing available purchase options.

Ariel Baños, a price management specialist and founder of Fijaciondeprecios.com, explains how consumers value discounts more, depending on how they are expressed in promotions at sales points and in advertising spaces.

Prices and Perceived Value

June 2018

To what extent can a higher price be considered an indicator of greater value for the customer?

Ariel Baños, pricing expert and founder of Fijaciondeprecios.com, analyzes two interesting cases to try to explain what factors are most important for customers when assigning value to a product or service.

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