The prices of a sales object are tightly bonded to its elementary properties, a cause-effect relationship we call product-price determinism.
As seen in another post, these elementary properties are genre, differentiation degree, and cost structure.
The genre of the sales object (differentiated, commodity, and essential) defines the price specie (from sale, from the market, and administered) and the price-determining agent (offerer or seller, buyer or free competition, and constituted authority)
Here, we will address its second elementary property: the degree of differentiation.
The differentiation degree of a product or service refers to the additional benefits of a particular offering related to the buyer’s needs and desires and competing offers. In economic terms, differentiation is the competitive advantage of an offering that increases the provider’s dominance over the price charged, makes the demand for the object offered less elastic, and promotes consumer loyalty.
According to Michael Porter, there are two generic competition strategies: differentiation and cost leadership. Porter’s third alternative, focus, is just a variant of them.
In the option by differentiation, the price tends to be higher due to value-added drivers such as quality, innovation, design, services, and advertising. The price is usually lower when choosing the cost leadership strategy because of the advantages obtained through inputs, technology, productivity, and volume, as illustrated below.
Consequently, the greater the offer differentiation, the greater the value added and the possibility of capturing overpricing, as we see in Apple’s products.
In turn, the lower the cost of an offer, the greater the chances of the provider operating at lower prices than its competitors—like what happens at Ikea—and still generating good profits.
Furthermore, it is necessary to remember that both strategies are not mutually exclusive. As the value-added offerer can operate at lower costs, the low-cost commodity provider can differentiate its offering with, for instance, credit, delivery, and after-sales services.
C. L. Eckhard, author of Pricing in Agribusiness: setting and managing prices for better sales margins.
Claudio Luiz Eckhard is a former professor, business consultant, and author of the books “Ajustando o Rumo”[Adjusting the Business Course], “Gestão pela Margem”[Management by Margin], “A Empresa Saudável”[The Healthy Company], and “Pricing no Agribusiness”[Pricing in Agribusiness].
