Do Higher Prices Defy Nature?

Even as I advocate higher prices…

…I understand that they will inevitably fall.

In his book, The Rational Optimist…how prosperity evolves, Matt Ridley offers countless examples of how, despite one of the worst recessions in 70 years, we’re better off than today than we’ve ever been. Why?

Because we’re able to acquire what we desire with fewer hours of our labor. Now for those of you who are among the ranks of the underemployed and unemployed today, that may not be a current reality. But from a long-term perspective Matt Ridley is correct, specialization of labor has allowed us to drive the price of virtually everything we purchase, staples and luxury items alike, lower and lower.

The question, then, is “How can I continue to encourage higher prices when, indeed, we’re all better off when prices are lower?”

The answer lies in understanding the natural cycle of pricing and my attitude toward this cycle.

Price’s natural cycle
Interestingly it’s the same cycle for each of our three value propositions – image, innovation and time savings.  Within each market there are early adopters, the mass market and late adopters.

Early adopters pay a premium for the right to lead the way.  They decide the early success of fashion trends, automobile designs, technologies and time-saving products/services.  One of the primary drivers for early adopters is their desire to be on the leading edge.  Their self-image is tied to being one of the first to try the latest, greatest of whatever interests them.

Let’s contrast that with the mass market which is more pragmatic with their spending.  These folks want some assurances before parting their dollars.  They want to know that the ‘latest fashion’ is going to last more than a month before changing their wardrobes.  Technologies must be devoid of most bugs and the capabilities expanded beyond those embraced by the early adopters before mass market buyers open their wallets.  Similarly, time saving products/services must be able to substantiate their claims before these buyers enter the market.

Finally, there are the late adopters – those who buy simply because there aren’t any other alternatives available to them.  They enter the market only after the mass market has been saturated and the price declines to reflect that saturation.

Readily available buyer data shows that early adopters pay anywhere from 3 to 5 times as much or more than mass market buyers and 12 to 14 times as much as late adopters.  Examine pricing trends for any offering, whether it touts image, innovation or time savings, and you’ll find that this trend exists.

Before we move onto my attitude toward pricing, let me remind you that each of us falls into all three categories depending upon what we’re buying.  Someone who buys the latest technology, may be slow to adopt new fashion trends.  Or they may place great value on fashion, but show little, if any, interest in time savings.

My attitude toward this cycle
I’m suggesting that we embrace this natural cycle, not fight it.  Those companies that choose to accelerate the price declines through heavy discounting, move through this cycle more quickly than necessary.  In the process they strip profits and cash from their companies.  Profits that are needed to spur new image, innovation or time saving offerings thereby depriving customers of additional prosperity.

Don’t discount to the early adopters until that market is saturated or someone comes out with a competing offering.  Don’t discount beyond what the mass market needs to enter the market or you’ll make it more difficult to serve them in ways to assure their loyalty and satisfaction in the future.

It’s counter-intuitive, but stripping profits and cash out of the cycle too early vis-a-vis premature price reductions, detracts from buyers’ long-term prosperity instead of adding to it.

Author – Dale Furtwengler