Once there were cavemen (and cavewomen), and barter was the system of exchange de rigor.  Labor specialization was starting to take hold, and people started to expand their horizons and starting to lay off the brontosaurus steaks every day and looking for more sophisticated dinners (arugula anyone?)

So the arugula caveman brings his produce to the market.  As soon as the watermelon caveman arrives, the arugula is priced in terms of watermelons, e.g.: 10 bunches of augula for one watermelon, and the watermelon is priced in terms of arugula, one watermelon for 10 bunches of augula.

As soon as the 3rd merchants arrives with roquefort cheese the cheese is priced in terms or watermelons and in terms of arugula, and the arugula and the watermelon are also priced in terms of roquefort cheese.

Therefore each good in the marketplace must be priced in terms of every other good in the marketplace, so in a marketplace with 1,000 goods, each one of them would carry 999 different prices.  A very complex system.

Moreover the merchant offering cows and needing arugula was faced with three choices:

1. exchange one cow for 1,507 bunches of arugula . . . OR
2. exchange one cow for 1,507 bunches of arugula, then exchange the excess bunches of arugula for additional goods needed . . . OR
3. cut a piece of the cow enough to obtain the necessary arugula, not really . . .

a highly inefficient process.

The solution was BRILLIANT:  introduce one new additional good in the marketplace that everyone wanted:  MONEY!

The fact that salt, shells, and other artifacts or materials were used as money is not meaningful, since money by definition will always have the following characteristics:

• highly desirable:  money has to be wanted and hence accpted by everyone in the marketplace;
• storage of value:  only non-perishable goods or artifacts can qualify as money, so the cow vendor could sell one cow at a time, converting and storing its value in terms of money for later consumption;
• rare/valuable:  so that a lot of value could be stored and transported in a small volume;
• easily divisible:  so that small exchange could be accommodated as well as large ones;

We can now see how precious metals, especially gold were soon selected as money.

Let’s go back to the barter system.  The exchange of one watermelon for 10 bunches of arugula would occur IF AND ONLY IF the watermelon vendor would attribute a higher value to the arugula than he would attribute to the watermelon AND IF the arugula vendor would attribute a higher value to watermelon than he would attribute to arugula.  If one of these two condition is not valid, no exchange would take place.

As soon as the exchange occurs each vendor would think, “Sucker! I would have paid 11 bunches of arugula for this great watermelon”; while the other would think, “Sucker! I would have let go the watermelon for 9 bunches of arugula”  further confirming that each value the other vendor’s offering higher than their own offering.

Introduce money into the equation and the shopper would ask, “How much for the watermelon?”, “10 dollars each” replies the vendor.  “No, thanks” replies the shopper.  The exchange did not happen because while the vendor value the watermelon less than $ 10, the buyer attributes a higher value to the $ 10 than to the watermelon.   “Hey buddy, how about 8 bucks?”

“OK!”.

By lowering the price, without adding any value whatsoever, the exchange is finally possible because the vendor attributes a higher value to $ 8, while the shopper attributes a value to the watermelon higher than his $ 8.

Conversely, other watermelon vendors in the marketplace may decide to add value to their watermelon offerings:

• organically grown watermelons: $ 15;
• vine-ripe watermelons: $ 12.50;
• watermelons delivered to your door: $ 12.

Note that a free-delivery of watermelon, or adding freebies to the offering is the equivalent of lowering prices, with some exceptions for co-branded deal, product introductions etc. but let’s keep this simple.

How does it apply to today’s marketplace?

Easily.  It is very tempting for companies to drive themselves out of business by means of continuously lowering prices while adding freebies to their offerings.  In the short term it does produce results because by lowering the price below the value perceived by the customer it promotes:

• new customer acquisition,
• higher consumption,
• and competitors’ customers switching to your company.

Unfortunately in the long run it has a few very undesirable effects:

• lower customers value of the product (cheapens it);
• set the customers’ mindset of constantly lower prices;
• set the customers’ mindset that everything is negotiable.

Which leads to a vicious circle where companies compete with one another on how low they can go in margins and profits, until companies reorganize under bankruptcy protection (MCI), or check out totally by going out of business.

Lowering prices indiscriminately as the sole mean of stimulating top line sales is lazy and it is stupid!

The question that every company, every marketer, every CEO, CMO, CFO, CXO, entrepreneurs must ask themselves is:

How can I increase the value to my audience and monetize on it?

Longer and better warranties or liberal return policies for instance have costs associates with them, and Hyundai and L.L. Bean were able to successfully monetize on the increase value offered to their audience.

Keep in mind that, as often it’s the case, pure innovation is process innovation, and once it’s exploited in the marketplace cannot be duplicated as successfully ad the innovators did: so if you are in the car business and you offer a 10 years/100,000 miles warranty, your audience has heard that before, they will yawn bored, and will ask: “So what?”.  Each innovation in an industry or marketplace raises the bar higher and higher and higher.

There’s room for ONLY ONE million dollar page, isn’t there?

So, are your efforts concentrating in lowering prices or are your efforts concentrated in increasing value to your audience?

Keep in mind, that while you do all the work and invest all the money, is the audience the final judge of value, and they vote with their hard earned dollars.

Some examples of companies that are NOT competing on price:

• Apple
• BOSE
• Hearts on Fire
• Martin
• Tiffany

Are your marketing efforts limited to:

• We’ll match competitors’ prices;
• We accept competitors’ coupons;
• We’ll beat any quote;
• The best . . . ;
• Award winning customer service;
• Free with purchase;
• New lower prices;
• The lowest prices;
• Earn miles/points with each purchase;
• We’ll give credit to anyone;
• . . . . . . . . . .

It gets worse.  Are you creating win-win propositions where you are delivering value to your audience, or do you have initiatives that are good for you as a company at the expense of your audience?

• Bottle returns accepted only between the hours of . . . It does benefit you, the seller, so you do not have to staff the store as much, and your people can concentrate on selling, but . . . how does that add value to your audience?  It doesn’t!
• . . . .

 . . . to be continued.

P.S.: Read Seth’s May 29, 2007 take on it here.

P.S.S.: Read Accenture on Pricing on here.

EXTRA EXTRA

Added: 08.13.2007:  Top Ten (10) Most Expensive Paintings of All Time.

Added: 10.25.2007: Seth Godin’s “I can’t afford it”

Added: 05.09.2009: Seth Godin’s “Two halves of the value fraction”

Added: 08.03.2009: $5 per slice pizza

Added: 12.20.2011: How much should an ebook cost?