Quality of service and pricing are inexorably joined at the hip. If one of them is off balance, the entire company’s equilibrium is destroyed. Getting clients to stick around is a tricky balancing act and it all centers around finding the equilibrium between quality and price.
Balancing High Effective Price and High Perceived Quality
What are “effective price” and “perceived quality”?
The effective price is the bottom line amount left over after removing any discounts or freebies. For instance, if your company sells widgets for $100 apiece but has an introductory offer of $25 off, the effective price is $75.
Perceived quality is never the actual quality – it’s what your client imagines the quality of the good or service to be. If you have high perceived quality, you’ll be able to charge a higher price. Consequently, if your perceived quality is low and you’re effective pricing is also low, you’ll be out of business quickly, especially if you are a small to mid sized company.
You’ve experienced this yourself: you’re willing to spend a bit more money for a product or service that’s top drawer with high caliber client service. Our brand is bound to the perceived quality of the good or service as well as the effective price.
Many companies work long and hard to stay in their version of a sweet spot –with high effective price and high perceived quality. But that isn’t for everyone or every company.
The most important piece of this puzzle is consistency – if you’re consistent about where you want to be, whatever the quadrant, you’ll be successful. Equilibrium between effective price and perceived quality can be reached in any quadrant of the graph we’re about to review. As long as you’re acting the way you want to be and you’re delivering, you’ll have that balance and your own sweet spot.
That sweet spot, regardless of which quadrant in which you desire to be, is called the line of sustainability and it’s only found in a line that cuts across a quadrant at a 45 degree angle. This is the only place where you can have any hope of sustaining a long term position with any quantifiable results.
And where you are on this graph is temporal. As the market and our competition change, so must we if we’re to hang on to the line of sustainability.
The Big Four
Let’s look at a graph and apply it to the following scenario:
Kathy is a busy working Mom with three teenagers and a husband who is constantly on the road. She has trouble keeping up with her daily email let alone keeping a house clean for a family of 5. She decides to hire Happy Hands, a new cleaning service in town, to help with the housework.
The chart below illustrates the four quadrants of pricing and quality and shows how effective pricing and perceived quality fall into one of four areas:
Scenario #1: Low Perceived Quality/Low Effective Price – Bottom Left
With this quadrant, Kathy might experience something like this:
After calling Happy Hands, she learns that, since they’re a relatively new company in town and anxious to build their client base, they have a great deal on house cleaning: 4 weeks of cleaning for $100 – which includes 2 weeks of special “deep” cleaning!
Kathy knows her house is a wreck, especially after last weekend’s slumber party with 8 teenaged girls. One of the things Kathy found most attractive was the “deep cleaning” that would happen every other week because she knew her dust bunnies had not only had children but were onto grandkids.
And the price couldn’t be beat … Kathy had done her homework. Other cleaning businesses in her town charged $100 for one week of cleaning so she was happy to save money and get the extra services.
The first week she comes home from work to see the results of the “deep” clean. She’s upset for two reasons: nothing special has happened for the deep clean and no one from Happy Hands bothered to ask if there were specific places she’d like to have extra work done.
Kathy had hoped to see that, after 6 hours at her house, it would sparkle and smell fresh. In reality, the dust bunnies hadn’t moved out and it smelled like cigarettes – something Kathy was allergic to.
Kathy started to believe that she’d gotten what she’d paid for: marginal cleaning at best and that, even at the rock bottom price, it just wasn’t worth it.
In this scenario, Happy Hands is in commodity hell because they’re competing strictly on price. Combining the poor service with the cheap price will ensure that Happy Hands is out of business in about a month. Surely, Kathy wouldn’t recommend them to anyone and now had to spend even more money to get the cigarette smell out of her home.
Commodity hell is unsustainable in both quality of product and a low price. You just can’t make much money in this situation unless you find a way to drastically — and quickly — improve service which would enable you to charge a higher price.
The best strategy to improve this relationship is to raise the price but there’s a caveat with this – you can only raise the price if the quality is also raised as well.
Scenario #2: High Perceived Quality/Low Effective Price – Bottom Right Quadrant
Here’s how this would unfold for Kathy:
Kathy hires Happy Hands and is excited about the prospect of her first deep clean. Instead of hearing nothing from the company prior to this experience, Kathy gets a phone call the day before the crew was to arrive.
“Hi, Kathy, this is Anna from Happy Hands. We wanted to know if there were any places in your house that need some extra attention in our deep clean tomorrow.”
“Anna, hi! Yes, my teenage girls just had a huge sleepover in the basement and it’s a mess. They spilled soda all over the floor and it needs to be scrubbed. Also, we have dust bunnies under some of the furniture that have set up warrens. Could you help with that?”
“We’ll do our best to get everything cleaned up this time around. If it doesn’t all get done this time, we’ll finish it on the second deep clean. And, although we usually don’t do the deep cleaning two weeks in a row, if we miss anything this time around we’ll make sure to do the second deep cleaning next week.”
While Kathy may not get all of the specific places she mentioned deep cleaned, she’s happy that she knows the reason why instead of being left to wonder when she gets home from work. And Anna has now given her a solution for catching what needs to be finished next time.
Anna has just deepened the initial relationship – and gained Kathy’s trust — by telling her about catching remaining items on the second deep clean. The problem Anna has, though, is that her pricing is so rock bottom that it will be hard for her to climb out of that hole.
In this case, we would need to get our effective price up or find another strategy to achieve the same result or we’ll quickly go broke. The best way to avoid that is by raising the price while maintaining high quality.
Scenario #3: High Effective Price/Low Perceived Quality
Here’s what happens for Kathy and Anna in this scenario:
Start with the same dialogue as Scenario #2 with the exception of Anna letting Kathy know she would complete the deep clean projects the following week. In addition, the price of $100 doesn’t include the deep cleaning – that’s another $200 each time with a 2-hour time limit.
Kathy comes home from work expecting to see that the basement floor has been scrubbed and when she goes to check it, she can see that it’s still sticky and dirt has been tracked onto it making it look even worse. And the dust bunnies have put on additions to their homes. Furious, Kathy calls Anna. “What’s the problem?” Anna asks. “We talked about the specific things I needed to have accomplished with the first deep clean but your crew didn’t do any of them.”
“Oh. Well, we’ll catch it another time.”
Kathy ends up cleaning her own basement floor and feels short changed because she’d paid extra for the deep cleaning and has now missed her son’s baseball game. She plans to contact the Better Business Bureau in town to complain and then will try to get her deep cleaning money back.
In this scenario, Anna’s effective price is too high for her perceived value. When we find ourselves in this quadrant with our clients, we need to increase the quality or we run the risk of losing the client.
If we don’t remedy this situation fast, we’ll start to bleed clients because the attrition rate will be out of our control. The best strategy here would be to raise the perceived quality by improving service but only if we maintain the price at the same time.
This scenario helps us make money in the short term but, eventually, it will turn into a loss as we drive more and more clients away.
Scenario #4: High Effective Price/High Perceived Value – Upper Right Quadrant
This is the sweet spot for businesses and here’s how it went down between Anna and Kathy:
Same dialog as Scenario #2 between Kathy and Anna and same price structure for deep cleaning as Scenario #3.
When Kathy returns home from work not only have the dust bunnies left the building, the basement floor is clean and has been waxed as well.
Kathy finds a note from the cleaning crew saying that they had found a leg broken on one of her chairs and had taken it back to the shop to be fixed because they also have a handyman on call. They will return it the following week when they come to clean.
Kathy calls Anna right away. “Oh, Anna, thanks so much for getting to the items I needed to be cleaned. It’s great!”
“Well, when the girl who was scheduled to clean saw the broken chair leg, she called me and we told her to bring it in and have our handyman can fix it.”
“I didn’t expect the floor to be waxed and the chair to be repaired but I
really appreciate it.”
Anna’s company has not only done what she said she would do but went above and beyond the call. The extra money charged for deep cleaning was well worth it because it freed Kathy up to go to her son’s baseball game instead of scrubbing the basement floor and she appreciated having the broken chair leg fixed without having to ask about it first.
High effective price and high perceived quality is the quadrant we want all clients to be in. This is a win-win situation for our business as we not only make enough money on the pricing end but we provide a high perceived quality for that pricing. Clients are happy and recommend us to their friends and family.
An effective strategy for this quadrant is to continue building on client loyalty — which helps us maintain high perceived quality as well as high effective price.
In order to find a sustainable balance between quality and price, you must:
- Stick to the line of sustainability. If you aren’t there yet, get there as quickly as possible.
- Be consistent with both the price and quality you’ve chosen. You don’t get the value unless the client consistently perceives you to be at the place you want to be.
- Re-evaluate your position every quarter, considering how the market and your competition may have changed.
Doing this will make your long-term future brighter in terms of both client satisfaction and profitability.
© 2012 Ralph Dandrea. All rights reserved.
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