Deflation

I have been interested in pricing strategies for a long time. Quite frankly, pricing is one of the most misunderstood topics in enterprise software and also probably the single most non-optimized part of our business. Even in the consumer world pricing has remained one of the biggest disrupters and will likely to remain so.

However, what gets my attention today is the reflexive belief that we all hold that things should get cheaper over time. What is overlooked in many of these discussions is two factors, wages are rising fast in popular offshore targets China and India, and both countries have an abundance of unskilled labor but a shortage of skilled types. Interestingly, inflationary wage pressures are felt across the board and not just in the skilled set.

"Absent a deflationary debt contraction ( no certainty ) wage pressures in China and India are going to diminish the deflationary contribution we have gotten used to from those countries products. i feel quite certain that my golf shirts will cost a lot more in ten years."

If this means my next iPod, laptop or cell phone costs a little more I won’t mind all that much, but what are the economic effects of significant price increases across a broad section of consumer goods, combined with currency pressures felt through Congressional pressures on China to let the market determine the value of the Yuan?

"Two U.S. Senate committees have approved legislation that aims to equip Treasury with new tools to pressure China into letting its yuan currency rise faster in value, which U.S. manufacturers say is necessary to eliminate an unfair price advantage for Chinese-made goods."

Interestingly enough, we appear to be entering a new form of economic cold war with China. On the heels of threatening action by Congress over the currency, a high level Chinese official threatens to use their $1.3-1.5 (depending on who you talk to) trillion in U.S. dollar reserves ($900 billion in Treasuries alone) as a weapon.

Shortly after that we see a string of Consumer Product Safety Commission actions against Chinese products, are we to believe these quality issues surfaced only recently? I don’t think I am being a conspiracy theorist to suggest that this is an attempt to weaken demand for made in China in light of the ballooning foreign reserves and their stubborn approach to currency valuation.

On a related note, with regard to China and pricing, I recently linked to a piece suggesting that China’s crackdown on software piracy was intended to drive up the street price of Windows and make Linux a more attractive option for consumers and developers. Microsoft counted by cutting in half the price of Windows, but in order to do that will they be required to make up the loss somewhere else? Is deflation illusory?

Shifting from macro economic issues to consumer-centric, I read recently about Skybus’s pricing strategy. Skybus is a new airline that is launching with $160 million in venture capital and a unique pricing strategy that is best summed up as flying à la Carte. In addition to stripping out costs wherever possible, such as no 800 number and no in-flight entertainment, they are attaching a price tag to things we have long held to be "free" such as soft drinks and pillows.

Through a shrewd strategy of reducing costs AND exposing the true pricing components to consumers Skybus should be able to carve out a strong position among flyers who really don’t care whether or not they get a bag of pretzels. The point is, consumers look at these things as "free" when in fact they are most certainly paying for them.

Q: You’re even charging for checked luggage, $5 a bag.
A: If you don’t check a bag, why should you pay for those who do? We make our prices very clear, so we’ve had very few complaints. If you pay $80 for a Skybus flight instead of $180 for the competitor’s flight, and you pay $5 for a bag and $2 for a soda, that’s $87 versus $180. America can do that much math.

This obsession we consumers have with "free" is both irrational and illusory given that we intuitively know that we are in fact paying for something even if it isn’t coming out of our wallet at the moment of consumption. Having said that, can a web-based business succeed with a business model that requires consumers to pay up front for access? I’m not so sure they can because consumers increasingly expect things to be free.

Take this example of a site I found recently, Visual Thesaurus, a very clever adaption of the age old thesaurus to a slick visual user experience. I bounced to StumbleUpon’s discussion page about the site and the overwhelming majority of comments, in between the comments extolling the capabilities of the service, are from people writing "wish it was free" or "I love it but I’ll never pay for it". Let’s have some perspective, this is frickin $20 a year people, $3 a month… or put another way, 25% less expensive than one Starbucks grande latte a month.

I don’t have any answers, mostly just questions, but I think it is increasingly clear that one can’t rely on the common sense of consumers when pricing a service, and whenever possible creating the illusion of a free service should be considered a requirement. Having said that, I’ll be curious to watch Skybus to see if their transparency strategy with regard to pricing pays off.

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More on this topic (What's this?)
China Economy Transformation or Bust, Part 2
China Transformation or Bust
There is more good News for Jinko Solar
Read more on Deflation, Investing in China at Wikinvest

Blog Hiatus

As you may have noticed, I haven’t posted much these last few weeks. Aside from not finding much to be interested in with our industry in August, a traditionally slow month, I have also been tending to family matters and enjoying the waning days of summer. I am feeling energized and will resume my usual writing routine.