In this article, the author explores the ‘impossible trinity’ in pricing, which has to do with the three key features aphorism (good quality, nice look and low price), and how this trinity relates to customer price perception. Author Carlos Hugo Barbery Alpire, DAEN. MSc., is Director of Accounting and Costs at COTAS RL School of Higher National Studies in Bolivia. He can be reached at hugo.barbery@gmail.com. This article was originally published in Spanish in the weekly supplement “Dinero” (p.2) of the newspaper “El Deber” of Santa Cruz de la Sierra, Bolivia on Tuesday, January 23, 2018.

The Pricing Advisor, February 2018

The impossible trinity is a dispute of the international economy where a country can simultaneously choose any two, but not the three public policy objectives: monetary independence, exchange rate stability and financial integration (Aizenman, J. 2011).

Similarly, in pricing there is an ‘impossible trinity’ which has to do with the three key features aphorism (good quality, nice look and low price); it can be good and cheap, odd shape; or nice and cheap, low quality, so that in a selective way the consumer will only choose alternately two of them according to the attributes that he or she values the good or service, within the framework of their preferences and possibilities. Or do you find a Rolex for the price of a Casio watch?

In the valuation of attributes, the academic reference is the hedonic pricing theory. That is, a partial equilibrium of intrinsic prices with respect to the characteristics that the consumer evaluates, so it can explain the value of a good as a group of attributes with individual weights and consequently implicit demands (Rosen, S. 1974), aspects that traditionally derive from econometric models, although they can also be analyzed by means of qualitative methodologies (Hurwich, M. 2013).

Communication, emotion and action are the three ways to modify the consumer’s propensity towards a certain good or service, in order to build a relationship of trust that strengthens his or her loyalty (Arellano, R. 2008). But this loyalty must be understood not only towards a product or service, or a brand, but also towards an experience in its broadest sense.

In the markets, prices are by default the variable that determines the transactional agreement. In the labor market there is the salary, in the financial one there is the interest rate, in the foreign exchange rate there is the exchange rate, in the retail sector the commission, etc. to name a few that by their nature, have some degree of intervention from the corresponding government authority.

But what happens to goods or services when the pricing system is contaminated with ‘subjective qualifiers’ (e.g.’ fair’)? Price control generally leads to inefficiencies that, with different degrees, lead to shortages (Krugman, P. 2007, e.g. taxis and apartments in New York city). In the price control system introduced in Venezuela (2003), the shortage was around 5%. Ten years later, the Central Bank of Venezuela reported 22% in its last official report and, according to unofficial sources, the shortage reached 41% in 2016 (El Nacional, 14/04/16).

A consumer exposed his ‘complaint’ about buying an ‘expensive’ product. The advice was: cross the street, you are free to choose (another store).