Economists tell us that wealth is created as prices come down…when things require less of our time and effort to acquire them. Yet, premium-price-strategy companies, like Apple, not only thrive under all economic conditions, they carry the highest market capitalization rankings of all operating companies. How do we explain this wealth-creation dichotomy?
Full disclosure
I am not, nor claim to be, an economist. The following analysis is based upon my work with a variety of companies, in equally varied industries.
Wealth creation
I completely agree that wealth is created when we can acquire more with the same amount of time and effort i.e. when prices are lower. Some economists have noted that, here in the United States, even those families in the lowest income strata own microwaves, multiple televisions and other conveniences.
Much of this wealth creation occurs as a result of what economists call economies of scale. When companies innovate, create new offerings, their costs, and consequently their prices, are high. The second level of innovation occurs as production processes improve, costs come down and the offerings become more affordable to a broader array of customers.
As mentioned earlier, premium-price-strategy companies create wealth, measured by market capitalization rates…albeit for its investors rather than an economy as a whole. They too are innovative, but they continue with premium prices to limit their market to only those who highly value what they offer. Apple’s offerings typically only possess 30% to 39% of the market…no where near the majority of all offerings of a similar ilk.
This begs the questions: Which approach is better? Which produces the greater wealth?
Amount of wealth
The former methodology, the one associated with economies of scale, seems to create wealth for a greater number of people; whereas the premium-price-strategy approach creates wealth primarily for the leaders of and investors in that company. So, on the surface, the former would appear to be the better of the two wealth-creation strategies.
What is less clear to me is the cost side of the equation. Specifically, which of these two approaches, economic wealth creation vs investor wealth creation, makes the best use of our planet’s resources? In other words, is the introduction of third and fourth televisions, which we see in many U.S. homes, an efficient use of resources? Or could these resources be better used elsewhere?
Asked another way: Is the fact that premium-price-strategy companies target only customers who value their offerings enough to pay a premium, actually help create a more effective use of our resources? Is it possible that we could create greater wealth if companies only served the people who value their offerings enough to pay a premium to get them?
As I said earlier, I’m not an economist so I can’t claim to have the answers to these questions.
I can tell you from my pricing work with companies, that both my clients and their customers enjoy stronger, longer-lasting and more mutually-beneficial relationships with a premium-price strategy. Similarly, when my clients offer a discounted price, neither they nor their customers are typically happy with the results.
Also, with readily-available mutual funds, many with low initial investment requirements, even lower-income individuals can benefit from premium-price-strategy companies, especially with many companies offering matching contributions in 401(k) plans.
Takeaways
To me, who is devoid of economic credentials, it seems that the premium-price strategy is the more effective approach to wealth creation.
It encourages consumers to spend on only those things that have value to them, thereby reducing frivolous spending which, in turn, maximizes use our planet’s resources.
If the savings from frivolous spending and impulse buys were invested, we could fund even greater levels of innovation. Talk to anyone in the startup community and the biggest obstacle they face is funding.
I’d love to hear your thoughts.
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Resources
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