Value Add – Price Premium

While creating a philosophy for Cyntax, I have been thinking what kind of businesses can command a price premium. I think the businesses in the value chain that add “unique” value to the end product are the ones where you can ask for money. This is probably as old and as commonsensical as Michael Porter‘s work on value chains, but realizing it myself, was an achievement.

Let me take an example. The tee shirts business. Three most important components are the supplier, the designer and the retailer. The supplier can not ask for a premium. Simply because he is manufacturing a commodity. There are bound to be many suppliers with similar or near similar offerings and only thing that all suppliers can compete on is the price. A retailer, might command premium if he is a large player and has a ready set of customers. Someone like, say Big Bazaar. But over a period of time, with Internet eliminating all kinds of middle men, a marketer would no longer need a retailer to sell his products. Cases in point being zappos (ok, zappos is a retailer), threadless and cafepress.
On the other hand, if you are someone like Tantra or People Tree or Play Clan, you add value to a basic white tee shirt. You add a unique design and print that design. You dont sell just a tee shirt. You sell this design that no one else can do. And you thus ask for a premium. To compete with a Tantra, I wont need the supplier, I wont need the retailer but I would need a designer. Obviously I am assuming that I would be able to squeeze the suppliers and command terms to the retailers and create a fantastic online community (and a shop).
Tee shirt business is ok. What about travel business? Who will command a premium?

Travel chain has two components – service providers (airlines, railways) and agents (Traditional, OTA). Off the two, agents can only sell the inventory that service providers make available. And its a simple business where you add zilch value (online agents add value in the sense that they make available the inventory real time) and hence they cant command a premium. Moment an agent asks for a premium, the user would move on to the next agent. You compete on mindshare and again, cost!

What about HR consultancies? Petrol pumps? FMCG companies? Who do you think commands a premium? What to you guys think?

[update: 21 May 2009] Today in my reading list I saw two posts, from two very different people, talking about roughly the same idea. I reposted this on Saurabh Garg blog.

  • One is from Scott Goodson, StrawberryFrog. The post is here. He says “In the future, suppliers will be valued less and less and squeezed more and more. It is idea generators who will be most valued – because “ideaspeople” create the greatest value, across every industry sector, not just our own.
  • Other is from KK, editor at Dare. The post is here. BTW his blog needs to be made more readable. Bad formatting et al.

Both these posts bring me back to that philosophical discussion on value add and price premium a business can command. Will update this as and when I can think of more.


#1 anaggh desai on 05.09.09 at 6:42 AM

In correct examples

#2 Value Add = Price Premium? « Questions. And Answers. on 05.20.09 at 9:04 PM

[…] 21 May 2009] I wrote this piece over at Cyntax blog sometime back and today in my reading list I saw two posts, from two very different people, talking […]

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