Market Structure Axioms in Sales
Information Asymmetry, Alternatives, Pricing, and Delay
In this post, we will cover market-related axioms like seller’s power i.e. information asymmetry, buyer’s power i.e. options, pricing and time delay.
When you go through them, I can bet that you will start thinking about your real-life examples when you acted as a buyer or seller.
There are more posts coming on sales axioms.
Enjoy!
Garvit Sahdev enjoys understanding the ideas that shape our world. The Thoughtful Tangle is an initiative to share this journey and experience with friends who love to do the same. He selects one idea and dives deep into it to understand its basics, relevance, impact, and opportunities around it.
Let’s talk about the first market structure axiom.
Information is Asymmetric (seller knows more than buyer)
In a market, a typical buyer buys less frequently than a typical seller sells. This enables the seller to have more information about what they are selling than the buyer. It’s basic and it’s widespread.
Now, a buyer also understands that they know less, and that makes them feel that the seller can take advantage of them. This is primarily the source of low trust, which can stop or delay transactions. This gap has to be filled by someone to make the transaction possible. This someone can be a seller, buyer, or trust platform, review platform, agent, broker, etc. However, remember that if you are building a long-lasting business, this trust must be fulfilled in most of your transactions.
Now, let’s see this from the seller’s perspective. As a seller, you can use this information to fool a buyer by selling them the wrong product or at the wrong price, but that will result in a long-term failure. Or you can use this information to educate your customers to build trust. (Ditto is a big example in the Indian Insurance sector).
From the buyer’s perspective, you can’t do much, but gather as much information as you can before making the transaction. You can gather it from third-party sources or directly from buyers.
From the transaction cost perspective, if you want to grow your business, make this information readily available to your buyers in a simple-to-digest format. This will reduce their cost of mental efforts, and they will see better margins between total value and total cost.
Let’s talk about the second axiom.
Buyers Always Have Options
Buyers always have options. They can either go to direct competitors, they can do it by themselves, or they can decide to do nothing, just maintaining the status quo. And sellers can honestly do nothing about it. Whatever they do, they can’t eradicate your options as a buyer.
But of course, they do a few tricks to make you forget that you have options as a buyer. They create urgency. They try to minimise competition by bringing some USP. They highlight the cost of maintaining the status quo.
Now, ideally, sellers should not do such tricks, as this gives them short-term revenue but reduces trust. Now, let us see how to build trust with competition. First, always acknowledge that customers have options. Second, help them to evaluate options (reducing the total transaction cost). Third, help them to see the extra value that you are delivering as compared to the alternatives.
For buyers, always showcase to a seller that you are not in a hurry and that you have options. And remember that you will always have this superpower.
Now, let’s talk about the third axiom.
Price is Bounded by Perceived Differential Value and Next Best Alternative
See, before I started reading about this axiom, I also had this misconception that price depends on cost, profit margin, supply, and demand, etc. But price is bounded by perceived differential value.
Let us first understand what is this perceived differential value. Imagine you are a buyer and you are comparing different solutions to your problem. Now, you will have one solution that is under your budget and serves most of your needs. Now, this is your best alternative when you evaluate other options. For each other option, you will try to compare the value with your best alternative. If that perceived value difference is more than the price difference, then you will buy the costlier option, or else you will settle for your best alternative.
Now, based on this understanding, the maximum price a customer can pay is perceived differential value + cost of best alternative.
As a seller, identify the real alternative your customers would choose. Understand the value gap they perceive between you and that alternative. Know what the alternative costs them (money, time, effort, opportunity). Price within the resulting range.
Now, let’s talk about the fourth axiom.
Time Has Value, Delay is Hidden Cost
Now, this is simple. Buyers delay action due to multiple reasons. But it’s not good for them. As sellers, instead of creating false urgency if we can tell buyers that delay has hidden costs then they themselves will take quick actions.
Hidden costs are of two kinds. One is cost due to existent problems in terms of time, money, effort, mental bandwidth, etc. Another is opportunity cost i.e. what the buyer can make or do if they do not have the existent problem. While talking to buyers, you can help them understand this.
Now, before telling them about delay costs and helping them, we should also know why they are delaying. This generally happens if they are spending more time in analysing, waiting for all the information, waiting for right time, etc.
Knowing the exact reason, you can also help them with the right information, etc. to help them reduce the delay costs.
Summarising, you need to tell buyers that there is a delay cost, you need to understand why they are delaying and then you have to help them take quick actions.
For buyers, I think it is obvious.
Thank you for reading this. I am hoping that it will help you in life. I will keep adding more axioms here as I will learn them in my life.
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