Take a Look Outside Your Industry!

Were you inundated with suggested New Year resolutions this year? Have you already broken the ones you made a month ago? Did you make a Pricing resolution? If not, let me suggest one for the remaining 11 months of the year: take a look at how other industries do their Pricing.

There are some compelling reasons for taking the pricing model from one industry and applying it to another. Why re-invent the wheel, if someone else has already gone before you and done so? Reed Hastings, the founder of Netflix asked himself why a DVD rental business shouldn’t adopt a gymnasium–type pricing model, where customers could borrow as many DVD as they liked as part of their monthly subscription.

Sometimes it makes sense to adopt the pricing model of an adjacent industry. Airlines have been doing revenue / yield management for forty years now, which has now moved into adjacent industries like rail travel, via the likes of Virgin Trains, Amtrak’s Acela services in the US and the European high speed rail alliance, Railteam. As many rail passengers will also be air passengers, they already “get it” when it comes to revenue / yield management.

Another industry’s pricing model may prove to be more cash-flow friendly. Valve software, for example, has created “episodic” pricing, where gamers, rather than buying a $50 - $60 game, buy a $20 game, followed by subsequent downloads.

Several years ago, Virgin Blue took the humble pub happy hour and put it on their website between 13:00 – 14:00hrs to dispose of unsold inventory. One could argue that this initiative provided some welcomed PR, but perhaps it also created a new channel to reach the extremely price sensitive passenger.

Meanwhile, Johnson & Johnson’s cancer drug Velcade is offered to Britain’s NHS under a pay-for-performance pricing model, not dissimilar to Google’s cost-per-click pricing model. Patients who do not respond to the drug (in part or in total) will be taken off the drug, with J&J honouring a money-back guarantee to the NHS. Those that do respond will be fully funded by the NHS.

There are also examples of companies adopting a pricing model that is under-pressure and being rejected by customers in other industries. Take time-based pricing for example, so prevalent in the professional services industries.

Tsiferblat, a Moscow-based chain of cafés doesn't charge for lattes, mocha’s and cappuccinos the way most cafes do.  It charges for the time you spend in the café: two rubles per minute for the first hour, and one ruble a minute thereafter, up to a maximum of five hours.

And speaking of the legal industry, the UK law firm Addleshaw Goddard recently won the “Most Innovative Law Firm In Value Resourcing” in the FT 2012 Innovative Lawyers Survey. The judges commended its “…new and uniquely comprehensive approach to its pricing, which shows impressive learning from other industries and offers options to suit all clients.”

Now wouldn’t that be an achievement to celebrate next New Years Eve?

Advertising’s slow road to value-based pricing

As a pricing consultant, I am frequently asked by companies from all sorts of industries to assist them in a move to Value-Based Pricing (VBP). These companies tend to be acting proactively and initiate the move to Value-Based Pricing themselves. So what is Value-Based Pricing and why do companies initiate the move?

Value-Based Pricing is where a company monetises part or all of the economic value it creates for its customers. The economic value is created by the vendors’ products and services either increasing the client’s revenue, reducing their costs or minimising their risks. These three sources of value are not necessarily mutually exclusive: some products can increase revenue and reduce costs, for example.

One of the most commonly cited reasons by companies for shifting to Value-Based Pricing is that their customers don’t buy from them because of what it costs the vendor to provide the product or service purchased. They buy from them because of the value they receive. If the research is to be believed, then the 70% - 80% of companies that resort to cost-plus pricing are pricing on a dimension that their customers just don’t care about.

To put it another way, cost-plus pricing (like billing by the hour) is based on inputs, while Value-Based Pricing is based on outputs.

Value-Based Pricing requires vendors to have a knowledge and understanding their customers’ value-chain and their value creation process, and this is achieved via long-term, sustainable relationships, rather than the odd transaction here and there.

As a result, Value-Based Pricing is more holistic than alternative methodologies. It enables companies selling goods to monetise the services involved in the provision of such goods, while enabling service companies to shift their focus to the provision of solutions.

The majority of companies I work with want to move to Value-Based Pricing so they can become the “price maker” in their industry, and reap the rewards that go with wearing that crown. Such a move also helps differentiate them, particularly in industries that are being commoditised or disrupted.

Which brings me to the advertising industry, which is one of two major industries where customers are demanding a shift to Value-Based Pricing because the industry itself is refusing to go there (the other industry is Professional Services, such as Lawyers, Accountants and the like).

On 20^th April 2009, Coca-Cola said it would adopt a “value-based” compensation system for the advertisers that do work for its 400 brands. Rather than paying advertising agencies for hours worked, Coke will pay for results achieved”

The Economist, 14^th May 2009

The situation where customers demand Value-Based Pricing is not one you want forced onto you. It will catch you off-guard and force you to make mistakes that come with not planning ahead and being reactive to customer needs. You will be a commoditised “price taker”, constantly beaten up by powerful procurement managers.

Perhaps more worryingly, there is a huge risk of polarisation across the advertising industry. Those that can provide value-based advertising solutions to customers will command premium pricing.

And for everybody else, there’s “commoditisation hell”.

This article (one of two) first appeared on the TrinityP3 blog

How much are you discounting by...?

Here's a great photo, sent to me over the Christmas / New Year break, by my friend @dgmackay.

It was taken in Hong Kong.

Nothing like being precise with you how much you're discounting by...and getting attention in the process!

I'm sure @Metisans will find this very "crunchy"