Outsourcing Pricing to the Customer

Summer is a great time to re-charge the batteries, strategise for the year ahead and catch-up on some reading. For me, it’s also a time to explore new pricing models. Here are a couple of innovative pricing models that caught my eye over the summer.

Logos Research Systems, a publisher of classic works in the field of biblical and theological studies, outsources pricing to its customers under the moniker of “Community Pricing”.

How does it work? The company suggests a product they are thinking of creating, and then asks customers (aka the community) what they are prepared to pay for it. The price point that is popular enough to make the product economically viable to produce it at becomes the price.

Customers who’ve indicated they are prepared to pay more are able to purchase at the cheaper price, while those who’ve indicated a lower willingness to pay are invited to resubmit their price.

There are a couple of nice advantages of this approach to pricing. Assuming the price “bids” are binding on those submitting them, all products priced this way should be profitable for the company. The platform also employs some nice gamification and social media strategies to arrive at the most popular price point.

The other interesting pricing model that caught my attention comes from the airline industry. Remember those “Mystery Fares” that the Australian domestic airlines launched to rebuild goodwill (and increase load factors) in the wake of the devastating 1989 Pilots Dispute?

Well, the EU airline German Wings allows prospective passengers to select travel dates and a theme for a booking (for example, gay friendly, partying, culture, shopping or seasonal sports), and then returns flights to between seven and eleven destinations for the passenger to choose from.

The passenger can de-select (say) three of the seven destinations, but in the process the price to the remaining four destinations will have increased by €15.00 (€5.00 per destination). On completion of the booking, the airline will advise which of the remaining four destinations the passenger will be flying to.

Passengers are being asked to make a trade-off between price and destination certainty. If the passenger wants to go to a particular destination, it’s going to come at a price. But for those who are a bit more adventurous, the name of these offers, ‘Blind Bookings’, couldn't be more appropriate.

To varying degrees, both of these models are outsourcing pricing to the customer.

So why are these innovative pricing models worth keeping an eye on? Well they can become mainstream. As The Economist recently reported, ten years ago there were less than 20 drugs that were offered on a pay-for-performance basis (i.e. charging for them, in whole or in part, only if they worked). Today, there are more than 140 drugs offered under such a pricing regime.

References:
Mark Ellwood, 2013, Bargain Fever: How to Shop in a Discounted World, Portfolio/Penguin, New York
Bertini & Koenigsberg, 2013, Outsourcing Price to Customers, http://ssrn.com/abstract=2255904