In an earlier post on ‘Value-based Pricing; Fair or Foul?' I compared the economist’s view of value-based pricing with the moral philosopher’s view of it and asked whether it was ‘fair or foul’ for customers.
Despite the analytical, economic and moral challenges of value-based pricing, it already IS in increasing use. At least, many companies are starting to experiment with it. In addition to Amazon, and airlines, trains, hotels and traditional users of yield management tools, other companies that have used it successfully include Schneider Electric, Intel and Volvo.
Customer insight is the biggest obstacle to value-based pricing
Pricing is one of the most powerful and one of the most neglected disciplines in business. As Hinterhuber & Liozu suggest in their paper on 'Is It Time to Rethink Your Pricing Strategy?’, most companies can significantly improve their profitability by using a structured approach to pricing based upon a deep understanding of what customers value and what they are willing to pay.
The biggest single obstacle to more advanced pricing is the lack of understanding of what customers really value. As Vargo et al describe in a paper ‘On Value and Value Co-creation: A Service Systems and Service Logic Perspective ’, our understanding of value has evolved from a utilitarian model based on benefits minus costs, to a phenomenological one based upon customers’ experience of using a product over time.
Understanding what customers really value
McDonald et al suggest in a paper on ‘Assessing Value-in-Use: A Conceptual Framework and Exploratory Study’ that the best way to assess the customer experience is through immersive ethnographic research. Ethnography is widely used by companies such as Proctor & Gamble to learn how customers use their products. As a CNN Money article on ‘The Consumer is Boss’ shows, P&G’s ‘Living It’ programme –where ethnographers literally live with customers – has been a valuable source of innovations that improve customers’ experience of using P&Gs products.
Strategyn founder Tony Ulwick has created a structured innovation process that assesses customers’ experiences by capturing details of customers’ ‘jobs-to-be-done’ and desired outcomes. As Ulwick & Bettencourt describe in their paper on ‘Giving Customers a Fair Hearing’, capturing details of customers’ jobs and desired outcomes at key touchpoints in the experience provides a good proxy for what customers value. Insights about customers’ jobs and particularly, about desired outcomes, are the foundation for value-based pricing.
Customer outcomes drive value-based pricing
Ng et al show in an AIM briefing on ‘Outcome-based Contracting’ how a company can not only provide customers with products or services, it can also provide them with ‘servitised’ outcomes. Customers only pay for the outcomes they desire, leaving the company to organise how they are created. For example, a [email protected] article on ‘Power by the Hour: Can Paying for Performance Redefine How Products are Sold and Serviced?’ describes how Rolls Royce offers its aero-engines not as products for sale but as ‘Power-by-the-Hour’ outcomes; airline customers only pay when the engines are in use powering their planes full of fare-paying passengers through the sky.
Despite its many challenges, value-based pricing is in wider use than many think. Offering customers’ servitised outcomes is one way to implement value-based pricing. But it is not without its challenges. The biggest one faced by companies is their lack of understanding of customers and what they really value.
If you are thinking of implementing value-based pricing the $64,000 question is, “Do you really know what YOUR customers value?” If not, don’t you think it was time you did?
Graham Hill is a partner at Optima Partners.
- Graham Hill, CustomerThink.com - ‘Value-based Pricing; Fair or Foul?
- Hinterhuber & Liozu - 'Is It Time to Rethink Your Pricing Strategy?’
- Vargo et al - ‘On Value and Value Co-creation: A Service Systems and Service Logic Perspective ’
- McDonald et al - ‘Assessing Value-in-Use: A Conceptual Framework and Exploratory Study’
- CNN Money - ‘The Consumer is Boss’
- Ulwick & Bettencourt - ‘Giving Customers a Fair Hearing’
- Ng et al’s - AIM Briefing ‘Outcome-based Contracting’
- [email protected] - ‘Power by the Hour: Can Paying for Performance Redefine How Products are Sold and Serviced?’
Graham Hill has been a Management Consultant, Interim and Director for over 30 blue-chip companies, in 15 different countries, over the past 30 years. Most of his work has involved building complex service systems, directing their implementation and managing the resulting organisational transformation. He is an acknowledged SME in customer...