The
June edition of Harvard Business Review has some excellent articles and this one combines two
themes that we have been covering on our courses; Pricing and Value. The authors - one a professor at London
Business School and the other at Harvard - are critical of those companies who
extract every cent they can out of customer transactions. The airlines who charge more for extras come
in for particular criticism and the authors point out that other airlines, who
do not do this, have benefited in terms of customer loyalty. I was not sure how this reconciles with Ryanair’s amazing profit growth when this company is the most prominent exponent of
this sharp practice; nevertheless I read on with interest.
The
authors argue that today’s consumers are not ‘passive price takers’ and point
out how Bank of America’s debit card fee and Netflix’s 60% increase in DVD hire
charges inflicted immense damage to their reputation and share price. The financially driven approach of charging
what the market will bear is no longer the best way, particularly where it is
exploiting customer ignorance or confusion.
The
alternative approach advocated by the article is to develop pricing strategies
that are a win/win for supplier and customer; the customer gets an added value
offer and the company gains more revenue, by the extra volume and loyalty that
is generated. The extra volume comes
either from increasing the size of the market or taking share from suppliers
who are not so enlightened. The core
principle is to say to customers ‘we value you as a person’ rather than ‘we
value you as a wallet’.
The
element that makes this article most interesting is the fact that the example
of best practice that is quoted, is the London Olympics 2012. Apparently this has been written up as a
Harvard case study because it features five key principles of shared value
pricing. Those like me who have paid
extortionate prices for tickets may find this hard to believe and it is
difficult to see how a one-off event like the Olympics - with no need for
continuing customer loyalty - can be a case study that illustrates general
principles.
The
five principles suggested as best practice are:
- Focus
on relationships, not transactions
- Be
proactive
- Put
a premium on flexibility
- Promote
transparency
- Manage
the market’s standards for fairness
I
thought these principles to be sound, though nothing new; for instance MTP’s
courses have been advocating proactivity as a key pricing skill for many
years. I also found the linking of each
principle to the Olympics a bit of a stretch, particularly the last one. Those who failed to get tickets and saw many
going to corporate sponsors may not think that all was fair, though it has to
be agreed that it was probably impossible to satisfy everyone who applied. If demand exceeds supply and prices have
already been determined, there is not much you can do.
The
other examples of shared value pricing are more convincing. The best is Amazon’s offer to waive delivery
costs in return for an annual fee of $79; this move achieved two objectives,
making the customer feel that they had a good deal and encouraging more
volume. Apparently this single
innovation increased sales by 30%. This
simple offer is contrasted with the more complex deals offered by other sectors
which only confuse and annoy the customer.
Banks and telecom are suggested as companies who deliberately avoid
transparency and are seen by their customers as inflexible and unfair.
Overall,
the article makes some good points which are food for thought. I would have preferred less emphasis on the
Olympics - whose links to the themes seem contrived - and more examples of good
and bad practice. It would also have
been good to see some recognition that there are some companies like Ryanair
who can and do get away with financially driven pricing because their competitive
position and cost leadership are so strong.
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