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.