We tend to think of innovation in terms of new products and services. But the need for innovation applies to a far broader range of business activities. You can innovate with your methods, processes, route to market, supply chain, marketing, partnerships and indeed with your fundamental business model. One neglected area for innovation is pricing. How can you be innovative with the monetisation of your value added? In what new ways can you get paid? Most companies set a price list for their products and services and then offer deals, discounts and negotiations. Maybe they are missing a trick. Let’s consider some alternative approaches:
- Turn your Product into a Service
Rolls Royce sold engines for aircraft and made money from selling spares and maintenance. They changed their business model to a service package called Total Care which covers predictive maintenance and overhaul activities. By charging customers on a $/engine flying hour basis, Total Care transfers the downtime cost risks for airlines and makes reliability and flying time a driver for profit for both the customer and Rolls-Royce.
- Demand Driven Pricing
The price of fish in the fish market goes up and down in line with demand. So does the price of an airplane ticket or a hotel room. Bierborse is a bar in Berlin Market where the price of beer rises or falls depending on demand. The canny beer drinker can win by choosing one of the less popular ales at a quiet time of day.
- Auction pricing
An extension of demand driven pricing is an auction. Google does not sell its advertising with a fixed price schedule. Advertisers effectively bid against each other to achieve the highest ranking on Google adwords.
- Razor and Blades
Gillette famously used this marketing ploy a long time ago – it sold its razors at a small loss so as to make money from selling the blades. The inkjet printer on your desk was inexpensive but over the year you spend a small fortune on ink cartridges. The Nespresso coffee company makes most of its money not from the machines but from ongoing sales of coffee cartridges.
- Bundle or Unbundle
Consider bundling more add-ons and services or separating them. Cruise liners sell an all-inclusive bundled holiday which includes food, drink accommodation and entertainment. The low cost airlines have unbundled their services to give a cheap flight but you pay extra for more luggage or early boarding.
- Pay what you Can
What if customers were asked to pay what they think is a fair price for the value they had received? This method can be deployed as a promotional programme or for regular business. It is used by the Metropolitan Museum of Art and the American Museum of Natural History in New York. The One World Café in Salt Lake City has no price list. People pay what they can. No one is turned away. If people cannot afford to pay then they can work in the kitchens or in the garden where much of the food is grown. A more commercial version of this technique is used by Priceline where you can state what you are prepared to pay for say a hotel or flight and suppliers might respond if it suits them.
- Get someone Else to Pay.
If your client cannot pay the full amount for using your product then maybe there is someone else who can contribute. The free newspapers that we regularly see in large cities are consumed by commuters but paid for by advertisers who are keen to reach this audience. Lifestraw is a brilliant innovation by Swiss company Vestergaard. It saves lives in the developing world by purifying water. But the people who need it most cannot afford it. However, because it replaces the boiling of water it qualifies for carbon offset credits and this is what funds the business.
- Vouchers and Discount Codes
Vouchers have been around for a long time but we keep seeing them pop up in new ways. They allow you to target a discount to a select group. Restaurant chains regularly offer discount vouchers by email to prior customers. This can boost business in the slacker periods of the week. Loyalty cards and social media discount codes are other ways to grant discounts to segmented groups while keeping your regular price list intact.
- Change the Value Proposition
Clockface Café in Moscow charges customer 2 Roubles per minute for the time they spend in the café. They can have free cups of coffee and biscuits but pay for their time while they surf the internet, work on their homework or chat to friends. 99% of cafes charge for each cup of coffee but the value in the café might not be the coffee – for many people it is a friendly place to meet or use Wi-Fi. Blockbuster’s revenue model was based on video rental fees and late return charges. Netflix used a different pricing scheme based on a monthly subscription with valuable recommendations.
In an article on this topic in Harvard Business Review October 2014 Stefan Michel argues that there are two kinds of innovation—one in value creation, the other in value capture. ‘But most companies focus only on the first,’ he says. The ways to innovate with pricing and monetisation are legion. Fresh approaches can differentiate you and attract new customers. What price innovation?