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Emotions Rise Over Pricing

September 9, 2010

Kevin Mitchell, Chairman of the Business Travel Coalition, is campaigning about the pricing practices of the major airlines. He is riled about all those ‘hidden charges’ and the unpredictability of what you will finish up paying when you book an airline seat. He would like us to sign a petition to go to the US administration – you can find out more a this link.

Kevin is not alone in his growing interest in pricing. At the corporate level, there is increasing understanding that we need to be more thoughtful – and more creative – about pricing and charging models. Not all of these initiatives are about subterfuge. In many cases, they relate to the need for greater creativity in response to market uncertainties and spending cuts. This was a point made recently by the President of Fujitsu, discussing the challenges of winning public sector business over the next few years. Buying organizations are also showing more interest in developing better internal guidelines and procedures about which price or charge mechanism to choose, and when.

Pricing affects behaviors and also depends on behaviors. For example, the old method of volume or revenue discounting is becoming steadily more discredited because volatile market conditions plus the speed of technological change often render ‘commitments’ utterly meaningless. Many suppliers were badly burnt by the speed and scale of the recession. Some customers also suffered from their inability to cut back or renegotiate. Discounting is also one of the surest routes to ‘commoditization’ of a product or service.

Recent years have seen the steady growth of use-based or performance pricing, yet many buyers remain suspicious of these alternatives. Research shows they typically lead to greater innovation and continuous improvement, yielding lower costs for the customer.

On one level, Kevin Mitchell’s campaign and the dilemma of corporate price and charge models seem miles apart. Yet in many ways they are closely linked. Price – rather than value – still tends to drive many buying decisions. Few organizations have developed sophisticated analytical methods to assess the relative value of supplier A versus supplier B. I have written previously on this topic – for example in highlighting the challenge of effectively pricing risk. Until they do develop better methods, many supply competitions will remain based on comparison of ‘sticker prices’ for supposedly like-for-like services.

Such competition encourages the type of trickery that Kevin deplores. Yet sadly, the buyers in many cases have only themselves to blame; their fixation on ‘commoditization’ has driven suppliers to create the lowest possible base price and then find all sorts of excuses for add-ons. These may be capacity based, or may be for extra ‘services’ which are often unavoidable and necessary (for example, Ryanair’s proposal to charge for use of the lavatory). Suppliers are also missing opportunities to change their value proposition, since many treat ‘prices’ and ‘terms and conditions’ as separate areas of the business and fail to grasp their connection in delivering economic value.

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