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The pricing shift

Posted on: Friday 22nd of June 2012

Interesting! According to an article in the latest edition of Harvard Business Review most companies’ approach to pricing is ‘antagonistic’ to customers. Seeing pricing purely in terms of how to maximise revenues from each transaction, companies routinely put their customers’ backs up, undermining relationships and, over time, their own businesses, warns pricing strategy expert Marco Bertini from London Business School.

Airlines offer a classic example of antagonistc pricing: a misleading headline price followed by extra, late-in-the-day charges for baggage, leg room, using a credit card, and so on. If you read economics textbooks this may be a perfect means of yield maximisation. If you read human behaviour/psychology textbooks it’s also a perfect way to signal the wrong intentions – to signal that, without a shadow of doubt, ‘the people I’m dealing with are cynical, manipulative and not to be trusted’. In the ‘enemy’ camp, in other words.

If you focus just on the numbers, in the short term, antagonistic yield maximisation can work a treat, especially where consumers have little choice (i.e. where all the main companies are part of an informal cartel adopting the same approach). But over time, antagonistic pricing sucks companies into financial dependence on trust-destroying sources of revenue, and it always – repeat, always – leads to a backlash.

The interesting thing about Marco Bertini’s article however, is that he takes it one step further. Antagonistic pricing strategies are based on a false assumption, he argues.

“Companies have traditionally treated value in the marketplace as a fixed pie and have reasoned that they must compete with their customers to appropriate as much of it as those customers will relinquish. Whatever value they can extract is value customers miss out on, and vice versa.

“What’s more, firms have presumed that they are the rightful owners of value and therefore entitled to charge what the market will bear. To that end, they have treated pricing as an optimisation problem, pricing mechanically in the pursuit of profit, routinely exploiting any consumer disadvantage, such as a lack of information or understanding, limited attention, limited choice.”

But, he goes on, “value neither originates with nor belongs solely to the form … value is not a fixed pie, it can be enlarged through collaboration with customers.”

If you substitute the money words (profit, price etc) with data and personal data the read-across to what Ctrl-Shift has been saying about the changing personal data landscape is almost one-to-one. Traditionally, companies have seen customer data as ‘theirs’ to maximise the value they can extract from it. We’ve been saying: ‘No.  Personal data is the person’s. Personal data is about shared value. If you collaborate with the person you can work together to grow the pie.’

In particular, we’ve shown how, by treating personal data exclusively as a corporate asset, companies have closed the door on enormous opportunities to create (and share) additional value. They incur this loss because customers are not willing to share additional VPI (Volunteered Personal Information) with them – information that’s now key to competitive edge.

Also, our work on decision-support services  (that help individuals gain better understanding and use limited attention better to make better choices) shows why they now represent a booming market. In an era of increasing consumer empowerment, antagonistic pricing strategies really do look stupider by the day.

Marco finishes his article thus:

“Considering the benefits to be gained by increasing the pool of value in the marketplace and sharing it with customers, any firm that is not evaluating its pricing through a shared-value lens should ask whether it can afford not to.”

Hear, hear. The same goes with personal data and information more generally.

Now the challenge is a) to identify what the range of possible shared value strategies are b) which ones work best in which circumstances and c) to put detailed, research-based flesh on the insight.

Alan Mitchell