Elsevier

Business Horizons

Volume 57, Issue 3, May–June 2014, Pages 413-423
Business Horizons

Is innovation in pricing your next source of competitive advantage?

https://doi.org/10.1016/j.bushor.2014.01.002Get rights and content

Abstract

Few companies treat innovation in pricing as seriously as product innovation or business model innovation. However, after interviews with 50 executives and the analysis of pricing practices of 70 companies worldwide, our research suggests that innovation in pricing may be a company's most powerful—and, in many cases, least explored—source of competitive advantage. Innovation in pricing brings new-to-the-industry approaches to pricing strategies, to pricing tactics, and to the organization of pricing with the objective of increasing customer satisfaction and company profits; too many companies today see pricing as a win/lose proposition between themselves and their customers. Innovation in pricing breaks this deadlock and shows how to increase profits and customer satisfaction conjointly. As a result of our research, we present a canvas laying out more than 20 possible avenues for innovation in pricing, offering to any organization—regardless of size, industry, or nationality—a few key ideas on how to increase both profits and customer satisfaction.

Introduction

Is product innovation a top priority for your company? If so, you are certainly not alone. Has your firm tinkered with business-model innovation? Great. Your competitors have done this already and customers may even expect it. But what about another advancement that is less recognized, yet still a crucial factor in product innovation: Could innovation in pricing be your next source of competitive advantage? Based on a series of interviews with CEOs and top management personnel—as well as analysis regarding pricing practices at leading companies in the U.S., Europe, and Asia (see Appendix)—we estimate that less than 5% of companies have applied innovation to their pricing strategy, tactics, or organization. Our research shows that companies that implement innovation to their pricing activities significantly outperform their competitors. Thus, chances are good that innovation in pricing is your next and most powerful source of competitive advantage.

Based on our research, we develop a framework to kick-start innovation in pricing. This roadmap provides a unique overview for understanding current global best practices of innovation in pricing and for guiding organizations to successfully implement it. The roadmap, which lays out more than 20 possible avenues for innovation in pricing, offers organizations—regardless of size, industry, or nationality—a few key ideas on innovation in pricing. Our research suggests that this is enough: many highly successful companies (e.g., Zipcar, Salesforce.com) have built their competitive advantage essentially around one, and only one, pricing innovation.

In this article, we first define innovation in pricing and discuss why it is too often neglected. Then we develop our roadmap for action. Following that, we delve into the essence of the framework by showing how the use of innovation in pricing strategy, tactics, and organization can lead to superior profits and increased customer satisfaction.

Section snippets

What is innovation in pricing?

Most companies unfortunately view pricing as antagonistic: a win-lose relationship with customers in that what one party gains the other loses, or so goes the weakly held assumption. Our research shows that innovation in pricing helps to break this vicious cycle. Such innovation brings new-to-the-industry approaches to pricing strategies, to pricing tactics, and to the organization of pricing with the objective of increasing customer satisfaction and company profits. As we illustrate via

Why innovation in pricing is not a priority

Our research suggests that product or service innovation is a top-management priority for close to 100% of companies. But only 5% of companies introduce new-to-the-industry pricing innovations; only one company from our interviews has implemented an innovative pricing strategy. Like GE, this business-to-business (B2B) equipment company has shifted from selling products to charging customers a given fee that reflects the enhanced productivity realized and includes service, maintenance, and

Roadmap for innovation in pricing

Our framework (Figure 1) starts with a simple premise: about 95% of companies do not engage systematically in pricing innovation. For these companies, pricing strategy is largely based on competition- or cost-based pricing, and pricing tactics are limited to discounting. Furthermore, these organizations do not have a dedicated function; for example, a chief pricing officer responsible for improving price setting or price-getting capabilities. The essence of the framework is three key areas that

Innovation in pricing increases value

The examples of Ryanair, Zipcar, and General Electric—as well as our own research—suggest that innovation in pricing is indeed possible, even in the absence of product innovation. Figure 2 illustrates this point.

Companies that put strong emphasis on product innovation without similar emphasis on pricing innovation are missing important opportunities for value capture. For example, instead of pricing high-speed train tickets in Europe in line with airline tickets, many formerly state-owned

References (35)

  • J. Forbis et al.

    Value-based strategies for industrial products

    Business Horizons

    (1981)
  • C.M. Hewitt et al.

    Wanted innovations in pricing of services

    Business Horizons

    (1961)
  • S. Liozu et al.

    CEO championing of pricing, pricing capabilities, and firm performance in industrial firms

    Industrial Marketing Management

    (2013)
  • T. Nagle

    Pricing as creative marketing

    Business Horizons

    (1983)
  • E.T. Anderson et al.

    Effects of $9 price endings on retail sales: Evidence from field experiments

    Quantitative Marketing and Economics

    (2003)
  • R. Best

    Market-based management: Strategies for growing customer value and profitability

    (2012)
  • E. Biyalogorsky et al.

    Contingent pricing to reduce price risks

    Marketing Science

    (2004)
  • H. Chen et al.

    When more is less: The impact of base value neglect on consumer preferences for bonus packs over price discounts

    Journal of Marketing

    (2012)
  • S. Dutta et al.

    Pricing as a strategic capability

    MIT Sloan Management Review

    (2002)
  • Ehm, H. (2010). Overcoming challenges and hurdles while introducing revenue management in the semiconductor industry....
  • S. Fay

    Competitive reasons for the name-your-own-price channel

    Marketing Letters

    (2009)
  • H. Ford

    My life and work

    (1922)
  • M. Goić et al.

    Cross-market discounts

    Marketing Science

    (2011)
  • A. Hinterhuber et al.

    Is it time to rethink your pricing strategy?

    MIT Sloan Management Review

    (2012)
  • A. Hinterhuber et al.

    Innovation in pricing: Contemporary theories and best practices

    (2013)
  • Jobs, S. (2010, January 27). Steve Jobs announces iPad price. Retrieved from...
  • A. Kadet

    Price profiling

    Smart Money

    (2008)
  • Cited by (0)

    View full text