Is innovation in pricing your next source of competitive advantage?
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
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