What’s the price of an airline ticket these days?
Is it the price you pay when you book the flight? What about the extra you might pay at check-in to ensure early boarding or a more comfortable seat? And how about those frequent-flyer miles that give you access to the members’ lounge and other perks before you board? Where do they fit in?
In fact, the total realized price, and profit, for the airline takes into account the full set of related transactions that occur before, during and after the so-called sale. This includes what you spent before you actually purchased the ticket, such as preferred customer status; at the point of sale, when you let the travel site bill your credit card and perhaps bought additional trip insurance; and the after-sale extras like the upgrades you bought on the day of the flight because you were exhausted and willing to spend a bit extra for a quiet place to unwind or a little more legroom.
Airlines and other companies are increasingly using technology to take what we call a pricing window approach. They recognize that within a window of opportunity, a total realized price is the result of the sum of the prices across a series of transactions. Those transactions may include initial outlays that don’t (yet) involve consumption of the core product or service; a range of expenditures at the traditional point of sale; and any number of after-sale purchases that increase the value of earlier purchases.
Many companies have taken isolated steps to set prices in ways that take greater advantage of the pricing window. But few have developed a comprehensive strategy, one that will help them realize the full potential for pricing that this fundamental rethinking of the transaction process holds.
There’s no question that it can be daunting to think about pricing strategy over a horizon that is no longer anchored by fixed points in time. But by understanding the nature of the opportunities that exist in each of the three stages of customer engagement in the marketing funnel, you can turn the greater prices realized throughout the pricing window into real profits.
Stage 1: Opportunities before the point of sale
Opportunities to create a price across the window begin as soon as a potential customer becomes aware of a product or service. The following are just a few options for opening the window before actually providing that product or service.
Start with a club fee, followed by discounted prices
One strategy, especially for companies with high fixed costs, is to recoup some of those costs before the customer actually purchases a single product or uses a service for the first time.
Warehouse club retailers have successfully used this approach for many years. Global operators such as Sam’s Club and Costco Wholesale Corp. charge customers a membership fee to gain access to their stores and the discounted merchandise inside.
The fees are relatively modest—$55 annually at Costco in the United States—but can equal the average per-customer profit that other stores earn each year. The store thus gets its profits up front, while customers looking to capture their own membership rewards may visit the stores as often as they want. That has been a winning formula for Costco, with some 66 million members globally, and Sam’s Club, with more than 47 million.
Another industry with high fixed costs that is benefitting at this stage is transportation. German railroad Deutsche Bahn charges customers a fee to obtain one of three levels of its loyalty card: BahnCard 25 and BahnCard 50 offer different discounts on rail fares, and customers choose based on anticipated usage. (BahnCard 100 offers unlimited rail usage for a fixed price.) An estimated 4.3 million Germans had a BahnCard as of 2010.
Companies may also seek to emulate businesses in the sports and recreation industry. Golf clubs and gyms, for example, have sought the model that best combines one-time initiation fees, recurring annual or monthly fees, and additional charges for special classes or personal attention, from golf lessons to sessions with a personal trainer.
Price for privileged access
In some niche markets, especially very competitive ones—high-end cars, for example, or pro sports season tickets—companies have long understood that the process of realizing a total price begins well before the product is delivered to the customer.
|For example, many US pro sports franchises have learned that many die-hard fans will spend thousands of dollars to buy a “personal seat license”—a transaction that entitles them no entry to games but instead the right to buy a season ticket. Some rock groups offer a similar if cheaper route to exclusivity. U2, for example, charges $50 for access to a variety of members-only offers and content on its website, including access to presale concert tickets.
Wealthy buyers will often part with cash to bypass waiting lists in order to purchase high-end sports cars. And sometimes money paid upfront can lead to discounts later. Italian airplane manufacturer Tecnam announced it would offer deep discounts on up to 500 of its planes in the United States to those who made a deposit in January 2012. The discounts, which were up to 20 percent, represent a significant savings on a $148,000 Eaglet G4 Sea Sky amphibian plane.
These tactics can reach average consumers as well. Dream Builder Advantage, a program offered by Exchange New Car Sales, is yet another example of a creative sales approach. The program, designed for US military personnel who are stationed overseas, allows participants to make monthly deposits into an account that can be used to purchase a new vehicle. As the money accumulates, participants accrue Discount Dollars equal to 7.5 percent of what they’ve saved (up to $500), which they can apply to the cost of the vehicle (see chart for more detail).
Stage 2: Opportunities near and at the point of sale
The second opportunity to develop a total realized price occurs as a customer approaches the checkout counter (whether it is virtual or real). Although there’s a fine line between enticing customers into spending more at the point of sale and annoying them (see Sidebar 1), some companies have used interactions at this stage of engagement to meet customer needs more effectively.
Use technology to tailor prices to customers
The pricing window approach can be enabled by technology, especially in the way it allows companies to understand how consumers spend money. With this knowledge, companies can present customers with tailor-made prices.
Consider Gap’s mobile program, created in partnership with a major credit card company. Gap delivers personalized (and localized) discounts when customers make purchases with a credit card linked to the programs. The card company identifies trends based on participants’ transaction history, and the retailer uses those trends to develop targeted offers that are then texted to the participant.
Peapod, the US online grocery shopping and delivery company owned by Dutch food retailer Royal Ahold, employs a similar tactic, using its customers’ purchase history to generate personalized discount incentives. The company estimates that it served some 350,000 customers in 2010, in metropolitan areas in 11 states and in Washington, D.C. And Saffron Rouge, an online organic cosmetics retailer, tailors its specials to different customer segments—for example, those who have previously purchased certain items or who have entered the site via a search engine. Some companies have experimented with offering different prices to online customers who have previously visited popular price-comparison sites.
Sell more and better at the point of sale
Bundling and up-selling are proven approaches that let companies provide more value, and profits, at the point of sale. In combination, they are especially potent.
Telecom companies, with their all-services-in-one packages, have been leaders with these tactics, and they continue to find new ways to use them. For example, French telecom operator SFR, which has more than 2.4 million television customers, entices higher spending with its multiscreen offers. In order to get this option, customers must purchase SFR’s premium Neufbox Evolution package. The package provides customers with a set-top box that gives them access to the usual range of TV channels and Internet connectivity, as well as cloud-based online gaming-on-demand and the multiscreen option. For mobile viewing, SFR also offers an app for the iPhone.
As more and more people seek to view television programs anywhere and at any time, it will make sense to bundle this capability with premium content offers—and to persuade customers to choose such options at the point of sale.
Music service Spotify shows how bundling and up-selling can work for customers visiting a website. The service, which is available in a dozen European countries and the United States, is free to users on a limited basis: 10 hours of streamed music per month. But the site also offers other options and, through a side-by-side checklist, makes the benefits of moving up very clear. At the Premium level—$9.99 per month in the United States—customers get unlimited streaming, an absence of advertising, exclusive content and mobile access, among other things. Though in a challenging market where people still often prefer free, Spotify in March 2011 became the first online music service to reach 1 million paying subscribers.
Price according to context
LexisNexis, the online source for legal news and business information, provides another technology-fueled example of an opportunity near the point of sale. Like Gap’s mobile program, LexisNexis uses analytics to identify and target customers with specific offers. For example, it packages legal libraries by tribunal (level or type of court) and/or geographic region. But during the ordering process, its search mechanism also identifies other relevant cases. That feature has led many LexisNexis customers to buy additional libraries or cases at the last minute—undiscounted and for several times the normal subscription price. This is an example of contextual pricing—using the exact situation at a particular moment to determine offerings and pricing.
Another point of sale innovation that relies on purchase context can be seen in how cell phone providers moved to “rollover minutes. Customers now felt that they weren’t being penalized in low-usage months.
Stage 3: Opportunities after the point of sale
Even after a sale is complete, opportunities to adjust price in the course of the ongoing customer relationship abound.
Companies can optimize pricing at this stage of engagement by stepping into their customers’ shoes and reacting to their needs. What might customers find useful? What other factors might be influencing their perception of what they’ve already paid for, and of what else they might be willing to pay for? Consider the following options.
Catch customers when their needs may have changed
Suppose a sale occurs before the customer uses the purchase, as is the case with hotel bookings. When the customer arrives at the hotel, the sale has already been made, but the hotel can then offer an upgrade or an add-on, such as a meal bundle, or tickets and transportation to a local show or tour. Hyatt Hotels Corp. offers standby deals via email to its Gold Passport members; customers can select offers for rooms with a view, late checkout times or upgrades to a suite.
Similarly, airlines sell tickets in advance, but they regularly offer upgrades after they’ve closed the books on that initial sale. AirTran Airways, for example, offers customers the option of upgrading to business class from any fare, on a first-come-first-served basis at the airport, for $49 to $129 per flight segment (one takeoff, one landing). And Virgin America offers upgrades to first class within six hours of flight time for $39 to $299, depending on the flight’s length.
Price according to what customers find most convenient
Another way to negotiate price after the sale is to offer customers an option for the way they use what they’ve purchased.
Most rental car companies offer customers the choice of refilling the gas tank before returning the vehicle (for less cost) or paying a premium for the convenience of simply returning the car without worrying about how much gas is in the tank. Many American drivers may balk, or even express outrage, at paying more than $9 per gallon when cars are not returned with a full tank. But the fact is that Hertz Corp., to take one example, added nearly $44 million to its top line in 2010 through these premium fees.
To avoid customer frustration, it’s important that rental desk employees stress the value of this service. For example, a customer might show up only a couple of gallons short a full tank, so the “extra” cost of about $20 may be well worth the convenience. For other companies that might be interested in such after-sale tactics, communicating value to the customer is essential.
Pay your customers back
Rebates and retroactive discounts—for customers who made a purchase just before a steep discount went into effect or a new product launched—are also effective pricing tools. And so are credits toward future purchases—for example, if customers buy a product just before it’s deeply discounted (as Apple did for early iPhone buyers, after the company lowered the iPhone price by $200).
Companies can also consider the merits of a strategically managed buyback or upgrade program. Sprint, Verizon and AT&T all offer buyback incentives, discounting new phones when customers trade in their old ones. And Adobe Systems offers complimentary upgrades to customers who have purchased software just before or after the company announces a new version, so long as the new version hasn’t yet shipped.
When pricing strategists begin to use the window approach, untapped opportunities to engage with customers (and make a profit at each new point of engagement) quickly begin to emerge. And customers stand to gain as well from the added consideration the company gives to their needs.
Ultimately, the pricing window approach should nest in the bigger picture of effective customer relationship management. In the final analysis, effective pricing is about having an analytically sophisticated, data-driven, ongoing relationship with customers, so the company is dynamically adjusting the exchange of value between buyer and seller throughout the course of that relationship—and both parties benefit.
Today’s opportunity is to optimize that relationship one buying window at a time.
For further reading
Contextual Pricing: The Death of List Price and the New Market Reality, by Robert Docters, John G. Hanson, Cecilia Nguyen and Michael Barzelay (McGraw-Hill 2011)
Sidebar 1 | Pricing imperative: Keep customer perception in mind
When brainstorming about opportunities to negotiate price, it almost goes without saying that it is important to keep the customer experience in mind. Almost, but not quite.
It is remarkably easy to get on your customers’ wrong side. Make the transaction too complex or too confusing, and customers will balk. And if they believe that a company isn’t playing fair, the backlash can be painful. Consumer groups had sharp criticism for one online retailer, for example, when the company experimented with charging prices for certain products that varied by as much as 40 percent, based on customers’ buying histories.
Sometimes the main issue is communication. One utility felt the public relations sting when customers protested the installation of smart meters (which report energy use to the company in real time). In large part, customers reacted negatively because they believed a significant increase in their bills was due to the newly installed meters; in fact, the increase was the result of a previously enacted pricing change that many hadn’t noticed. So great was the negative publicity surrounding the smart meters that consumers in other states jumped on the bandwagon. Rumors proliferated, including one suggesting that smart meters posed health dangers and several that questioned the power company’s ethics.
While both companies eventually overcame their challenges, the lesson is clear: Failing to anticipate consumer reaction to new pricing approaches can lead to unnecessary costs and angst. Better to test such changes early and often. (Back to story.)
Sidebar 2 | How to jump-start a productive pricing discussion
Want to start a productive conversation with your pricing team? Ask them to consider the following.
- How many points of exchange or transaction are included in your definition of a sale?
- Does this include transactions or sales both before and after the “real” sale?
- Where do the transactions with the greatest profit occur in your product’s sales window? Where might they occur?
- How can including multiple sales transactions across a sales window allow you to better tailor your pricing for customers who are more (or less) price sensitive than you currently assume them to be?
- What new channels do you need to participate in—and integrate into current operations—to effectively price and sell across the entire selling window?
- What new partnering opportunities can you open by expanding the view of a sale to include the entire selling window?
About the authors
Paul F. Nunes is the executive director of Research at the Accenture Institute for High Performance. He is based in Boston.
John G. Hanson is a Boston-based senior executive in Accenture’s Pricing & Profit Optimization group.
The authors would like to thank Ivy Lee for her contribution to this article.