The way most companies make money is not just broken; it’s destructive. From insurance and financial services to telecommunications and air travel, companies use pricing to extract what they can from every transaction. Look, for example, at how airlines siphon off value. Once a customer buys a ticket, the slow bleed begins. Want extra legroom? Pay us. Want to check a bag? Pay us. Want a pillow or something to eat? Pay us. This antagonistic approach may have worked in the past. But today’s consumers are not passive price takers. They root out and disseminate information about a firm’s prices, exploiting social media platforms to publicize policies that they believe are unfair. And they don’t hesitate to abandon companies that cross the line.
Pricing to Create Shared Value
Reprint: R1206F
Many companies are in competition with their customers to extract as much value as possible from every transaction. Pricing is their weapon of choice, and consumers fight back by rooting out and disseminating pricing policies that seem unfair. The problem is that companies generally think of value as a pie that is rightfully theirs. But value is not fixed, and it neither originates with nor belongs solely to the firm. Without a willing customer, there is no value.
Instead of using pricing in a way that turns customers into adversaries, companies can use it to enlarge the pie. That means viewing customers as partners in value creation—a collaboration that increases customers’ engagement and taps their insights about the value they seek and how firms could deliver it. The result can be new revenue, increased customer satisfaction and loyalty, positive word of mouth, and cost savings.
The multiyear process to price the 8 million tickets to the upcoming London 2012 Olympic Games suggests five principles for using pricing to create shared value: Focus on relationships, not on transactions, by using pricing to communicate that you value customers as people; set prices proactively to discourage detrimental behavior and to encourage behavior that is beneficial to both your firm and your customers; allow prices to change in response to shifting customer needs; promote transparency by providing the rationale for your pricing; and make sure that prices and the processes by which they are set meet consumers’ expectations about what is fair.