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Business Model Changes Being Led by Pricing

December 8, 2016

Cost or competitors pricing is a usual starting point for outmoded pricing models. The starting point should be value the customer gets. With value the issue, it is likely many business model changes are being led by pricing.

Customers are more knowledgeable in what things cost and where the bargains and lower prices are. This works well for products that are indistinguishable, but a good marketer should create a sizzle that separates them from the pack. For example, in February 2009 during the depths of the recession I was in a shopping mall where almost every store was virtually empty except two – and they had lines of people waiting to get in or get served. These were the Apple Store and Starbucks. The lesson here is that people will buy and also pay premium prices for things they want, value, has reliability, or that confers a feel-good benefit. I believe Apple and Starbucks did that and still do. My question is, do you?

Apple sells a smart phone that, in 2009, was the hot new thing, but still seems to be that today and remains an image enhancer. It also has added features that extended its value beyond the cell phone era. With regard to Starbucks, let’s be realistic, Starbucks sells coffee – nothing glamorous about that, but it is packaged as part of a life style and image garnish. Question: What are you selling and is pricing a factor?

I contend that to be successful you either need to sell very large quantities of a low cost product at low prices or a smaller number at higher prices. In the long run it is easier to sell smaller numbers but you need to create a reason why it should be or needs to be acquired. You need a USP [Unique Selling Proposition] to stand out and create demand at the price points that will yield maximum profits. Effort needs to be put into pricing as it should be for every aspect of what you do. So the issue is how can it be done and sold at a price that optimizes sales and profits.

Some illustrations:

  • Medical services have become commoditized with urgent care centers springing up everywhere. If you want a personal, on call doctor, you might have to sign up for a concierge service from the family doctor you are used to seeing. The models have changed and so has the pricing. The availability of low cost capable but impersonal service for a large percentage of needs is a new model that caused an outgrowth of a higher priced model providing the accessibility and convenience of your “personal” doctor when needed. Pricing is a factor in both new models.
  • Amazon prime and Netflix have changed the way television series’ and movies are viewed. These are additional products at additional prices and do not seem to have displaced any other forms of viewing. I also believe the Blockbuster store model was extinct before Netflix got its foothold into critical mass. In both cases the prices are low enough to make this a must have item while all of the competing services are still being purchased.
  • Amazon’s free shipping model has been emulated elsewhere and is quickly becoming an industry standard. The same with same day shipments from warehouses. Pricing strategies drove the volume and business model changes.
  • Quicker and more reliable shipping has enabled the customers of many manufacturers and distributors to keep smaller inventories. This added dependence, a [slight] willingness to pay increased prices and allowed suppliers and customers to work closer together to project needs. Pricing drives this.
  • Publishing magazines and newspapers has shifted to online versions greatly reducing costs and news and information delivery. Newspaper articles for the “morning” paper are routinely posted the night before as written and edited. Many book and text book manufacturers are moving to instantly downloadable versions, and print on demand hard copies that reduce costs, inventory maintenance, and excessive inventory. All of these reduced costs are being passed on [with some holdbacks providing added profits] to consumers. Lower prices created a shift in reading patterns.
  • Uber is upheaving the taxi industry with lower prices, but uses dynamic pricing at higher demand times. The same with Airbnb for the hotel industry. Airbnb is not as ensconced, and maybe it won’t get to where Uber is, but it is making a dent nevertheless.
  • The venerable “old fashioned” post office is changing its pricing with forever stamps and flat rate packages and they have seen an uptick in revenue and profits. They also offer free pickups and still provide Saturday home deliveries that the major courier services change extra for. While the Saturday deliveries are not guaranteed except for a higher fee, the regular delivery service has improved significantly and with coordinated timing of drop offs at the post office users can take advantage of schedules that can save a day in the delivery process with significant cost savings.
  • There are many other illustrations. In all of the above, pricing played a significant role in driving the model. All of the above also reflect different and quicker ways of delivering services and products to the ultimate consumer. Things are changing. In many respects pricing is the leader. To maintain competitiveness in tomorrow’s market place you need to develop the uniqueness that will command higher prices or higher volume and critical mass. This column started out with pricing models and concluded with changing business models. They are related. Think about your next step!

One Comment leave one →
  1. 6hawthorne permalink
    December 8, 2016 9:56 am

    Hi Ed Business Models also change by government intervention Bob Nagler

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