JEAN-MANUEL IZARET
BEST-SELLING AUTHOR // PRICING CONSULTANT // RESEARCHER // SPEAKER // TEACHER
PROGRESSIVE PRICING
The main idea of progressive pricing is that customers should pay in proportion to the value they get
Simple and seemingly non-controversial idea
But if two people buy a product at the same price, it does not necessarily represent the same share of value
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maybe they bought 'Nest', a product that helps save energy heating a house
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maybe one lives in a colder place than the other and has more opportunity to save on energy bill
So progressive pricing could mean higher prices for some customers that get more value (energy savings)
This could also mean a different pricing unit, one that is better correlated with value
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for instance 'Nest' could decide to charge a service as a proportion of the energy savings they can demonstrate
TRADITIONAL PRICING
The traditional model of fixed prices for all customers is inherited from the XIXth century traditional economics of goods and commodities
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Physical goods can be resold unchanged which opens the opportunity for arbitrage
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If someone can buy a product at a lower price than others, they could resell it for a profit
In addition, physical commodities tend to have low margins
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Low margin means high variable costs compared to prices which limits possible price differences
Now that traditional model creates issues
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access is limited to people who can pay the price
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some customers get a big surplus as a proportion of the price they pay when others get none
WHY PROGR. PRICING ?
Traditional does not work in the XXIst century economy with more services and innovative knowledge-based products with low/no marginal cost
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New products are often customized for their user and therefore differentiated vs. competition
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Their variable costs are very low compared to value because they are based on data and software
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This allow a larger access to customers
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Companies who keep a flat pricing model are at a disadvantage
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To serve all customers, flat prices need to be low
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But low margins does not allow enough cash flow to invest an innovate
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Companies with a more progressive pricing model can innovate more and gain share
Internet companies 'Freemium' are perfect example of that logic
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Products/services are free for many customers...
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... but those who get more value need to pay...
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... and prices increase with the value customers get
Pricing model levers
PROGR. PRICING HOW?
Many levers to structure a progressive pricing model
Google prices its adds by auction a mechanism by definition aligned with value
Aircraft engines are priced by the flying hour, a pricing basis aligned with value. If one is not enough, it is always possible to add eg per mile and minute for cabs
User aggregation is used in software that charge per employee as opposed to user. Also used by Netflix.
Selling different product to different customers is a great way to align what they pay with the value they get. Therefore the packaging of the offer is a much a means to align value as one meet customer needs
Selling a product as a service allows to create a unique relationship with a customer and therefore to price to value. Subscriptions are just one such example.
Personalized pricing is a way to align with value but is open to criticism of unfairness. When doing so, companies should always be able to explain why prices vary and demonstrate they have objective rules.
The same applies to dynamic pricing
Changing prices based on channel and local market conditions is often less aligned with customer value.
Price realization is the difference between list prices and net prices. It can be explained by promotions, rebates and discount, all levers that can be used to price progressively.
Yet without as many well defined rules these levers tend to not align mostly with competitive prices rather than customer value, particularly for discretionary discounts
In markets where progressive pricing is most desirable, companies often need to combine several of these levers in order to best align what they charge with the value they create
FOR MORE INFORMATION
Read the BCG Perspective
from the Bruce Henderson Institute
Why Progressive Pricing Is Becoming a Competitive Necessity
January 2019
ETHICS OF PROGRESSIVE PRICING
Progressive Pricing models can be controversial if not explained well
Companies who adopt them should be transparent with their customers on the criteria they used to adapt their prices. In general the best approach is to change the unit of prices because this is completely transparent.
The ethical question has two sides:
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Do customers perceive progressive pricing mechanisms as fair and why?
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Is it fair from an overall market perspective to have prices set in a progressive way?
For the first question, please visit our page on 'Fairness in pricing'
For the second, we are working on a paper on that subject