Innovation and Pricing? It’s About Business Models
Pragmatic Institute’s box of the month is Innovation. At first glance, what does pricing have to do with innovation? After all innovation is about solving customer problems. Usually with new technologies and capabilities. It’s about new products. It’s about invention.
Innovation is about solving customer problems. We sometimes have the chance to innovate using business models. When you hear the phrase “business model” you should think “pricing”.
Netflix changed the business model for renting DVD’s from daily rentals to a monthly fee. They solved the problem that people didn’t want to pay late fees.
In October, 2007, Radiohead (a music group) used “Pay As You Wish” pricing for their album In Rainbows. This solved the problem of prices being too high to attract new listeners, but still collected revenue from their fans.
In 2013, Kid Rock announced he would lower ticket prices and make up that revenue with a share of the concessions. Again, solving the problem of price being too high to attract new fans.
There are many more possible new business models. Freemium has become huge in many software businesses. (think LinkedIn). Uber changed the business model for taxis. Airbnb changed the business models for nightly rooms. Craigslist changed (obliterated) the business model for classified ads. The list could go on for a very long time.
The big question though, how can you change your business model? Should you?
Here’s an idea. Determine what your customers purchase from you. Not the physical product, but the benefit. Can you deliver that benefit another way?
Think back to your college marketing class where you probably heard the lesson from Harvard Business School Professor Ted Levitt: “People don’t want to buy a quarter inch drill. They want to buy a quarter inch hole.” If you are currently selling drills, realize your customers are actually buying holes. Is there the possibility of a new business model? Absolutely.
Back to Netflix. Customer buy the experience to watch a movie in their own family room. They weren’t “renting DVD’s”. Netflix found a new business model to serve that need.
Your homework for today, think hard about what your customers actually purchase from you. What is the benefit they are trying to achieve? Then, determine what gets in their way of more efficiently reaching that benefit. That is where you may find an opportunity for innovation in pricing.
Oh, instead of thinking about what, why and how your customers purchase, you might actually try asking them.
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