The LAB: Innovating the Pricing Process (November 2011)

Setting prices on new products and services is one of the most challenging roles in marketing. Pricing mistakes are costly, yet it’s one of the most tempting tools to use when trying to generate revenues.  Fortunately, methods like Value Based Pricing and frameworks like The Big Picture make the job easier.

What if you wanted to explore more innovative ways to set prices?  Applying the SIT innovation patterns would create new insights and options. The SIT patterns help break fixedness – the tendency to limit the way we see things to what we know.  These patterns are innate to all of us.  We just need to “extract” them from within and deploy them in a systematic way.

For this month’s LAB, we will apply SIT to pricing.  While there are many methods and schools of thought around pricing, the SIT templates should apply to any of them. I would do the following.

1.  SUBTRACTION:  This tool forces you to remove a component from the system, preferably an essential one.  For the pricing scenario, we would remove the components of value one at a time.  You get to see how it changes price and the customer’s perceptions.  For example, would the customer be able to see the difference?  If not, they may not be willing to pay for the value in the first place.

2.  MULTIPLICATION:  To use this pattern, we make a copy of a component but change it in some counter-intuitive way.  For our example, let’s copy the price, but change it – we have multiple tiers of pricing that let customers understand each value component and what it is worth on the margin.  Companies like Sears already do this well especially in their appliance line of products.  A more provocative idea is to copy the price setting process, but do the copy in reverse.  This might help a cross-functional team understand how to align better when setting and communicating price.

3.  TASK UNIFICATION:  This pattern forces you to take a component and assign it a new job plus its existing job.  In this scenario, we imagine giving the component, “price,” an additional job.  For example, what if the price had the additional job of dissuading competitors from matching?  That certainly is odd, and it is exactly the type of configuration that leads to new thinking.  How would it work?  Perhaps the price comes with a caveat to the effect that “our quoted price will always be $1 lower than our competitors!”  Competitors are less likely to trigger a price war once they test the claim and realize it is true.

4.  DIVISION:  The division pattern takes a process and rearranges the steps to create new configurations.  We have three ways to use Division:  Functional, Physical, and Preserving.  An example of Preserving Division is cutting the price into smaller units.  Essentially, this becomes an installment pricing plan which is already in use.  Let’s do something more dramatic.  Let’s cut the “pricing communication” and place it somewhere else in the process (an example of “Functional Division”).  Imagine seeing the price of something only after you put it in your online Shopping Cart.  Retailers like Costco do this.  This changes the perceived level of commitment (by placing it in the cart) and increases purchase intent. For an even more dramatic version, we would let customers see the price only after using the product for a period of time.

5.  ATTRIBUTE DEPENDENCY:  This pattern uses attributes of the product or service instead of the components.  We take two attributes and create a connection – as one changes, the other changes, or we break the dependency if one exists.  In our scenario, there is (or should be) a direct correlation between Price and Value.  Price increases as the value increases.  Now break the dependency.  Better yet, flip the dependency: price increases as the value decreases.  Why would this occur?  Perhaps this approach would work in a category with high obsolesce: airline seats, tomatoes, hair cuts.  The price of the haircut increases the longer you wait.  That would be a tough sell in competitive markets, but it may work with exclusive, in-demand stylists.