The Pricing Prophet: Are other industries doing it better?

Were you inundated with New Year’s resolution suggestions this year? Have you already broken the ones you made a month ago? Did you make a pricing resolution? If not, let me suggest one for the remaining 11 months of the year: take a look at how other industries do their pricing.

There are some compelling reasons for taking the pricing model from one industry and applying it to another. Why reinvent the wheel if someone else has already gone before you and done so? Reed Hastings, the founder of Netflix, asked himself why a DVD rental business shouldn’t adopt a gymnasium–type pricing model, where customers could borrow as many DVD as they liked as part of their monthly subscription.

Sometimes it makes sense to adopt the pricing model of an adjacent industry. Airlines have been doing revenue/yield management for 40 years now. It has now moved into adjacent industries such as rail travel, via the likes of Virgin Trains, Amtrak’s Acela services in the US and the European high-speed rail alliance, Railteam. As many rail passengers will also be air passengers, they already “get it” when it comes to revenue/yield management.

Another industry’s pricing model may prove to be more cash-flow friendly. Valve Software, for example, has created “episodic” pricing, where gamers, rather than buying a $50-$60 game, buy a $20 game, followed by a choice of add-ons (an extra mission on a game, for example) for a nominal price.

Several years ago, Virgin Blue took the humble pub happy hour and put it on its website between 1pm and 2pm to dispose of unsold inventory. One could argue that this initiative provided some welcome positive PR, but perhaps it also created a new channel to reach the extremely price-sensitive passenger.

Meanwhile, Johnson & Johnson’s cancer drug Velcade is offered to Britain’s NHS under a pay-for-performance pricing model, not dissimilar to Google’s cost-per-click pricing model. Patients who do not respond to the drug (in part or in total) will be taken off the drug, with J&J honouring a money-back guarantee to the NHS. Those who do respond will be fully funded by the NHS.

There are also examples of companies adopting a pricing model that is under pressure and being rejected by customers in other industries. Take time-based pricing, for example, so prevalent in the professional services industries.

Tsiferblat, a Moscow-based chain of cafes, doesn’t charge for lattes, mochas and cappuccinos the way most cafes do. It charges for the time you spend in the cafe: two rubles per minute for the first hour, and one ruble a minute thereafter, up to a maximum of five hours.

 And speaking of the legal industry, the UK law firm Addleshaw Goddard recently won the “Most Innovative Law Firm In Value Resourcing” award in the FT 2012 Innovative Lawyers Survey. The firm breaks tasks into four levels of complexity, with a fixed rate applied to each. The judges commended its “new and uniquely comprehensive approach to its pricing, which shows impressive learning from other industries and offers options to suit all clients.”

Now wouldn’t that be an achievement to celebrate next New Year’s Eve?