Digital Pricing: Determine the right pricing for new business models

January 22, 2018

Digital Pricing

Digitalization is leading to new business models and therefore new revenue and value-enhancing opportunities. The successful companies of the future are the ones who are able to define the right pricing models to effectively extract willingness-to-pay. In the 2017 Simon-Kucher Global Pricing and Sales Study (2017 GPSS) it was found that only 18% of all companies are “digital heroes”. These companies are able to avoid price wars and on average realize a 37% higher EBITDA than other companies.

But with that being said, the study also found that in general digital companies are twice as likely to start a price war, with a detrimental impact on profit. This is because one of the strongest effects of digitization is the increasing price transparency. It leads to an increase in price elasticity, which makes the market more attractive for price-aggressive sellers to reduce prices. At the same time it is also making it harder for premium sellers to successfully maintain and increase prices.

In recent years there have been many examples of companies who embraced digitalization by redefining the way in which they do business to capitalize on the new developments. Each of the examples with a distinctively simple recipe; revise the pricing model to be more beneficial to the customer whilst having an uplift on the provider’s bottom-line.

Most people have heard about the big disruptors of the last few years, namely: AirBnB, UBER, Alibaba, Netflix, Spotify, and the list goes on… But many of these companies were designed from the ground up as being a digital proposition with digital pricing. There have also been companies who have changed the game in their markets, or who have had to compete with the famous disruptors mentioned earlier. Below is a selection of fundamentally different examples which you may not have heard of before:

  • Reacting to a disruptor: In the UK a taxi company was forced to react to the introduction of UBER when their number for rides decreased by ~25%. To counter this, they introduced a multi-tiered digital loyalty program to generate new customers (3k-4k new customers per week) and increase customer loyalty (20% ride frequency increase) through tactical digital promotions.
  • Thinking out-of-the-box: In 2013 a tax on theatrical shows decreased attendance by 30% in Spain. An independent theater changed their price model to “pay-per-smile” driven by digital facial recognition software. Through this change they managed to increase audiences by 35% and the average ticket price increased by ~25%.
  • Monetizing innovation: A tire manufacturer had a breakthrough which increased their tire durability by ~50%. To monetize the innovation they changed to a digital pricing model, whereby the customer does not buy a tire anymore, but pay to keep their vehicles moving (i.e. vehicles are remotely tracked and the tires are maintained by the manufacturer).

In many industries this is the perfect time to start digitalizing channels, product offers and pricing. Advice based on Simon-Kucher expertise:

  1. Be on the lookout for “new” digital opportunities and competitors
  2. Focus on digital pricing and offer design as this is where the monetary potential lies
  3. Digital transformations are not quick-wins, they take time, resources and change management

Simon-Kucher & Partners has identified seven pricing trends for 2018:

Trend 1: Dynamic Pricing: Four pitfalls to avoid

Trend 2: Behavioral Pricing: Instrument for revenue growth in 2018

Trend 3: Digital Pricing: Determine the right pricing for new business models

Trend 4: Customized Pricing: Fully capture customer value

Trend 5: Defendable Pricing: Align price structures

Trend 6: Servitization: Key strategy to drive profitable growth

Trend 7: Sympathetic Pricing: Create brand supporters