Increasing Revenues With Differentiated Pricing Models
Increasing Revenues With Differentiated Pricing Models
Today’s customers are very price-sensitive because they want to be sure they get the most bang for their buck when making purchasing decisions. The key to this is to have innovative pricing models.
Bundles, also called bundle offers, package deals, or package solutions, have found their way into numerous industries and in some cases have become indispensable. Bundling is a common practice in the telecommunications industry, with banks, and fast food chains. Instead of pricing and selling products and services individually they are combined in the form of package deals and offered as a whole at a single price. Taking the telecommunications industry as an example, customers with a package deal no longer pay individually for each text message, call, or kilobyte of data but rather a fixed monthly amount for a defined volume. In addition to a cell phone plan, telecommunications providers may also offer a package deal that includes landline, internet, and sometimes TV. This enables providers to act as a one-stop shop on the market, maximizing value creation.
The advantages of bundles for consumers
Ideally, the advantages of bundles for consumers lie in the price/performance ratio, in that customers are led to believe they will get more bang for their buck because the bundle is (perceived to be) cheaper than the sum of the individual services used. In terms of price, it is an advantage for customers when multiple services are purchased. Bundling also means that customers know ahead of time what the price will be instead of having to wait for the individual services to be added up at the end of the billing period. From a functional point of view, it can make sense for customers to opt for a bundled solution if the products and/or services included in the bundle can be combined with each other. From an administrative point of view, it also makes more sense for customers to obtain as many services as possible from a small number of providers, since everything from quote to invoice will also be bundled. It also puts customers in a better position when negotiating with their providers.
The advantages of bundles for providers
In addition to the already mentioned opportunities to maximize price skimming, bundles also allow providers to better exploit economies of scale as an increase in output quantity typically decreases average manufacturing costs. Suppliers with low marginal costs or with high one-off setup costs (e.g. for a telecommunications network) or acquisition costs (e.g. for a sufficient customer base) benefit from an increase in output since their fixed cost share is already very high when compared with their variable costs. Another benefit for providers is the cross-selling effect. Suppliers bundle products that they would otherwise not be able to sell individually to customers. Another idea would be to create cross-sector bundles, unlocking previously untapped opportunities for price skimming, for example by having banks, insurance companies and automobile manufacturers combine their offerings into a package deal that leaves consumers with nothing to be desired.
Bundles must be attractively designed so that customers perceive an advantage in the package deal over the individual products or services because customers will only opt for a bundle if it is tailored to their needs. In this context, providers should continuously review the attractiveness and profitability of their bundles and be able to adjust the content of the packages as dynamically as possible when necessary.
The WAVESTONE Pricing Platform (QPP) enables providers to set up numerous bundles that add real value for customers and providers alike by creatively bundling multiple services.
After analyzing their price factors and determining the appropriate pricing strategy, companies are faced with the challenge of how to price their products and services. Below we will take a look at the differences between flat rate pricing, tiered pricing, and graduated pricing.
Flat fee pricing
The flat fee, or fixed fee, is probably the most common pricing type. The way it works is simple: customers are charged a constant price for each consumption unit. There is no reduction or increase in the unit price in the event of a change in consumption. The diagram illustrates the linear progression of flat rate pricing.
Flat rates are a specific type of flat fee where the price charged remains constant regardless of actual usage. Flat rates are often associated with pricing structures in the telecommunications industry. Typically, flat rate customers will consume greater quantities of the product or service than they would if each additional consumption would be charged. The flat rate is therefore suitable, for example, for providers with low marginal costs for the provision of additional products or services consumed.
Tiered pricing
Tiered pricing is, for example, used by some countries to calculate income taxes. Tiered pricing is characterized by the fact that a constant rate or percentage is applied within each tier (interval). Special attention must be paid to the transitions to the next tier. If unit prices are reduced too much from one tier to the next (as in our example below), the total price can become significantly cheaper when a tier is exceeded by only the minimum quantity. This can be remedied, for example, by minimums that are built in per tier to smooth out the progression somewhat.
Graduated pricing
Graduated pricing is a common practice in the manufacturing industry where economies of scale can be realized. One benefit is that it incentivizes customers to order larger quantities by offering them quantity discounts on higher order volumes. In short, the higher the order volume, the lower the cost per unit. Instead of quantity, however, quality, timing, etc. can also be used as criteria. The diagram below shows a graduated price model that is applied locally.
The WAVESTONE Pricing Platform supports flat fees as well as tiered and graduated pricing and the combination of all options for the pricing of products and services. For tiered and graduated pricing, global and local minimum amounts and maximum accounts can also be included to achieve the desired progression.
The price of a product or service is undoubtedly one of the most important factors affecting the success or failure of a product on the market, thereby determining whether a product can be marketed profitably. Price is essentially a vendor’s vehicle to achieve the following:
The use of specific pricing models is an important set of tools for achieving these objectives. By using differentiated price models, different groups of needs can be addressed in a more targeted manner.
Which pricing models are available?
When it comes to creating new pricing models, there are basically no limits to creativity. The only limiting factors are:
- Availability of a system that enables you to handle differentiated models
- Availability of relevant data to execute different pricing models
The scope for pricing models is wide open. Today’s most common pricing models include:
| Pricing model | Characteristics |
|---|---|
| Flat rate pricing | A fixed price for one consumption unit |
| Tiered pricing | A differentiated price for an additional quantity of consumption units |
| Bundle pricing | A price for a combination of products and services |
| Auction | The buyer determines the price in a bidding process |
| Behavioral pricing | The buyer influences the price through his behavior |
| Dynamic pricing | The price is made dependent on external, benefit-generating factors |
When are individual pricing models particularly suitable?
| Pricing model | Suitability /effect | Additional effect besides the price function | Pricing model as an enabler of emotions |
|---|---|---|---|
| Flat rate pricing | Individual products without additional services, transaction-oriented services with a constant cost structure independent of use, list price character. | None | Non-existent |
| Tiered pricing | Price model should encourage the customer to consume more of the same. The customer perceives a better price-performance ratio when consuming larger quantities. Customers are likely to consume more than they actually need or stock up. | Increase in sales volume via a product | Low |
| Bundle pricing | Bundle pricing is intended to encourage customers to purchase additional products. Depending on the design of the bundle pricing, the customer can be given the feeling of being able to achieve a better price-performance ratio by making high use of the products/services.
Bundle pricing has the advantage that the specific needs of customer groups can be addressed very well with different price-performance structures of bundles and thus several different groups of needs can be specifically addressed. Bundle pricing is more challenging to calculate because the return is based on an expected level of usage and “overuse” can lead to losses. |
Cross-selling Increase sales volume across different products |
Moderate |
| Auction | This pricing model differs from others in that the price can be determined by the customer. Auctions are suitable for two typical cases:
|
None | High |
| Behavioral pricing | While bundle pricing can address the needs of customer groups, behavioral pricing is based on the needs of each individual customer. This pricing model is based on different behavioral patterns and enables customers to obtain pricing that is optimized for their behavior. Behavioral pricing is suitable for the use of frequently recurring services. The focus here is on customer loyalty. | Customer loyalty | High |
| Dynamic pricing | In dynamic pricing, the price is made dependent on external, benefit-generating factors. The higher the customer benefit, the more expensive the price and vice versa. A ski ticket price, for example, can be made dependent on the days of the week, the weather, or the number of tickets sold in advance, i.e., capacity. In this way, the price can consider the individual customer’s perception of benefit. Both revenue and capacity utilization can be optimized through clever dynamic pricing. | Optimization of Profitability and capacity utilization | High |
Conclusion
The use of differentiated pricing models has often been criminally neglected. One reason for this is the lack of suitable systems and data. The selection of the right pricing models has a targeted effect on key success factors of the company such as revenue, customer perception of benefits, customer loyalty, and capacity utilization. In addition, the use of innovative pricing models that are tailored to customer needs can emotionally charge products. This has a positive effect on the identification with the products and services and thus on customer loyalty.
WAVESTONE Pricing Platform
QPP sets no limits to your creativity regarding pricing models. As a platform, it offers the possibility to connect all your products as a pricing service and to include any combination of products in bundle pricing models.
