Who hates having to buy from a business that only cares about how much money they can extract from you? Commercial focus or awareness talks about understanding the strengths and weaknesses of a business in relation to how it gains profit, customer satisfaction, and the biggest challenges.

 

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How can you spot a business that view customers as cash cows? It’s how they set their price.

 

Mechanically pricing for profit (i.e., ‘running the numbers’ to optimise prices to the Nth degree and squeezing even more money out of fees) says a lot about a company’s actual business agenda versus the one they publicise in news articles, their website, brochures and annual reports.

 

Taylor Wells advisory firm believes that pricing mechanically purely for profit is fundamentally flawed. It’s a broken system for a business to make money. In this article, we will demonstrate how your prices instantly broadcast what your company actually believes in, what it thinks of its customers, and how it wants to interact with them.

 

We will discuss case examples of aggressive pricing and commercial focus driving a deep wedge between businesses and their customers; and case examples of carefully structured price rise programmes that unite businesses with their customers.

 

Capability Building Programmes For Pricing & Sales Teams!

 

Commercial Focus: Real-World Examples

 

1. The airline industry is famed for often taking advantage of lucrative and hidden extra charges.

 

For example, the baggage fees and other ancillaries that airlines keep introducing (like paying for extra leg room, stowing extra baggage, hotel fees, insurances) are particular add-on charges designed solely to compensate airlines for their actual and potential margin risk and losses on airfares.

 

The returns airlines make off additional charges is huge. US airlines made approximately $41B in ancillary fees pre-pandemic. Australian airline, Qantas makes about $56 per passenger in ancillary revenue.

 

2. The bank industry’s monthly bank fees and credit card charges is another example. It is an industry famed for divisive charges. What’s worse is how they are designed solely to capture additional price premiums.

 

The controversial over-draft charge is a particularly punitive bank charge. US consumers paid more than $35B in overdraft fees which equates to $35B in pure profit for the banks.

 

Nearly all US banks implemented these charges until relatively recently. UK banks like Santander, Halifax, RBS, Lloyds still enforce the over-draft charge. Commbank, ANZ, and Westpac in Australia also implement over-draft fees.

 

Unfortunately, most of the customers forking out the money for overdraft fees are largely from a lower-income demographic who regularly exceed the limit due to cash flow issues.

 

3. Finally, small and medium-sized businesses are gradually introducing more self-serving, payment limits and card charges.

 

These days, minimum card payments of $20- $50 are a prevalent anti-customer occurrence. This happens in most restaurants, shops, and cafés across Australia. It seems we can no longer simply buy a cup of coffee on our cards as this falls below a ‘made-up’ minimum payment limit. Consequently, many of us are walking into cafes craving coffee, only to walk out again with coffee and cake, bun, soft drink, and snacks for later.

 

commercial focus

 

In a recent Forbes study, businesses gain 5.7x more revenue when they focus on providing superior customer experience than those who don’t. Often, they are market disruptors, feedback-driven, and innovative. What’s more fascinating is how the most profitable companies aren’t profit-centric. Rather, they are customer-centric which is quite a paradox.

 

Take the case of Disney amusement parks. Did you know that every year, Disney’s prices increase? But since their business model is based on “making dreams come true,” customers are willing to pay for the Disney experience.

 

Virgin Atlantic set itself apart from its competitors with a member lounge area, complete with food and drinks. How did it work? Customers were more than willing to pay for a pleasant travel experience. Other features included discounted upper-class services and complimentary transportation from and going to the airport.

 

As a business, it’s important to know why you do what you do. There is a correlation and combination of customer-centric, product-centric, and value-centric approaches.

 

YETI is a US company that offers insulated coolers and ice chests. They set themselves apart in the market by providing a range of durable and sturdy outdoor ice chests. Their products were targeted for outdoor activities (camping, fishing) and can withstand extreme weather conditions.

 

More brands tie their principles towards environmentally conscious efforts these days. Take Girlfriend Collective and PIYOGA, for example. Girlfriend Collective sources its fabric from recycled materials and plastic. On the other hand, PIYOGA donates 10% of its profit to international ocean conservation programs.

 

Then there are household brands for skincare and beauty that offer plastic-free packaging. So, customers aren’t simply buying their monthly supply of shampoo, body wash, or lotion. Actually, they’re selling the feeling of doing your part and contributing to taking care of the environment.

 

In short, these brands sell dependable and enjoyable services. In fact, it’s not solely because of their products that customers are more than willing to pay for premium prices. Truth be told, successful brands pay attention to superior customer experience.

 

Introduction to Price Optimisation 💰 Podcast Ep. 74!

 

Case study 1: Ticketmaster is an example of how mechanistic pricing and miscalculated commercial focus can quickly disconnect a business from an actively engaged and customer base.

 

The short-term benefits of aggressive pricing are well documented. Often, they are generated from mathematically-driven price optimisation. Also, Pricing Teams Build Accountability, so you want to create an environment of engaged and satisfied employees in your organisational function.

 

Ticketmaster is famed for its highly lucrative revenue model. It has a business, pricing, and revenue model that is widely despised by fans, musicians, and bands alike. In fact, it started out as an experiment and has since developed a stronghold as a multi-billion-dollar ticketing industry.

 

Ticketmaster is first and foremost a revenue-generating machine. They implement a price optimisation software to take advantage of changes in the demand and customer loyalty to bands, music, and artists.

 

They are masters of yield management and capacity utilisation. However, they are often criticised on social media for extracting the most money out of their customers. How do they do this so effectively?

 

They run price optimisation software that implements a dynamic pricing capability alongside restrictive ticket limits, high service charges, and a strict no refunds policy – a quadruple whammy for consumers. In short, it completely controls the value it offers to customers and quite to a suffocating level.

 

Examples of bare-bones dynamic pricing capability 

  • When you purchase, the price of Platinum Tickets is set according to demand at the time. So, it may vary. It means you pay the price displayed at the time, but the price of similar Platinum Tickets may increase or decrease after you’ve purchased.
  • Platinum Tickets are some of the best seats or tickets available for each event. That means that the numbers of available Platinum Tickets may be extremely limited and can sell out quickly.

 

Examples of restrictive refund policy

  • You won’t be entitled to a refund if the price of similar Platinum Tickets subsequently falls.
  • Ticketmaster does not issue an exchange or refund for a lost, stolen, or damaged ticket (including when a ticket does not arrive in the mail.)

 

Example of lucrative additional fees

  • Tickets purchased on the Site may be subject to a per-order handling fee.
  • Handling fees vary depending on the event. The event partner and Ticketmaster often reach an agreement.
  • Fees cover the costs of providing ticketing services, including infrastructure costs, and operating an internet site
  • The relevant delivery fee is charged per order. It depends on which delivery option/s are available and selected at the checkout.
  • There is a limit to a specified number of tickets for each event when purchasing tickets on a site. This amount is verified with every transaction and included on the unique event page.
  • Single ticket fees excludes fees that are calculated on a per-transaction basis.
  • The final total of your order includes the other fees per transaction.

(source: ticketmaster purchase policy)

 

Ticketmaster uses poor pricing to control its customers. People frequently complain on social media about aggressive pricing practices and additional charges. Yet, Ticketmaster knows that customers will keep coming back since it’s a necessity in the market, currently. It has locked down the entertainment industry where there’s very little competition. In fact, they have bought all major venues with high levels of demand.

 

The company might be more interested in promoting its own artists and venues than selling tickets for rival acts. Again, this reduces customer experience and access to the diversity of entertainment. It literally functions as an online payment gateway and space. Thankfully, a wave of start-ups is emerging in the event ticket industry –  in part to redress the imbalance created by suboptimal pricing practices. Nearly all these start-ups are promising lower service fees to fans in hopes to provide consumers with better alternatives.

 

 

Case study 2: Hilti is an example of a company that aligns its commercial focus and revenue models to their client’s business model.

 

Now, let’s move on to an example of a business getting its commercial focus and pricing model right – i.e., a model that creates value for the business and its customers.

 

Hilti is a fleet management company largely catering to the B2B segment. A few years ago, it introduced a fleet management program. Their mission was to become the go-to-hub for customised tools for large construction businesses and contractors.

 

Hilti spends a lot of time listening to their customer’s pains and headaches. They wanted to know exactly what was keeping contractors up at night. What were their biggest pains and headaches? They wanted to learn how they could help enable contractors on big commercial building job sites.

 

Many of their customers’ pains and headaches concerned logistics. They were not getting the right tools on time nor the exact items they need. Other big concerns were the additive and expensive replacement costs for highly customised tools, product failure, theft, etc. To solve these problems for their customers, Hilti designed their tools on-demand program.

 

Then, they launched the program to contractors and positioned it as the best way to avoid logistical problems and reduce costs by outsourcing tool delivery, maintenance, and replacement. The program provides contractors access to all Hilti’s tools for a period of 3 to 24 months, only when contractors need them. In fact, Hilti takes care of pretty much all of their contractor’s tool management needs. This makes them indispensable to their customers.

 

 Why it works

 

Contractors value Hilti enormously for solving a major commercial problem. Customers are also locked into the Tools on-demand program. Thankfully, this is because Hilti has worked out its demand and value drivers. The company advises them on how best to avoid supply and product failure in the future.

 

Hilti was very careful not to damage the relationship it had with large construction companies. Rather than offer contractors a large fixed fee arrangement for the program (a common practice), Hilti introduced a subscription pricing model. It breaks down fees into a single monthly payment and no additional charges.

 

Contractors are more than willing to pay this monthly fee. It’s because Hilti has customized its revenue model to fit the contractor’s business models and cash flow. Hilti’s value discovery exercise with contractors reveals that construction company contractors did not care about owning tools. As Hilti figured in the end, contractors are actually after the productivity they could achieve from Hilti. Above all, Hilti understands and removes the pain of product failure and the burden of ownership.

 

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Implications on Commercial Focus

 

A disadvantage with mechanistic pricing (or bare-bones price optimisation and commercial focus) is how it creates a transactional, antagonist, and dehumanised customer experience. Price software struggles to integrate dynamic pricing methodology with customer sensitivity data and differential value drivers across segments and products.

 

Obviously, price software does not understand nor care about the complex emotional and cognitive human responses to price changes. It only monitors alterations based on mathematical probability and makes a call on the best price. Price software businesses are still struggling to capture differential value drivers within their price software. Often, they use clunky segmentation, restrictive business rules, and assumptions as proxies for customer value.

 

Even if you have the best price software installed, businesses still need a pricing and revenue management team to lead and implement higher-order problem-solving. That’s in addition to the integration of complex mathematics and heuristics.

 

Customers remember bad pricing experiences too, and feel they’ve been ripped off by a business. In fact, they’ll repeatedly share their experience by word of mouth and online. Customers dislike aggressive pricing and additional charges. It dehumanises the customer’s experience. In fact, it completely closes opportunities for shared wealth and value creation.

 

When businesses aggressively raise prices with little consideration to their customers, they are basically messaging that they:

  • don’t believe in or care about customer loyalty;
  • won’t spend time, effort, and resources on building customer engagement,
  • and are solely concerned about making fast cash and plenty of it.

 

Your commercial focus and pricing strategy can either drive your customers away and destroy value. Or it can attract more customers, expanding wealth and value creation. It’s important to know why your products matter and find the target market that shares those values. Then, communicate the experience you want to provide to your customers.

 

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Conclusion

 

Pricing and commercial focus need to be less antagonistic and a more socially conscious, collaborative exercise. Customers don’t want to buy from businesses that reduce them to cash cows. Otherwise, they may instantly switch to competitors. Businesses that use mechanistic pricing to drive up their profits should not take advantage of their position of power. They must be wary of the burgeoning platform revolution.

 

Mechanically pricing for profit routinely exploits consumers who are, in some way, disadvantaged. Especially in aspects where customers lack information to make an informed buying decision, cognitive degeneration (elderly people), limited attention (younger people), or choices.

 

If you want to figure out how to integrate value into a dynamic pricing system, you’re on the right track. Customers do not mind paying for premium services that they value. That’s as long as you target the right customers with quality value. Overall, businesses must correlate their purpose and method of gaining revenue while creating the experiences that customers want.

 

In fact, customers will want to expand the pool of value on your behalf. This can be done by prioritising customer satisfaction and loyalty, positive feedback, and word of mouth. What’s more, is all of these bring new revenue opportunities and cost savings. Value involves co-creation. It is a key driver of business expansion. Moreover, your pricing communicates to customers that your relationship with them is more than just a number. It is the summation of the total economic and social value.

 

Businesses should look beyond the dry mechanics of “running the numbers.” That is still relevant but no longer sufficient on its own. In fact, acknowledging that humanising the way we generate revenue can open up opportunities to create more value.

 

For a comprehensive view on driving pricing strategies to maximise growth,

Download a complimentary whitepaper on How to Drive Pricing Strategy to Maximise EBIT Growth.

 

Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?

If so, please call (+61) 2 9000 1115.

You can also email us at team@taylorwells.com.au if you have any further questions.

Make your pricing world class!