Commercial Focus: Who hates having no choice but to buy from a business that only cares about how much money they can extract from you?

 

How can you spot a business that view customers as cash cows? Answer: by how they 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 a fundamentally flawed and broken way 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.

 

Real world examples of commercial focus: Guess the industries famed for their lucrative extras?

1.The airlines industry is famed for taking advantage of lucrative and often hidden extras.

 

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 particularly negative add on charges designed solely to compensate airlines for 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 in 2015-6. Australian airline, Qantas makes about $56 per passenger in ancillary revenue.

 

2.Likewise, monthly bank fees and credit card charges is another example of an industry famed for divisive charges designed solely to capture additional price premiums.

 

The controversial over-draft charge for example 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 circa 2014. UK banks like Santander, Halifax, RBS, Lloyds still enforce the over-draft charge. Commbank, ANZ, Westpac in Australia also has the over-draft fee.

 

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

 

Commercial focus pricing

 

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

 

Minimum card payments of $20- $50, for example, are a prevalent, anti-customer occurrence found in most restaurants, shops and cafés across Australia.

 

It seems we can no longer just buy a cup of coffee on our cards anymore as this falls below a ‘made-up’ minimum payment limit. Consequently, many of us are walking into cafe wanting a coffee, walking out again with a coffee and a cake, bun, soft drink and snack for later.

 

Case study 1: Ticketmaster: an example of how mechanistic pricing can quickly disconnect a business from an actively engaged customer base

 

The short-term benefits of aggressive pricing generated from mathematically driven price optimisation are well documented.

 

Ticketmaster famed for its highly lucrative revenue model started as an experiment and has since developed a strong hold on a multi-billion-dollar ticketing industry.

 

Among fans and musicians and bands alike, Ticketmaster has a business, pricing and revenue model that is widely despised.

 

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 extract fast cash from us 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 –quadruple whammy for consumers.

 

Ticketmaster completely control the value on offer to customers, and to a suffocating level.

 

Examples of bare bones dynamic pricing capability

  • The price of Platinum Tickets is set according to demand at the time you purchase, so it may vary – you pay the price displayed at the time you make your purchase, but the price of similar Platinum Tickets may increase or decrease after you have purchased.
  • Platinum Tickets are some of the best seats or tickets available for each event, so 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, damaged or destroyed ticket (including where 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 and are agreed between the relevant event partner and Ticketmaster.
  • Handling fees cover the costs of providing ticketing services, including things like infrastructure costs and operating an internet site.
  • Handling fees vary depending on the event and are agreed between the relevant Event Partner and Ticketmaster.
  • The relevant delivery fee is charged per-order and depends on which delivery option/s are available and selected by you at checkout.
  • When purchasing tickets on a Site, you are limited to a specified number of tickets for each event (also known as a ‘ticket limit’). This amount is included on the unique event page and is verified with every transaction.
  • Per ticket fees but excludes fees that are calculated on a per transaction basis.
  • Per transaction fees are added to the final total of your order.

(source: ticketmaster purchase policy)

 

Customers and artists alike widely hate how Ticketmaster mechanically prices to optimise revenues and drive up profit.

 

They use pricing to control customers and cap value.

 

People frequently complain about aggressive pricing practices and additional charges on social media.

 

Yet, Ticketmaster know that customers will keep coming back because they are currently a necessity: They have locked down the entertainment industry; there’s very little competition; they have bought all major venues; and there’s high levels of demand.

 

There are also growing concerns that Ticketmaster might be more interested in promoting its own artists and venues than selling tickets for rival acts – again reducing the customer experience and access to the diversity of entertainment on offer.

 

Very little innovation and value is offered to its customers; it is literally offers an online payment gateway and space.

 

Thankfully, a wave of start-ups is emerging in the ticketing industry –  in part to re-dress the imbalance created by suboptimal pricing practices.

 

Nearly all these start-ups are promising lower service fees to fans. Let’s hope they provide consumers with better alternatives – watch this space.

 

Case study 2: Hilti – an example of a company that aligns their commercial focus and revenue models to their clients business model

 

Now, let’s move on to an example of a business getting their 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 customers pains and headaches. They wanted to know exactly what was keeping contractors up at night; what were their biggest pains and headaches.

 

Hilti wanted to learn how they could help enable contractors on big commercial building jobsites.

 

Many of their customers’ pains and headaches concerned logistics, i.e., not getting the right tools on time, not getting what they wanted and when they wanted them.

 

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 a Hilti’s tools on demand program.

 

They then launched the program to contractors and positioned the program as the best way to avoid logistical problems and reduce costs by outsourcing tool delivery, maintenance and replacement to Hilti.

 

The program provides contractors access to all Hilti’s tools for a period of 3 – 24 months and only when contractors need them.

 

Hilti takes care of pretty much all of their contractor’s tool management needs – making them indispensable to their customers.

 

Contractors value Hilti enormously for solving a big commercial problem. Customers are also locked-in to the Tools on demand program because Hilti have worked out their demand and value drivers and advise them on how best to avoid supply and product failure now and in the future.

 

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

 

Contractors are more than willing to pay this monthly fee because Hilti’s revenue model (i.e., a monthly fee) is customized to fit their contractor’s business models and cashflows.

 

Hilti’s value discovery exercise with contractors reveals that contractors from construction companies did not care about owning tools as Hilti initially thought, but rather the productivity they could achieve from using them.

 

A simple monthly price communicates a clear message to contractors and potential contractors: Hilti understands and removes the pain of product failure and the burden of ownership.

 

Implications: Why do customers act so violently to aggressive pricing or commercial focus?  

 

A big danger with mechanistic pricing (or bare bones price optimisation and commercial focus) is that it can create a transactional, antagonist and soul-less customer experience.

 

Price software struggles to integrate dynamic pricing methodology with customer sensitivity data and differential value drivers across segments and products.

 

Price software does not understand nor care about the complex emotional and cognitive human responses to price changes. It only monitors changes based on mathematical probability and makes a call on the best price.

 

Price software business are still struggling to capture differential value drivers within their price software – often using 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 and integration of complex mathematics and heuristics.

 

Customers remember bad pricing experiences too.  What’s more, they will repeatedly tell everyone they know in person and on social media when they feel they have been ripped off by a business that is only out for themselves.

 

Customer hate aggressive pricing and additional charges because they dehumanise the customer experience and completely shut off the opportunity 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, destroying value or attract more customers, expanding wealth and value creation.

 

Conclusion on commercial focus

Pricing and commercial focus needs 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 – they will instantly switch to an alternative provider.

 

Business they use mechanistic pricing to drive up their profits should not take advantage of their position of power and be wary of the burgeoning platform revolution

 

Mechanically pricing for profit has been shown to routinely exploit consumers who are disadvantaged in some way, i.e., where they have a lack of information to make an informed buying decision, cognitive degeneration (elderly people), limited attention (younger people), or limited choice (deprivation).

 

For firms figuring out how to integrate value into a dynamic pricing system you are on the right track.  Don’t get disheartened; customer’s do not mind paying a premium for a service they value as long as you are targeting the right customers with the right value.

 

In actual fact customers will want to expand the pool of value on your behalf via increased customer satisfaction and loyalty, positive word of mouth, cost savings, new revenue opportunities and other advantages.

 

Value is co-created. Value neither originates with nor belongs solely to the anyone – the business or the customer.

 

Value is a key driver of business expansion.

 

Your pricing communicates to customers more than a number, it is the summation of the total economic and social value available.

 

Businesses should look beyond the dry mechanics of “running the numbers”—still relevant but no longer sufficient—and acknowledge that humanizing the way they generate revenue can open up opportunities to create additional value.