Value is shared with customers rather than extracted from them
Following on from my ‘Will We See Hourly Rate Load Pricing In The Legal Industry?‘ post of last week, during the course of this week I had the chance to read a January 2019 Whitepaper by Jean-Manuel Izaret and Just Schurmann ‘Why Progressive Pricing Is Becoming a Competitive Necessity‘ published by Boston Consulting Group and the Henderson Institute.
For those who have not read it, Izaret and Schurmann’s Whitepaper provides some really thought-provoking insights, including:
- Progressive pricing scales prices up or down on the basis of the value an individual customer derives.
- the levels of pricing under progressive pricing are value-based, not means-based
- Progressive pricing seems to violate the rules of traditional economics, which assume that customers buying the same product or service will pay the same price.
- Progress pricing enables providers to offer each customer a fair, personalized product and price point.
In essence, progressive pricing enables service providers, such as law firms, to calibrate the value they provide at an individual customer level.
But, importantly to Izaret and Schurmann (see #4 of their ‘four most important differences between progressive and traditional pricing approaches‘):
Progressive pricing is a fairer way to determine prices, because customers pay a price proportional to the value they receive, rather than paying the same fixed price others pay.
For any supporters of value-based pricing, the above quote is pure gold.
But, the caveat in next line of Izaret and Schurmann’s piece is probably more crucial:
But the firm must make the case for this perceived fairness
QED, it is the duty of the firm to communicate the value the customer is getting, not the customer!
As a growing advocate of value-based pricing in professional services, one of the greatest take-outs for me was this line:
Making progressive pricing a profitable day-to-day reality can happen only if firms change how they create, define, and measure value so that they can share it fairly.
All I can say to that is “amen” – because it isn’t going to come out of utilisation and realisation rates, no matter how hard you look!
It is such a great piece I’m going to leave you with the following three quotes from this paper:
- Companies must first step back and re-imagine the concept of value in their market. How can a business combine its own capabilities with the close personal knowledge of its customers to create something that fundamentally changes a customer’s life?
- Can you define value, measure it, and get everyone to agree on what value is?
- Most firms are accustomed to expressing prices in units of product or some other basic metric such as hours. If they can instead calibrate prices in terms of unit of value, then the price per unit of value can remain constant and the amount a customer pays can scale in proportion to the value demanded. That is the essence of fairness.
Great read. If it is not on your list – add it* (*then get back to me and let me know if you agree)!