Offer Design and Price Models

December 02, 2016

Offer design and pricing models - Simon-Kucher

The customer loves the golden middle 
Customers are rarely rational when it comes to purchasing decisions and price perception. They simplify matters and in doing so act irrationally – but still predictably. Two of the approximately ten behavioral pricing effects are the anchor effect and the tendency toward the middle. With the anchor effect, customers can be subconsciously influenced by price anchors, such as high prices set early on. The tendency toward the middle means that customers typically opt for the middle product when given three choices (low, medium, expensive). New York taxi drivers use both effects. When paying, customers are suggested three tip amounts (20, 25 and 30 percent), though by no means have to choose one. In doing so, taxi drivers increased their average tips from 10 to 22 percent. That’s ultimately 144 million dollars a year.

Familiarize yourself with the effects of behavioral pricing and factor them into your offer design and pricing. You’ll be able to set the best possible prices only if you know how to predict your customers’ irrational behavior.

Think about tomorrow, today 
Anyone wanting a profitable business today and into the future has to understand new technologies, changes in customer behavior and their impact on existing busi­ness and revenue models. This is already recognized in the digital world, but is equally applicable to more classical industries. Companies such as Uber and AirBnB are revolutionizing the market and driving out established business models by capitalizing on the rise of the sharing economy. Taxi drivers worldwide are struggling due to new app-based competitors and hoteliers are similarly affected by the many customers now booking private apartments while the owners are away. Develop­ments such as Software as a Service (SaaS), Industry 4.0 and cloud technologies are affecting many indust­ries, and will drastically change the structure and requirements of future revenue models. The result: Two-thirds of companies worldwide are currently moving to future-proof their businesses, adjusting revenue models in reaction to the prevailing market trends.

Don’t lie back and relax because you have a successful revenue model — the competitor landscape is evolving constantly. Combine your experience with technological expertise and market knowledge and continually adapt your revenue model.