Customized Pricing: Fully Capture Customer Value

January 22, 2018

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Nowadays we can buy our lunch via online ordering and pick it up from the takeaway counter. This fast, casual digital touch point in the customer journey not only provides the customer with quick service. Ordering platforms create an excellent opportunity for customized pricing.

Order a sandwich online at US salad chain Salata, and you will be provided with 28 cross- and upsell options to customize your salad or purchase additional food and drinks. Options how you can customize your offering can for example be extra sauce, additional ingredients, increased order size, or sides and drinks. Food chains, like Salata, are increasingly providing customers options to customize their offering during the ordering experience. By doing this, they apply what we call a customized pricing strategy.

Customized pricing has been used in different forms for years. From airlines that upsell a business class seat, to customization of your brand new car. The foundational concept is that customers have a different willingness to pay for similar products. This provides cross- and upsell options that can help differentiate price and fully capture the customer value. The main reason why customized pricing is gaining traction now, is the rise of digital. When communicating a product to a customer, one of the key success factors for conversion is the simplicity of your proposition. Traditionally, when communicating the proposition during the customer journey is too complex or tedious, you will lose your customer. However, the rise of digital and new ordering technology, such as mobile orders, has changed that.

A company that has successfully embraced customized pricing in the restaurant industry is McDonalds. After a pilot, the company introduced its digital ordering kiosks in 2,500 US restaurants in 2017. It turned out that in the restaurants where the digital kiosks were installed, sales increased by 5-6%. In traditional McDonald's restaurants the menu is shown static above the ordering counter (only a limited number of products can be displayed). In contrast, digital kiosks give the option to display an enormous amount of products for cross- and up-selling purposes. Based on the product chosen first, McDonalds can give recommendations for matching products. When the first product you pick is a burger, you can get a recommendation for fries, or even for an entire burger menu. In this case the use of digital communication channels helped to customize pricing and to generate up- and cross-sell opportunities.

However, the implementation of customized pricing is dependent on customer acceptance. The airline industry is one example. During recent years, budget airlines have increasingly unbundled services and components of the key offering. For example, Americas operating Spirit Airlines unbundled check-in luggage for customers. Then, in April 2017, it also added an additional $35 charge for cabin carry-on for a 2 hour one-way flight. While Spirit Airlines claims the fees have been a great success, these hidden costs can also have a strong negative impact on the customer experience.

In conclusion there are 3 findings that companies need to keep in mind when leveraging customized pricing.

  1. Ensure that your customized pricing propositions are in line with your overall customer and price strategy
  2. Tap into digital opportunities, such as mobile apps, and add a digital touch point to your customer journey
  3. Ensure that when you are implementing customized pricing it is in line with bundling principles and allows for effective value communication

Simon-Kucher & Partners has identified seven pricing trends:

Trend 1: Dynamic Pricing: Four pitfalls to avoid

Trend 2: Behavioral Pricing: Instrument for revenue growth

Trend 3: Digital Pricing: Determine the right pricing for new business models

Trend 4: Customized Pricing: Fully capture customer value

Trend 5: Defendable Pricing: Align price structures

Trend 6: Servitization: Key strategy to drive profitable growth

Trend 7: Sympathetic Pricing: Create brand supporters