Implementing Value Pricing: A Radical Business Model for Professional Firms

CHAPTER 11

Price the Customer, Not the Service

If I have 2,000 customers on a given route and 400 different prices, I’m obviously short 1,600 prices.

—Robert Crandall, former CEO, American Airlines

The most common pricing mistake among professional firms, alongside underpricing, is pricing the service, not the customer. Studying elasticity, consumer surplus, demographics, and psychographics, as discussed in the previous chapters, are not the full story of a customer’s perception of value. To establish an optimal price, you must understand the value drivers of your customers, and what causes them to be more or less price sensitive. This is not as precise as computing price elasticity, but it is far more valuable when dealing with something as subjective as value. Value pricing is different than the concept of elasticity, since it is not concerned with how changes in price will affect revenue. It is more concerned with setting a price commensurate with the value you are creating for a flesh-and-blood customer—not some amorphous notion such as a “market”—to drive profit.

Ten Factors of Price Sensitivity

To assist those who are in charge of pricing in ascertaining and judging price sensitivity, the following ten factors should be examined to see which apply to your particular customer circumstances. There are many factors that influence a customer’s price sensitivity, and pricers need to understand these factors long before setting a price for any individual customer. Nagle and Holden ...