Opportunities for Action in Information Technology. The Death of Averaged Pricing

Transcription

1 AveragedPricing-G3 6/14/01 3:42 PM Page 1 Opportunities for Action in Information Technology The Death of Averaged Pricing

2 The Death of Averaged Pricing Of all the tools companies can use to spur consumers to act, pricing is often the most effective but also the most blunt. Recent advances in information technology, however, have greatly sharpened this tool, allowing for ever finer consumer segmentation. The technology has done this in two ways. It has dramatically expanded the breadth and depth of consumer information that can be gathered and processed, and it has enabled the instantaneous delivery of customized pricing offers to targeted consumers individually. Taken together, these advances signal an end to the era of broadly averaged, one-size-fits-many pricing and herald the dawn of truly price-differentiated commerce. The impact on businesses, business models, and consumers stands to be nothing less than profound. To be sure, the promise of differentiated or individualized pricing is hardly new. Getting consumers to haggle, bid, or otherwise actively work to win incremental savings was central to the business model of many a failed dynamic-pricing dot-com. What has changed, however, is that new technologies are allowing dynamic pricing to occur in the background, unseen and unbidden by the consumer. The increasing prevalence of more subtle ways of collecting data and transmitting offers makes receiving individualized prices effortless and ultraconvenient for consumers. The resulting opportunities for businesses are sizable. Most businesses, however, are ill prepared for this new world. Their strategies and daily operations have long been predicated on averaged pricing, in which one group of customers effectively subsidizes another.

3 As it becomes possible to deliver individually segmented offers, prices will become de-averaged, and customer subsidies will disappear. Companies that aren t ready for the transition could find themselves victims of cream skimming, as their best customers are lured away and the average costs to serve their remaining customers increase. Preparing for this radically altered landscape is not simply a matter of understanding and implementing the best technology. Companies will also need to shift their mindset and initiate changes at all levels of the business. And they will be forced to deal with customer confusion, apprehension, and countermeasures, as well as the specter of government regulation. But companies have little choice. De-averaged pricing is real. For many businesses, it is just around the corner; for some it is already here. The time to act is now. Two Steps in the Pricing Process There are two primary steps in the pricing process: the gathering and analysis of consumer data and the communication of an appropriate offer. Recent advances in technology have greatly enhanced the ability to execute both steps. Gathering and Analyzing Data. Technology is giving companies an increasingly subtle, yet more and more potent, arsenal of ways to collect consumer data. These fall under two headings: active and passive. Active data collection occurs when consumers provide personal data in exchange for information or services. Passive collection occurs when the underly-

4 ing technology itself provides the information without the consumer s conscious participation. Businesses engage in active data collection when they ask shoppers to name their price for goods and services online thereby revealing their price sensitivity or to give their location (by zip code) in exchange for information such as theater times and locations. Passive collection is much more significant, however. Besides opening new avenues of data gathering, it can also yield more accurate information, precisely because it does not rely on active consumer involvement. (People often err or lie, after all, when they volunteer personal information.) Such technologies as GPS (Global Positioning System) and cell-tower triangulation allow for ready determination of consumers locations. Screen scraping and other browsertracking technologies make it possible for companies to collect data about consumer demand and price sensitivity even before there is a purchase. And thanks to telematics, a technology that uses chips embedded in products to transmit information, manufacturers can collect data on product use without the customer s involvement. These new capabilities give companies two major advantages they did not enjoy before. First, with access to actual consumer identity, location, usage, and demand data in advance of the purchasing decision, companies can reverse the cycle of the traditional pricing process. Rather than being forced to set a price and then determine its popularity, companies can now gauge a consumer s likely price threshold with a good degree of confidence before making the pricing offer.

5 Second, thanks to data-mining software and powerful ecrm (electronic customer-relationship management) systems, companies are learning how to organize and analyze their enormous collections of customer data in a manner that previously would have been cost prohibitive, if not impossible. With this capability, companies can define and segment markets on the basis of any number or combination of criteria rather than simply by such broad means as zip codes and demographics. The still evolving ability to define ever-narrower segments, including, ultimately, segments of one, is an advance with powerful implications. Designing and Making Pricing Offers. Advances in IT are also revolutionizing the second half of the pricing equation: the delivery of the offer itself. The most exciting development is the advent of individualized delivery. Having rich information about specific customers is really useful only if companies can tailor and deliver pricing offers to those customers individually, without risking the cannibalization of other customers. This capability is finally arriving. Internet cookies and personal wireless devices allow companies to deliver a specific price at a specific time to a specific customer, and to that customer only. Cellular phones facilitate this exclusivity by not permitting users to forward individualized offers to friends. Businesses can also create and deliver pricing offers in response to an increasingly wide array of triggers. They can fashion offers that incorporate a combination of a consumer s identity, location, usage patterns, and demand cycles. A company can design and offer a price to an individual on the basis of a combination of facts that are unique to that moment: the

6 person is within 400 yards of a certain store, has a history of purchasing that store s products, and recently completed a Web search for those products. This capability will become especially powerful as passive data collection becomes pervasive, courtesy of ever cheaper and smaller chip-based transmitting devices. Early Movers A number of companies have already begun to exploit these new capabilities. An example is the Progressive Casualty Insurance Company, one of the largest auto insurers in the United States. In a pilot program, Progressive is offering its Texas customers a product whose premiums are determined by actual vehicle usage, rather than by driver accounts of vehicle use and such traditional variables as vehicle type and driver age. A system that combines GPS and cellular technology automatically collects information on when, where, and how much each vehicle is driven, and relays it to Progressive. Then, at the end of each billing period, the company bills according to actual usage. This practice gives Progressive a much firmer handle on expenses than before and far more certainty in planning. The program is also a hit with customers, whose premiums are an average 25 percent lower than they would have been under conventional cross-subsidized billing methods. Another intriguing example is SCAN, a provider of cellular-based price-comparison technology in the United States and the United Kingdom. Using SCAN s service, a consumer in a bricks-and-mortar store can access information about a product by entering its name or Universal Product Code into a cell phone. SCAN responds instantly, sending price comparison information from competing online and

7 offline retailers, as well as the means to purchase the product directly from those retailers. The company plans eventually to track consumers locations, browsing patterns, and purchasing histories, including the degree to which promotional discounts appear to drive purchasing decisions. Turning Promise into Advantage As IT continues to evolve, the transition to individualized pricing will only accelerate. Companies should therefore begin to think seriously about how to position themselves at the front of the curve. They should take the following steps: Think big picture. Most important, companies must anticipate the threats and opportunities they might face. They need to determine which of their customers are subsidizing others and consider ways that they or a competitor might exploit the underlying pricing disparities. Otherwise, they could well see their best customers become ex-customers. Embrace the right technology. Companies should quickly bring themselves up to speed on the full spectrum of technologies, identifying those that might add value to their businesses. They should consider partnering with companies that already have those technologies in place rather than starting from scratch. They should also be aware of current or emerging technological standards that could affect their choice of equipment and partners. Plan for broad operational changes. Companies should recognize that they will need to upgrade systems and processes for both speed and interoperability. Many functions that are now performed

8 manually including the basic determination of when to change prices will need to be automated. Companies should start drawing an IT project map for this makeover. Prepare customers. As Amazon discovered last year, some resistance from customers to individualized pricing particularly to perceived pricing inequities is inevitable. During what Amazon described as a random pricing experiment, the company appeared to be penalizing some of its loyal customers with higher prices, causing an uproar that was settled only with apologies and refunds. Companies need to recognize that such concerns, as well as growing worries about privacy, are valid. They should have clear mission statements that explain the pricing logic or criteria they use to differentiate consumers. The statements should also spell out plans for handling sensitive consumer data. To further assuage consumers concerns, companies should begin to educate their existing customers about the potential benefits of individualized pricing including convenience and the ability to earn better prices. Anticipate regulatory hurdles. Given consumers worries and the fact that individualized pricing will indeed lead to higher prices for some, government intervention is also a certainty. Companies may ultimately have little say here. Still, they need to be aware of the ways that pending regulation could speed or slow the adoption of new pricing strategies in their industries. Count on a bumpy ride. Individualized pricing will be dynamic in more than one way. Because IT will continue to evolve, companies must prepare for new twists and turns as the rules of the game evolve as well. For example, it is likely that technologies will

9 emerge that can capture individualized pricing offers and then broadcast them to interested consumers. It is also likely that consumers will eventually have the means to block unwanted data collection. All the more reason to begin educating them now. * * * The technology-driven shift from averaged to individualized pricing, already under way, will be seismic in scope. For some companies, it will mean a material boost to their business and their ability to attract new customers; for others, the consequences could be harsh. But the genie is out of the bottle. Companies can substantially increase their chances of success in this new environment by planning for the transition now, while the competitive landscape is still open. Orin Herskowitz Michael Haugen Roy Lowrance Orin Herskowitz and Michael Haugen are consultants, and Roy Lowrance is a vice president, in the New York office of The Boston Consulting Group. You may contact the authors by at: herskowitz.orin@bcg.com haugen.michael@bcg.com lowrance.roy@bcg.com The Boston Consulting Group, Inc All rights reserved.

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