Paul Simon wrote that there must be fifty ways to leave your lover. Well, to some extent, the same rule holds true in pricing structures. And choosing the most effective way is still the challenge.
At Strategic Pricing Management Group, we‘ve put together a comprehensive list of pricing structures based on our experience and knowledge of pricing in a wide variety of markets. The list outlines the many different ways to price a product or service, ranging from the very conservative (fixed price, cash) to the esoteric (gain sharing or performance contracts). The list already numbers more than 50 and is constantly growing as new structures are developed.
The fact that so many different pricing structures are in use is testament to the fact that creative pricing structures are a powerful means of enhancing competitiveness. While adapting new pricing structures can involve a great deal of risk, doing so also offers companies a chance to create higher than average profits.
There are plenty of cases of companies using creative pricing structures to gain competitive advantage. For example, many years ago, Alcan Cable decided to break with tradition and de-linked the price of aluminum cable from that of aluminum metal. Once the initial headaches and problems were overcome, the new pricing approach was far more successful – and has generated much higher prices – than its predecessor. Aluminum cable is far more profitable than its cousin, copper cable, the price of which continues to be based on commodity prices for copper.
In North America, most confectionery companies use “line pricing“, while in the UK similar companies abandoned this structure several years ago. Line pricing is a practice whereby all products in a certain category – chocolate bars for example – are priced the same regardless of product quality or other attributes. The change has been a success, enabling companies to price their products according to attributes that appeal to customers, and to offer a variety of products at different price levels. The shift has led to more product differentiation, using price as a means of distinguishing product quality.
Among the more recent and innovative pricing structures is one called Index Pricing. This price structure is being used in the de-regulated utility industry where energy brokers offer to sell energy to customers at some price that is tied to a market index, usually some percentage points below the market price. While the concept of a price index is not new, its application to energy prices is a recent development.
In addition to Index Pricing, other phrases that have entered the pricing lexicon over the past few years include Partition Pricing, Optimum Dynamic Pricing, and Gain Sharing. Many of the newer pricing structures are amalgamations of existing structures applied to a new market, with a twist.
We believe that pricing structures will continue to evolve as companies seek more creative ways to deliver their products and services to customers. Pricing structure can be a source of added value to customers, enabling them to buy on terms and conditions that suit their needs. For suppliers, understanding all of the pricing possibilities and options is the first step in choosing the structure that is appropriate for a product or service, and in finding creative ways to differentiate the product or service from competition.