George Stalk Jr. is senior adviser of Boston Consulting Group of Canada Ltd. and adjunct professor of strategic management for the Rotman School of Management at the University of Toronto.
In this age of sudden technological advances, pricing is no longer a mundane part of your company's operations. It can profoundly affect your company's future success.
Many companies are good at managing pricing, and understand how a strong pricing management structure can add one or two points to earnings.
Some have discovered the strategic advantage in platforms such as "power by the hour" - which, for example, General Electric Co.'s transportation division uses to sell its locomotives based on hours used by the railroads - and "bundling," through which companies such as Rogers Communications and Bell Canada package multiple offerings into one convenient, attractively priced package that rivals with narrower offerings find difficult to match.
Many of these practices, however, are now so widely used that they no longer deliver the strategic advantage they once did. Companies looking for a pricing edge might want to learn from the experience of one insurer that has been experimenting with a new model, best described as "dynamic pricing."
With dynamic pricing, a company aligns the price of its product or service with the desire of a consumer to use it at the moment the customer wants it. To make it work for both the customer and the company, the company must gather data on its customers' use of the product in real time, process the data and then set prices that adjust rapidly up and down. The ensuing pricing system is one that can be very enticing to customers.
Take Ohio-based Progressive Casualty Insurance Co. It has long been an innovator in the innovation-starved U.S. property and casualty insurance industry - the first company to allow customers to pay premiums in monthly instalments, and the first to take on high-risk motorists as customers, and make those policies profitable. It was also the first to experiment with dynamic pricing.
Progressive became interested in using wireless GPS and motion sensors to change the way its insurance is priced. It saw in the technologies the ability to monitor its policyholders' vehicles in real time: where they were, at what time, at what speed, and how they were being driven - with fast starts, sharp turns or hard braking, for example.
Such data could be translated by Progressive's computers into levels of risks, and insurance prices could be adjusted up or down - right down to the minute. To appreciate how revolutionary pricing by the minute is, consider how pricing in the automotive insurance industry usually works.
For most insurers, it's all about customer segmentation. To set a premium, insurers fit customers into a segment for which the likelihood of an accident can be knowledgeably predicted. The segment is based on age, gender, type of vehicle, place of residence, distance driven in a year, prior driving violations, and so on. Drivers in that segment pay the same average price. With average pricing, it's inevitable that the segment to which the insurer assigns a customer will contain some members who are at a higher risk, and some at a lower risk. This means lower-risk drivers are subsidizing higher-risk ones.
Enter Progressive. Using data about drivers' behaviour, the company could precisely gauge their risk level - at a particular moment and over the course of an hour, day, week, month or year. It could then set prices determined in part on actual risk levels for each of its policy holders, based on their real-time driving behaviour. And it could do so by the minute, setting a six-month premium for each driver based on all that moment-by-moment data.
Progressive tested the system in Texas from 1998 to 2001, equipping cars with GPS systems, sensors and wireless technology to calculate premiums based, in part, on how much, when and where a vehicle was driven. Participating customers saved an average 25 per cent on premiums, according to the company.
In 2004, Progressive introduced a usage-based program, TripSense. In exchange for a discount, customers plugged a data recorder into their car, which collected information about its use, including when, at what speed, and how far it was driven. Drivers using TripSense were eligible for a discount of up to 25 per cent, and received an average discount of 12 per cent, according to Progressive.
Last year, the program was tweaked into another one called MyRate, using wireless devices in cars that automatically collect and transmit data to the insurer. MyRate is now in 15 states and continuing to expand, with drivers averaging 12-per-cent discounts, according to Progressive.
A dynamic-pricing strategy should work wherever consumers are willing to wait, or pay more, for a product or service depending on its availability (such as for hotel rooms, hit movies and shows and restaurants).
Dynamic pricing could also be used wherever information technology can remove an intermediary between consumers and a company, so that the firm receives data about consumers quickly and frequently.
If dynamic pricing could be right for your company, and you have the money needed for enabling technologies, you could accumulate immense amounts of detailed information about customers, giving you vital advantages over your competitors.
But you'll need to move fast if you want to be on the front end of building the advantages that come from greater data accumulation, analysis and reaction - and keep rivals off your trail as long as possible.