Pricing and innovation are not normally associated together in the same sentence. Pricing is thought to be stagnant (and boring) and impossible to alter, replace or radically improve. Innovation, on the other hand, is….Well, innovation is radical and revolutionary! It’s what drives growth and separates the market leaders from laggards. For many people, innovation is perceived to be everything that pricing is not.
But for most industries, the reality is that pricing is not stagnant; it’s fluid and almost always changing. And sometimes even simple changes in a pricing model can lead to dramatic improvements in bottom-line growth. Pricing innovation—the creation and monetization of these pricing model changes that strengthen competitive advantages—is one of most overlooked aspects of innovation.
The Boston Consulting Group provides a good example with the following description of how General Electric radically advanced its commercial aircraft engine business by means of a simple change to its pricing model:
“A master application of pricing innovation was General Electric’s reinvention of the commercial aircraft engine business. Engine manufacturers had traditionally used engines as a loss leader to secure the lucrative business of selling replacement parts. When several trends threatened that model, GE offered airlines the option of buying power by the hour—in essence, purchasing as a package engines, parts and MRO services (maintenance, repair and overhaul) and paying on the basis of uptime, or per hour of use. The strategy has allowed the company to make the most of its competitive advantages (its technical skills, diagnostic capabilities, financing expertise and scale, and end-to-end MRO services) against major competitors.
GE’s offering, which it calls Maintenance Cost Per Hour, aligns industry pricing with customer value (by tying prices to uptime) and aligns customers’ interests with its own (by tying GE’s way of making profits to uptime rather than maximizing the number of replacement parts its sells). GE’s strategic use of the power-by-the-hour concept has helped it transform the competitive position and profitability of its commercial aircraft engine business: It now accounts for the lion’s share of engine sales and has the highest margins in the business.”
Here’s the takeaway: Pricing innovation can be a powerful tool in your quest to maximize profits and to deliver a sustained competitive advantage. When was the last time you looked at your pricing model through the lens of innovation?
Patrick Lefler is the founder of The Spruance Group – a management consultancy that helps growing companies grow faster. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.