Introduction to Contextual Pricing

Everything should be made as simple as possible, but not any simpler.

—ALBERT EINSTEIN (C. 1933)

We would all like to cultivate better pricing at our companies: pricing models that fit the market, an optimum price tag, strongly supportive systems, and foundational price strategy. We would like pricing coherent with brand, product, and channel, which inspires confidence—and is as simple as possible.

Many smart people have proposed simplifying principles to help explain pricing results. Value, costs, messaging, and customer frames of reference have all afforded insight. Each construct offers a crisp and simple explanation—but appears to fail in some market situations. Those failures are painful when encountered, and they discourage management from giving pricing the attention it deserves—that a company deserves.

This book offers a unifying perspective on pricing. By taking into account buyer psychology, market competition, and organizational politics, it provides a holistic outlook on an important topic. Our approach is relatively simple: we describe how the customer decision process and market conditions provide the relevant context for better pricing. Thus the unified perspective is known as “contextual pricing.”

Success comes from understanding context. This idea has been leveraged with great results by some leading companies. The Coca-Cola Company, for instance, includes temperature at the point of sale in its pricing context. An ice cold cola commands a better price in the middle of summer on a hot beach than during a snowstorm in the Arctic! Being able to adjust prices to the immediate context of the buying occasion is how Coke has moved to monetize contextual insights.

Another example: Plastic packaging manufacturer Paktiv has found that the time frame of a customer’s needs drives the price paid. Paktiv and other industrial commodity plastics have found they can get sharply higher prices on “rush” orders of plastic containers for supermarkets and other customers. Including the time frame is how Paktiv prospers in a cutthroat commodity business.

The contextual perspective on pricing can be applied directly to pricing initiatives at your company. With a few simple pricing tools, it’s possible to achieve a 1 to 7 percent realized price gain, and, with a better set of pricing processes and systems architecture, a 10 to 12 percent improvement should be possible. With better price strategy and structure, replicable gains of 30 percent or greater have been achieved in a wide range of industries: software, consumer goods, entertainment, education, transportation, retail, insurance, and others.

Contextual pricing is the concept that a handful of factors, mostly relating to the buyer’s frame of reference (comparison points), will explain most pricing, and will provide management with the most powerful levers for improving price structure and results.

The focus on context is growing. Leading firms such as Coca-Cola, Amazon, GE, IBM, Google, Hertz, Proctor & Gamble, Standard & Poor’s, and AT&T have begun to use context to shape their offers. Some have employed this perspective to refocus attention on the local point of sale rather than national price indices. Many are placing new emphasis on understanding competitive offers. Some have shifted management attention from a single-minded focus on product value to the customer view—asking, “What does the customer know about our product and its alternatives?”

Notice how when Amazon alerts you that “people who have bought this book also have bought …” it changed your context for buying the book? Notice how when airlines made round-trip tickets much cheaper than one-way tickets, it changed your ideas on vacations by air? What about when cable companies added in telephony services into their service bundles—did they change how you thought about the value being offered? This is the application of contextual pricing.

These approaches to shaping the buying process are an antidote to price pressure. The contextual focus matches prices to major purchase scenarios so that you avoid price level battles you cannot win and book higher margins where the opportunity arises. Examples of purchase scenarios include sales to loyal long-tenured customers, skeptical potential new customers, large bids, rush orders, new products launches, and so forth.

Timing matters too, obviously. For instance, during a major software and services buy, a lot of attention is paid to price level, but, after that, add-ons and modifications often face far less price scrutiny. The same feature sold later (after use of the initial purchase) might command far better margins.

Contextual pricing is the antidote to price pressure.

One other unusual aspect to this book you’ll notice is the argument that pricing can be intuitive and will mesh with other components of the marketing mix. Pricing and branding ought to go hand in hand; product development could incorporate insights learned from price study; and pricing must reflect the realities of channel. Most importantly: pricing is marginalized and powerless if it does not actively seek contextual insights directly from customers. And we do mean directly: talk to customers and consumers, don’t expect context to spring from boilerplate surveys.

For a leading B2B information provider, the single most important context turned out to be the buyer decision process. When the purchase decision was made by committee (drawn from various departments) then the price was 25 percent lower than when the decision was made by a single manager. This context was known to the sales force and actually documented in its CRM, so all that was needed was to develop a price structure which would capitalize on this difference. This, and other aspects of contextual pricing, drove a 30 percent+ increase in realized revenues.

In other aspects of life, context defines how things are evaluated. Music is evaluated according to the social and personal context of the time. Food is valued according to contemporary tastes and dietary concerns. Even what is considered beautiful and desirable in marriage partners varies with social context, according to research in that area.

Management teams who adopt a contextual perspective find it intuitive, and their companies are generally rewarded with materially better pricing. While pricing books do not have a reputation as being enjoyable reads, we hope that this one is more interesting than most,¹ and much more rewarding.

Note

1. A low standard, we admit. But perhaps a major contextual element for your book purchase decision.