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December 29, 2008
What I Learned On Vacation (Pt. 1). Delivering Value vs. A Funky Pricing Plan.
When you go on vacation, you have a lot of time to think (especially if you travel coach because you certainly can't work in the cattle section of the plane...). This year, one of the things I thought about was business models and pricing.
Airlines spend enormous amounts of effort concocting complex pricing schemes intended to maximize revenue per connection/flight. The result is a byzantine labyrinth of prices that make consumers pay for: a) lack of knowledge; b) not being one of the lucky people to get one of the "cheap seats"; c) wanting adequate legroom, etc. I actually believe some transparency might help both the airlines and the consumers. If consumers understood costs better, we might be willing to pay more in return for better service. Of course, given this is the Internet age when we all seem to believe everything should be free (or paid for by advertising) that is a somewhat naive concept.
Take telecoms. If you can figure out telecom pricing structures...you are a better person than I. And now, out comes word that text messages are really a way to fleece customers. But as consumers, we are fickle. We want short-term contracts, low prices, freedom to change carriers...all things that make it harder to plan long-term business strategy. Strange but true, I don't think telecom executives started by saying "Let's devise pricing that only Einstein can figure out." These plans reflect the fact that consumers are smart, and when price plans are simple, we quickly devise ways to exploit them, especially if the products are commoditized. And, telecommunications has reached commodity status, as has airline travel. And while consumer commodities like shampoo can advertise their way to differentiation, service-based offerings like air travel or phone service actually need to deliver differentiated experiences, something that has proved devilishly challenging!
So, how will newspapers, software companies, and the many other businesses being reshaped by Internet transparency and new forms of competition make money over time? Or, how do many of today's "hot" properties (e.g. Twitter) really make money over the course of years? Will 20 million people really be willing to pay for the right to tell you they are about to eat dinner...??? And, will you pay for the right to listen? As for business models based on advertising, they now seem wildly risky given the global "deleveraging". Businesses are being right-sized and based on actual cashflow, not on excess borrowing and vague investment strategies.
Real businesses have costs and helping customers to understand that and justify your price is one of the challenges of Internet transparency. If you are really good at what you do, the value should be obvious. If you are not, then obscure pricing plans seem to be your inevitable destiny (that or hawking everything under the sun like some popular blog sites ;-).
And all this was just on my flight to Lisbon!
Posted by jcioban at December 29, 2008 3:51 PM
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