Innovative Pricing Models

I was having a conversation the other day with the CEO of a small and growing company. We were talking about innovative pricing models that could help attract – and then lock in customers. Although there are many models out there, here are three I find particularly interesting.

The Consumable Model

With this model you give away (or sell at a reduced cost) a product that has a consumable portion to it. Give away the razor and people need to buy the blades. Get a cell phone, and you need to buy minutes. Buy a printer and you need to buy toner. The consumable portion can be sold on an as needed basis (the consumer needs to buy), as a subscription (you get a set amount each month – such as cell minutes), or as an automatic replenishment (use and we resupply). Staples recently introduced “Ink Drop,” a NetFlix style automatic replenishment for printer ink. Send in the empty cartridge and they will automatically send you a new one. I discussed this concept in my entry on analogy driven innovation.

The Substandard Model

With this model you sell a product or service at a significantly reduced cost, knowing that people will want to (or need to) upgrade at some point. I worked with a large computer manufacturer a number of years ago. Their top of the line product was out of the price range of many companies. So they offered a scaled down and slower version that was quite affordable. Here’s the interesting twist. The slower model was exactly the same computer as the top of the line model. All they did was add a chip to slow it down! They knew that many companies, once the computer was installed, would want the costly upgrade. To do so, they would simply remove the rogue chip.

The Freebie Model

This model is growing in popularity (I suspect it was originally invented by drug dealers looking to hook new addicts). Give a product/service away for nothing. Then, as they want more – or have increased needs – you start charging. This is particularly useful for web-based products where the cost of delivery is inexpensive bandwidth or software. Offer a base product for nothing. Although you may limit the number of users or the number of features, it is a fully functioning product. This is not a trial. Many website offer free versions of their base product, but charge a subscription for their “gold” level features. Adobe did a brilliant job of offering the Acrobat pdf reader for free. This created an industry standard…and helped sell their pdf creation software.

Are you looking to attract – and retain – new customers? If so, try these three models. With some creativity, I am confident that all of these models can be applied to your business.

What other innovative pricing models have you seen?

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Innovation at the Four Seasons Hotel

Last week I attended a presentation at the Four Seasons hotel in Boston given by Barbara Talbott, the EVP of Marketing for the Four Seasons. She discussed “The Power of Personal Service.”

Here are my notes from that speech. Admittedly, not much was radically new, but it was a good reminder of how personal service can be a powerful competitive advantage.

People First: At the Four Seasons, they talk about the “3 Ps” – people, product, and profit. Their philosophy is that people come first. If their employees focus on service, then they will have a good product which will bring profit.

Attitude not Aptitude: When they hire, they hire based on attitude rather than skills. They believe that they can train anyone on basic tasks, but they cannot instill passion. That must already be there. The service attitude mindset is pervasive and not limited to customer facing roles. Their accountants must have the same passion for excellence and service.

Customers = Employees: In many companies, customers are treated like kings (well, that’s what they want to believe) while employees are treated like second class citizens (if they are lucky). The Four Seasons claims to treat their employees like they treat their customers.

Service as Differentiator: In an earlier blog entry on innovation targeting, I discussed the need to find your one differentiator. For the Four Seasons, it is clearly “customer service.” Everything they do is driven by the customer and for the customer. In fact, they strive to go beyond expectations – and beyond what training can deliver. Some stories we were told include:

• A guest left their luggage in a taxi and did not realize it until the taxi had taken off. Although the customer did not know which taxi company, let alone which cab, the bellman tracked down the luggage and had it delivered to the customer…without the guest ever asking for this to be done.
• While checking out of the Four Seasons Paris, a couple was asked by the front desk clerk if everything was okay (supposedly she could tell something was wrong). The guests told her that their stay was perfect. However their daughter was staying in Paris for a few months and they were a little concerned about leaving her behind. The clerk pulled out a business card and wrote her personal cell phone on the back saying, “Call me from the states if you ever need anything.”

Treat All Customers Exceptionally: Because they realized that teens have different needs, they introduced a “Teen Concierge.” This concierge is closer in age to teenagers and is there to serve the needs of these younger guests.

Stick to Your Knitting: Someone in the audience asked, “Why don’t you lend your brand/expertise to helping other industries (e.g., airlines) deliver exceptional customer service?” Barbara responded that protecting the brand was more important than expanding the brand.

The Innovation Advantage: Someone in the audience asked why other hotel chains do not deliver Four Seasons style service. The assumption was that cost wasn’t the issue. Barbara responded that it is hard to replicate. The service mindset permeates the entire company. Competitors cannot just decide to deliver exceptional customer service. It must be part of the DNA.

Direct Line Members: The Four Seasons designates certain employees as “direct line members.” These line employees get direct access to the general manager on a regular basis and can discuss anything, except for pay. These employees are responsible for getting input from other front line employees and serve as the eyes and ears of the business.

At the event, I spoke with several Four Seasons employees. All of them clearly drank the Kool-Aid; they were professional without being pretentious. During my travels, I stayed in Four Seasons hotels quite a few times. Their service has always been outstanding and consistent, yet subtle (not in your face).  It’s unfortunate that most companies do not appreciate the value of customer service.

How can your company benefit from the service mentality of the Four Seasons?

Here’s an interesting piece of trivial: Isadore Sharp, founder and CEO of the Four Seasons Hotels opened his first hotel in east downtown Toronto. He originally wanted to call it “The Thunderbird Motel.” Good thing that name was already taken!

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Quote from Fritjof Capra

A person functioning exclusively in the Cartesian mode may be free from manifest symptoms but cannot be considered mentally healthy. Such individuals typically lead ego-centered, competitive, goal-oriented lives.

Over preoccupied with their past and future, they tend to have a limited awareness of the present and thus a limited ability to derive satisfaction from ordinary activities in everyday life. They concentrate on manipulating the external world and measure their living standard by the quantity of material possessions, while they become ever more alienated from their inner world and unable to appreciate the process of life.

For people whose existence is dominated by this mode of experience no level of wealth, power, or fame will bring genuine satisfaction, and thus they become infused with a sense of meaninglessness, futility, and even absurdity that no amount of external success can dispel.

From “The Turning Point: Science, Society and the Rising Culture” (1982) by Fritjof Capra, author of “The Tao of Physics”

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Analogy Driven Innovation

photo credit: Peter Emmett

Here is another tip from our “Little Book of BIG Innovation Ideas.”

As adults, when we try to solve a problem, we often ask, “What does this mean?” We try to pull the answer from our knowledge bank, just like finding the solution in an encyclopedia. Solve the problem the way it has been solved in the past. This can be useful, but it provides a limited set of possibilities.

An alternative (and more insightful) way of looking at problems is to ask, “What is this like?” Make connections. Find analogies, metaphors, and associations that fit the problem you are looking to solve. Recombine ideas in new ways.

If you are redesigning a business process, you may want to borrow best practices from a different industry.

South West Airlines did this when it benchmarked an Indianapolis 500 pit crew to improve plane turn-around time. Hospitals gained new insights by studying the check-in process of hotels. An office supply company improved the return of empty toner cartridges by applying NetFlix’s DVD subscription process.

Take it a step further and look to non-business analogies and metaphors. If redesigning a product, ask what the product is really like. If redesigning a computer chip, look to racing circuits, rivers, or anything with a flow. A gas pipeline company developed a new technology for finding and sealing pipeline cracks by mirroring the clotting agents in the human body.

To find solutions from other industries, processes, products, or disciplines, ask the following questions:

• What are the attributes of the problem?
• What is it like?
• Who else addresses a similar problem?
• How could you adapt their solution to your problem?

An example of this was in today’s news. Researchers developed a new adhesive by studying the gecko lizard’s “gravity-defying feet.” This new waterproof bandage is biodegradable, sticks well when wet, and is safe to use inside the body to augment sutures or staples.

Sometimes the best solutions have been around for centuries. We just need to adapt them to our specific needs.

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How to Be Unique

“The more you are like yourself, the less you are like anyone else, which makes you unique.” — Walt Disney

This quote is quite appropriate given my recent blog entries (and this one too).

This is great advice for any organization that wants to be more innovative.

I play golf — not well, but I play golf. My handicap is in double digits. For me to shoot par would be a dream. But for Tiger Woods, par would be a nightmare.

I am reminded of this comparison when I see companies that are satisfied to focus on their understanding of “par,” otherwise known as best practice. It was once an admirable aim, but is not sufficient today. Your competitors are more like Tiger Woods than they are like me. Par won’t keep you alive in the current environment.

Instead of copying what worked for someone else, find what makes you distinctive and target your innovation efforts there.

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