Are you pricing the experience or the outcome?
By: Steven Forth
As services come to dominate the creation of solutions to some of our most difficult business challenges, there is more and more attention being paid to service design. Value, emotional and economic, need to be put at the centre of service design. This is something that most service design efforts have struggled with. One reason for this is that much of service design is embedded in the design thinking and customer experience communities, where pricing has been sidelined as a technical issue that can be dealt with later, by somebody else. As we argued in ‘Customer Experience (CX) Includes Price (and Value),’ this is too narrow a view and can lead to the failure of a service. Value needs to be central to service design, and it is value that drives price and willingness to pay (WTP).
Pricing experts are equally at fault though. Most pricing experts are trained in price optimization and management, rather than pricing design, and are not conversant with the emerging best practices in service design (some of the best work in this area is by Majid Iqbal and is documented in his excellent book Thinking in Services. Those pricing experts trained in value-based pricing have sophisticated tools for understanding the value of outcomes (Economic Value Estimation being one of the most powerful) but are less adept at designing and understanding the value of experiences.
Experiences and outcomes are both critical to the perception and delivery of value
A pricing design process that is aligned with service design thinking will consider both. Before we go farther, let’s clarify what we mean by experience and outcome.
Think of your daily commute. Some of us commute by car, some by bike, by foot, and some by transit. The outcome is the same in all three cases, one gets to the office on time. In my case, the time required is from doorstep to elevator is about the same for each mode. The outcome is the same. The experience though is very different, as is the value I put on the experience.
Another example is depositing a check. I can do this three ways: using an app, by going to the ATM, or by standing in line for a teller to help me. In all cases the outcome is the same, but the experience is different.
Less common are cases where the experience is the same and the outcomes are different. One example is in healthcare, where treatments can seem to be very similar (I take a pill, blood is collected and goes somewhere for analysis) but the outcomes can be very different. The same can be true of some professional experiences. All of my lawyers tend to blur together (sorry) but the outcomes of poor legal advice are very different from those of competent advice.
Both experiences and outcomes can be differentiated or commoditized
There is an interesting set of tensions operating here that have a big impact on service design and pricing design. Putting these together gives a classic 2x2 grid, and where your offer falls in the grid gives you some guidance on how to approach pricing.
If the experience and outcomes are both commoditized then you have a true commodity. Competing as a commodity is a hard place to be as prices will naturally move towards the variable cost. It is hard for most companies to make money in such circumstances so it is a good idea to try to move out of this quadrant. A famous pricing story tells of a land fill company in New Jersey (where else) that was able to get a significant premium over the alternatives. How you may ask? What could be less differentiated than landfill? Well, it is the service that matters, and this company guaranteed delivery within a half hour window or it would provide a discount. When you are running a job site having people standing around waiting for the landfill is a cost. The landfill company had to organize its service around predictable delivery.
Many services innovations are around the experience and not the outcome
In its early days, service design was often driven by the need to improve experience for commoditized services like insurance. This early emphasis has persisted though there are signs of a sea change, especially in healthcare, where it is becoming clear that the overall design of the service has a big impact on patient outcomes and delivery costs, a kind of outcome for providers and payers.
One of the more challenging things to price is the situation where experiences are similar but outcomes are very different. This is especially true when there is a long time lag between experience and outcomes (as is the case with many medical tests or professional services) or where outcomes are not well published and there are few benchmarks (hence the move to evidence-based medicine in recent years). Here the key to successful pricing is being able to demonstrate superior outcomes.
The best place to be is to offer a differentiated experience and to deliver superior outcomes. Wherever possible, this should be the design goal. It gives the most opportunity to design compelling pricing, that communicates the differentiated value and that aligns value delivered with price.
It is difficult to bring together pricing of offers that combine a differentiated experience and differentiated outcome. We lack the tools to do this well (it is part of our work at Ibbaka to develop these tools). One framework that can help us with this is concept blending. This methodology comes out of work in metaphors and cognitive psychology. A good site to explore this is Mark Turner’s site (take a look at this and see if you can solve ‘The Riddle of the Buddhist Monk’).
For a more academic perspective on this, see “Introducing Procedural Utility: Not Only What, But Also How Matters” by Matthias Benz, Bruno S. Frey and Alois Stutzer in Zurich IEER Working Paper No. 129 from 2002.
Here is a simple process for integrating experience and outcomes into value-based pricing.
Begin by figuring out which quadrant your offer falls in. Is your differentiation from the experience you offer, better outcomes, or both?
Then ask how the experience determines outcomes and vice versa. The most powerful solutions are those in which the experience and the outcomes reinforce each other.
See how to quantify both experience and outcomes. What are the economic and emotional value drivers on each side? Are there connections between these value drivers?
Find pricing metrics that track the value metrics. Ask if there are connections between the value metrics for the experience and the value metrics for the outcomes. If not, see if you can find a way to price the experience and outcomes separately. This is often done in travel, where there is a ticket to get you from A to B and then an extra fare to get into the first class carriage.
Feed the work on value design and pricing design back into the design of the service. Make sure that your service design process takes into account experiences and outcomes.
