Pricing the Customer’s Experience..

A Nice Story to Start With..
We do not buy our meat at the local butchery very often. For reasons of convenience and price we settle with less quality than we would actually want, but hey.. such is life. And I assume we are not the only ones. That’s why I was so positively surprised when my wife returned from the butchery a couple of weeks ago and started collecting our kitchen knifes. The owner offered her to sharpen the knifes, free of charge, because we would need them sharpened for cutting our meat into a home made ‘steak startare’. “That’s an entrepreneur who gets it”, I remember saying.

Ending Like Too Many..
And because of this excellent experience we decided to shop at the local butchery more often. And so we did. This week they had a nice ‘family’ offer that we wanted to buy, not once, but twice. And that’s when they told us that we could only have one per family. Not a real problem, but for the fact that what followed was a ramblings full of complaints that ‘people’ just could not expect the butchery to have unlimited offers etc etc.. We took home the offer and some more, and talked over dinner that we were really disappointed with the experience..

The Simplest Of All Business Models
I did not put much thought in this experience, until I read this excellent post: “the simplest of all business models” by Rags Srinivasan. He describes the challenge coffee-shops have with pricing their service because of the “free wifi” offering that seems to be mandatory these days. Everyone recognizes the ‘free rider’ who occupies a table all morning on just one latte or doppio.

These ‘negative’ side-effects of the offering are often mitigated by either charging prices one would be imprisoned for in Italy, or by sweeping tables really often and ask ‘politely’ if one would like another drink. Others may limit the time free wifi is available on one drink. All mitigation-measures that harm the Customer’s experience. It’s the mechanism that is sparked when pricing schemes are not aligned with how value is created by Customers. It’s the same mechanism that made my butchery do what they did.

The mechanism is known in all industries, e.g. when discounts are only available if ordered on-line, are limited in time or quantity, or when returning goods is not allowed for discounted articles. And what to think of a lowest price guarantee within a five mile radius and compared to only a couple of other brands?

Making It Complicated
All these measures of mitigation are not only making the experience overly complicated, they also are ways of telling Customers: “we can’t afford the offer we made you, and you should understand that.”

Well, as a Customer, I don’t want to understand, I don’t want to consume a service for which I need to read the fine-print first, or need to think ahead of what ‘might happen’ so I can calculate if I want to take the risk of accumulating costs and effort when that risks occurs. I don’t want that because frankly I don’t have the time, nor the brains that can do all that at the same time. And I most certainly do not want to feel like I want something that seems to be considered ‘unfair’, something that makes me feel like I’m being a ‘pain-in-the-***’. And I don’t want the hassle either. Oh, and I only want to pay a fair price, not your fair price, but mine!

The Way Out
I do believe there is a solution to this Pricing Effect Mitigation Trap. That solution is adjusting your price model to the job a Customer is trying to get done, in other words: to the desired outcome and experience resulting in that outcome. In my comment to the earlier mentioned post I said it like this:

“many entrepreneurs these days recognize that they do not provide a single service for a single job-to-be-done. Instead they recognize they are platform hosts that allow multiple parties (including themselves) to serve multiple user-segments for multiple jobs-to-be-done. The coffee-shop could also be seen as such a platform, allowing business users to meet and work, allowing tourists to have some security from the fact that the coffee is as good as it is at home and allowing others to feed on their need to stay (or get) awake.. The coffee-shop is a place for multiple parties co-creating all kinds of value

Recognizing different segments by their jobs-to-be-done (in context) and offering different pricing options (bundled, or unbundled) based on how they like to consume the value offering and their willingness to pay for that, would be the way to go..

This could include the “work -fast connected- all day with as many coffee as you want for a fixed fee”-offering as well as the “your-morning-shot-to-go”-offering or the “catch-up with a friend over coffee”-offering.”

I have to admit that I find it quite easy to come with Customer-job-based segmented offerings for Starbucks, yet not so easy to do the same for e.g. insurances.. Maybe you can help?

So, what do you think? Is pricing for different jobs-to-be-done a way out of the Pricing Effect Mitigation Trap? Does pricing in line with Customer’s value creation process and desired outcomes prevent you from delivering a disappointing experience? And, equally important: could it prevent you from leaving value on the table? Let me know what you think!

p.s. If you want to read more on when and how to apply the job-to-be-done framework I suggest you read “A Method For applying Jobs to be Done to Product and Service Design” by Hutch Carpenter. An excellent, pragmatic starting point!

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23 responses to “Pricing the Customer’s Experience..

  1. Wim – I see your comment about thinking of the jobs-to-be-done segments in insurance. ‘Segments’ obviously follows the jobs themselves. So what are those?

    Insurance is not an area I’m well-versed in. I know I need various types: health, life, property. And there are commercial types of insurance as well that I don’t encounter.

    Well, right off the bat there, I’m sure the jobs vary between all those. Health insurance is part of a chain of interactions with the health care system. Life insurance is much less intense, with payments to the provider and the potential for a single triggering event (knocks on wood…).

    I’d say there jobs related to these areas:
    – Convenience (“17 touchpoints? make it 3″)
    – Benchmarking (“how do I compare against…others, my goals, economic projections”)
    – Help in deciding on plans, amounts without the input of the profit-seeking entity (“what do peers do?”)
    – Notifications when I should change my plan (upward or downward)

    Some thoughts there, although as I said, I’m not an expert in insurance. I’m sure there are many other areas that merit investigation. The core offering – risk based pricing that pays out when needed – is pretty much “solved”. But there are all sorts of opportunities to provide differentiated offerings that make a firm stand out.

    • Hi Hutch,

      First of all thx for the inspiration. Your post got me thinking, and in combination with Rag’s I knew I had to write this.

      On a meta-level I believe that when Customers are being insured they are trying to secure themselves from the financial consequences of events that may, or may not, occur. In the end they want to feel secure by knowing they made the right decision and will not be surprised by unexpected costs in case such an event does occur.

      Now, if you read this, do you still believe the core offering is pretty much solved?

      Just curious ;)

      Thx again, for the comment as well!

      Wim

      • Hi Wim, Hutch,

        a few years back we discovered that something very interesting is going on in the insurance business: there is a difference between the actual risk that can be calculated, and that an insurance company covers, and the perceived risk that the customer experiences. We have been doing a lot of qualitative research concerning insurances, and this keeps coming back. To give you an example, for a hospitality entrepreneur the highest risk, calculated, could be fire. But the entrepreneur perceives the risk of his employees changing jobs all the time is the risk that threatens his company most.

        I don’t think there are many insurance companies that use perceived risk as the basis for their product portfolio or marketing activities. So in a way ‘risk based pricing’ is not solved yet at all, let alone experienced risk based product or service development (which I think should come first). What do you think?

        btw, I think you piece is very interesting from a service design perspective, thanks Wim!

        kind regards, Neele

        • Hi Neele,

          Thank you for this very interesting view on perceived risk. I would love to learn more about the research you did and your point of view on this.

          Wim

          • Hi Wim,

            And I would love to share some things about the research we did. Based on the results I would say there is a gap between the perspective most companies use to develop new products, services and other outings and the perspective consumers use to choose a product or service. There is a lot to gain there, which makes me really enthusiastic. The most important thing for us though, is to make users, whether they are B2C or B2B, come to live when we present the results of our research by using rich visuals. It works better when you see it, so perhaps I could show you some of it over a cup of coffee?

            kind regards,
            Neele

  2. Your post underscores why Price is one of the 4 Ps of marketing — and why the Ps need to be considered as a group, not individually.

    I’ve never been a big fan of the concept of “THE customer experience” — as if there was just a single experience that captured the entirety of the dealings that customers have with a business. In the coffee shop example, maybe it negatively impacts the “experience” of the customer who buys one cup of coffee and sits for hours using the free wi-fi to be asked to buy something else or leave. But isn’t the “experience” of other customers — ie, those who would like to sit down for 15 minutes and drink their coffee — negatively impacted, because some lingering customer is hogging a seat for hours at a time?

    And what if the lingering customer comes in once a week to buy one cup of coffee, while the other type of customer (15 minutes customer) comes in EVERY day w/ a friend and buys 2 coffees. Should the experience of the “bad” customer (once a week, hours at a time) be optimized at the expense of the experience of the “good” customer?

    I think this is basically what you’re trying to solve with the “pricing for the job done” approach. I’m concerned, however, about two things.

    First. that a lot of marketers won’t grasp the “job done” concept. It is, I agree, all about segmentation. And, in this case, segmentation based on something other than demographics. In the example above, the two segments are “lingerers” and “15 minute customers”. I guess the “job done” for segment 1 is “find a place to hang out” and segment 2 is “find a place with great coffee where we can drink it for 15 minutes” but I’m not sure how universally easy that will be for marketers.

    The 2nd concern involves knowledge of profitability and potential. If a pricing decision requires subordinating one segment’s “experience” for another, the marketer should know what the profitability of each segment is, and the size (revenue and profit potential) of each segment is. If there are 1 million lingerers in a market, and 10,000 15-minute customers, even if the latter segment is more profitable on a per customer basis, the total opportunity for pricing to advantage the latter segment may be too limiting.

    • Hi Ron,

      You’re spot on, on all accounts and your concerns. With regard to the latter: that’s why there are companies thriving and (more) companies that are not.. To what segment do you want to belong?

      Thx for reading and contributing to the discussion!

      Wim

    • Ron
      Both your concerns are valid and more often people commit the second mistake (we got 1M Likes … etc). Strategy is about making choices. For the choice to be effective one needs to base it on relevant data. Given different segments, their needs and the revenue potential the marketer needs to choose which segment they want to serve (no one can be all things to all and besides including the wrong segment may alienate others). I guess we see examples of this in Luxury sector.

      Now to 4P – I am just not a fan of it. It is too tactical and the first P is product – People and Purpose (job) do not show up. I prefer the STP-P (doesn’t have the same ring to it but more strategic approach) http://iterativepath.wordpress.com/2013/01/10/segmentation-targeting-positioning-and-pricing-as-customer-jobs-to-be-done/

      -Rags

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  5. Hello Wim

    Let’s take insurance. An insurance policy provides a bundle of services. For example, some health insurance policies provide cover for say maternity. Or access to specific hospitals across the country. If you take a jobs to be done approach then you unbundle. You allow the buyer to specify what she wants cover for (which health issues and services), which hospitals, which types of rooms, how much excess etc. So as someone who has worked in insurance this can be done. And, some forward thinking insurance providers are going along this route. Why? Because it helps them to provide customers with prices that are in tune with the level of cover that the customer wants. Why? Because insurance premiums were becoming more expensive and some customers were not renewing their policies.

    If we take a look at car insurance and especially for younger drivers who find it too expensive here in the UK. There are companies that allow you to have a black box installed in your car and it measures your driving: how many miles you drive, where you drive, how fast you drive etc. And on that basis the insurance company adjusts the premium to your risk profile.

    All of which is my way of saying that it is possible to put pricing choices in the hands of customers. Most customers are intelligent people. You can offer them the equivalent of gold, silver and bronze pricing and spell out what customer experience goes with that. And thus let the customer choose what job he is hiring you to do for him – including price and customer experience. Furthermore, you can create a la carte options and leave it to the customer to choose.

    Then there is the issue of communicating with customers, educating them and setting the right expectations. If you take a look at your butcher scenario, how could it have been handled better? Not to let it happen in the first place. The butcher could have clearly spelled out the conditions associated with the offer. Such that you never had an expectation that was not fulfilled. It could be spelled out in writing on boards. He/she could have mentioned the offer and clearly stated any limitations before you ordered. Yet, this is not what marketers do. Marketers are trained to entice/seduce rather than be honest/straight. That I see as the central issue. The belief that one has to deceive customers to get them to turn up and shop with you.

    I do not see price as an issue, airlines practice it all the time. The obstacle that shows up for me is the paradigm from which many business folks operate.

    Maz

    • Hi Maz,

      As much as I agree with you that many marketers are trained to entice/seduce rather than be honest, I don’t think it’s the central issue. Yes Customers are intelligent, but also busy and not very conscious of how they make decisions. The latter is what neuro-marketing is built upon. To me, the judge is still out whether that’s fair practice or not..

      My first response to the butcher’s offer was the same as yours, yet I’ve come to conclude that it probably would not have mattered. Yes, in hindsight, I might have thought that I should have better read the ad, but that does not improve the experience, does it?

      The central issue to me is that too many marketers continue to think that price is the best way to make ends meet. It is not. By bringing in the conditions they actually admit that themselves. If only they took a little more time understanding how (different) Customers create what (personalized) value in what context, then they would see the world is full of opportunity to create more value than they currently are, for all parties involved. And because they don’t do so enough, they turn to deceiving Customers to get them to turn up and shop with them.. Stop doing the latter is of course a good thing, it will not solve the first problem though.. imho that is.

      What do you think?

      • Hello Wim

        You and I are in agreement that customer do what they do out of habit and there are cognitive biases that marketers can use to entice customers down avenues that work for the marketers. And who says that there is a place for ethics in capitalism? Capitalism by definition is an amoral undertaking.

        I am also clear that customer are responsible for their lives. Customer have a choice in the matter of what decision they make and how they make them. Customers are human beings. And as such they know that there is certain way that they should show up in the realm of business. Example, I have never seen anyone on an aeroplane bitch/whine/cause fuss about not being allowed to sit in first class when they have only bought an economy class ticket. We know what is expected of us. Which is why most people who do enter a coffee shop will feel pressure to buy if they want to keep sitting at the table.

        As for your central issue, it occurs to me that you are disclosing something valuable: the lack of deep – contextual – insight into customers. And using that insight to come up with value propositions and customer experiences that create better value for the company (higher prices, more customers) and the customer. I wrote about this issue just recently:

        http://thecustomerblog.co.uk/2013/01/14/what-does-it-take-to-generate-deep-contextual-customer-insight/

        The comments make interesting reading. Adrian wrote:

        “HI Maz,
        I, for one, think that more immersion in our customers lives would lead to better insight, understanding and empathy. The challenge for many a business leader is that they would look to their market research people or their marketers to help organise this. However, many in these communities, including the VoC and survey community, would dismiss this type of insight work as not a ‘good’ methodology.

        Adrian”

        My response to him was:

        “Hello Adrian

        As a strategist the ‘fit-for-purpose’ of any strategy that I develop is only as good as the depth of contextual insight into the lives of customers. And mostly, what is already there shows up as not useful. The mirage of insight being mistaken for genuine insight.

        Why is this so? Because this task is left to the market research folks. And in some organisations to the VoC folks. The foundations of market research, as I understand them, were to support/propel the function of advertising. That is to say insight to generate the right stimuli to play upon the instinctual drives – hopes and fears that go with being human. The next development was simply to get access to people’s views and intention – the Gallup school of polling voters to get access to opinions and voting intentions. VoC is thus a variant of this Gallup type research.

        What is missing is the human-centred contextual insight into the lives of customers: what they care about, what they are concerned with, how they show up in life, what they do, who they do it with, what they use to do what they do, what they talk about…… Put differently, neither market research nor VoC gets you access to the experience of being a customer nor a tramp – aka George Orwell dressing up and living as a tramp to get access to the being/living of tramps.

        In the course of a strategy engagement I was delighted to learn that an NPS VoC programme was in place. My delight turned to disappointment when I looked at the reports. The answers that I was after – what matters to customers, their context, their experiences – were simply not there as a totality. Often, I have found my own experience of ‘becoming a customer and walking the path’ as generating more useful insight than any market research or VoC report.

        As for your point on methodology. It occurs to me that there is a lot of truth in this in the sense that there is an addiction to scientific process and rationality. And so inventing/defending a ‘scientific methodology’ is more important to getting access to ‘truth’ – that which truly matters. Yet, this is not the fundamental cause of what is so. The cause lies in high status people not wanting to get their hands dirty. Put differently, it is easier to read a report on poverty than it is to be poor, say for six months – to live as the poor live, where the poor live. Here is an article that points that out clearly:

        http://www.dailymail.co.uk/news/article-2260550/Transport-Minister-Simon-Burns-FINALLY-realises-like-train-work.html

        Here we have a transport secretary being forced, eventually, to take a train to work rather than use a chauffeur driven car to take him everywhere. The point is that this person was forced to face the reality of the transport experience. He, himself, did everything to not experience it, to maintain his privilege, his comfort. It occurs to me that he discloses what is so for just about every executive in every company. Which is why the customer, customer service, the customer experience as simply idle words, empty talk, the latest shiny object.

        Maz”

        To sum up, I am in agreement with you. And it occurs to me that how people show up is a systems issue not a HR issue. Put differently, marketers are not going after deep contextual insight into the lives of customers because the system in which they are embedded does not expect them to do so. It may even prevent them from doing so. Rare, is the organisation that is up for changing its products, its offers based on input provided by marketing. It is too much trouble. The mandate of the marketing folks is to come up with clever ways to shift existing product. Hence the obsession with messaging.

        Maz

        • Excellent points (and post btw!) , specifically about the “system” not supporting, or even hindering, going after deep Customer insights.

          And I believe that trying to understand the jobs Customers are trying to get done and the outcomes they desire from it is the best ‘deep contextual Customer insight’-framework around.. What do you think? A framework you might give a try?

          Curious, as always.
          Wim

          • Hello Wim
            Thank you, I appreciate your feedback and your kind words.

            As for making JTBD as the focus of deep contextual insight, I am in total agreement. And, yes, that is what I strive to get at. Clearly, jobs to be done = content. And l all content occurs/shows up in specifc contexts. So I search for the contexts. Why? Context give rise to moods, urgency, importance, significance and meaning of any content. Put differently context is needed to make sense of content.

            Maz

  6. Very good post. The coffee shop and the butcher examples make the big transition from selling goods to selling a service-that-includes-goods. This transition is the only way the British High St. is going to be saved. The disappointment with the ‘one offer per family’ is a question of them managing expectations in advance.
    In the case of insurance, it is already selling a service. The question may be one of looking at the service in the context of a larger job to be done by the customer. I just bought some train tickets and turned down insurance because I have year-long travel insurance. What might be nicer would be the option of someone I trust making sure I get to my destination and back, by whatever means works.
    (WordPress is being its usual pain in the neck by asking me to log in rather than just post a comment)

  7. Getting a coffee where I have to choose the coffee type, size, location of consuming AND whether I’ll be there for ages sounds unnecessarily complex.

    Also, I often start in one segment (eg fast coffee) and change into another (eg doing some stuff on my phone/computer, meeting someone who I ran into).

    Segmenting is good at times, but if it makes a situation more complex than it needs to be…

    My inkling is that the default is to use no segmentation, followed by unseen/unnoticed and only then self selected segmentation where absolutely necessary.

  8. Wim,

    another thoughtful post – but i am afraid you are going too far this time.

    Customers, beyond how long they will stay or what they want, go to the coffee house to pay someone for the convenience of making food/drink and serve it to them in a specific location with decor, services (wifi in your case) and other add-ons.

    Once you determine you are dealing with a commodity (coffee) with an ancillary service (someone else making it for you and providing you a place to enjoy it, regardless of what you are doing) then the pricing is no longer an issue — if you just want coffee at the cheapest price, you make it at home; if you want a lower price but the service of making it, you go to other place; if you want the full service – you go to starbucks. THIS is the customer choice, and no vendor could ever fulfill all those needs… thus, the price you pay at starbucks subsides my wifi, my morning sandwich (which you will likely not get to enjoy) and many other things. that is the contract between starbucks and its customers.

    your example presupposes that customers don’t have a choice and therefore all go to the same vendor; this is the opposite of what it is. any vendor should focus on one JTBD, price accordingly, and retain the excess from those not enjoying the benefits of the ancillary services as pure profit. this is what free markets allow. you can always go elsewhere — i still remember the first time a bank told me that maybe their services were not what a cheapskate like me needed — turns out they were right. i was not prepared to pay more for something that i could see no benefit to.

    in the insurance world is similar: you sell a commodity that others can sell equally well (and cheap). you gotta figure out who you are after, what is their JTBD (get the commodity or get the service(s) in addition to it) find your exclusive differentiation,price and market accordingly, and collect your profits… if someone gets more (or less) than others, the number of customers covers for the +/-… at the end, if you figured out your costs appropriately and your pricing appropriately you end up with profits.

    if you did not, maybe you need to reconsider the business model or the offering.

    i wrote about this some time ago, but i won’t spam you with links (not my intention)… let me know and i can point you to it privately.

    • Hi Esteban,

      The Customers job is not about what they do (go to Starbucks) , it’s about why they do it (yes, convenience may be part of it, but is not all of it), and what they are trying to achieve by doing it.. I’ve had coffees at my favorite coffee-shop to satisfy my need for coffee, to satisfy my need to catch up with friends, to work in a comfortable place to finish my preentation etc etc..

      For each of my (different) jobs I use resources of their offering, but in slightly different combinations. For some I use their wifi, for others not, for some I use their seats, for others not etc etc.. Different jobs, different combinations, and ultimately different outcomes. Outcomes that I also value differently and as a consequence might have a different willingness to pay for… Just coffee = 3,– ; Catch-up with friends = anything between 10,– and 25,– ; finish a presentation for the board-meeting = 20,– to 50,–.

      I’m not implying that a coffee-shop should offer all different kinds of pricing models for all different kinds of purposes. I do think there is room for multiple pricing schemes in one coffee-shop though, yet I don’t think they should go overboard. The simplest of schemes is differentiate prices for a take-away coffee and for consumption in the shop, much like do charge more for a cafe in Paris when sitting on the terrace outside or having your cafe at the bar (which is a regulated price btw.. ).

      I’m also not implying that Customers have no choice, but I do think that entrepreneurs that feel forced into offering the same utility as Starbucks, but do not feel they can charge the same prices for a latte (or cannot make ends meet), or that want a piece of their pie, should consider other pricing schemes. A scheme that is better aligned with the Customers value created and offers opportunity to increase margin, because there is an higher willigness to pay.. (which being cheaper, the most used differentiator when it comes to competing, usually does not offer). How about paying by the minute? (http://operationsroom.wordpress.com/2013/01/14/paying-by-the-minute-at-a-coffeehouse/ )..

      And of course any entrepreneur should first try and find out what jobs their customers are trying to get done, because for Customers it is not a matter of full service, but a matter of the right service (at the right time/context etc).. Understanding what jobs Starbucks (or any other competitor and/or alternative) does not satisfy (completely) is an opportunity to make those unsatisfied Customer (segment) a better offer..

      Thx for visiting and taking the time to comment! Truly appreciated.

      Wim

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