Author: Dan Zatta, Ph.D.

In today’s rapidly changing economy, the most successful firms are those that have as their number one priority a total comprehension of the value perceived by their customers combined with innovative approaches to monetization, as the author explains. Dan Zatta, Ph.D. is the author of the international pricing best seller “The Pricing Model Revolution” (Wiley, 2022), which will be translated into 12 languages, and “Revenue Management in Manufacturing” (Springer, 2016). As a pricing management advisor with nearly 30 years of experience, he helps companies grow their revenues and profits. He can be reached via LinkedIn.

The Journal of Professional Pricing, March 2023

The most successful companies – those with above-average profits – have discovered the new source of competitive edge: pricing and, along with it, the way they can capture the value they provide to their customers through innovative monetization approaches.

Despite being the main and most powerful profit driver, in many companies pricing still remains at the stage of mere potential. This does not enable full profit to be obtained, whilst in the worst of hypotheses an inadequate pricing model results in losing customers, revenues, and profits.

We set prices “as we always have done” or by “adding our margin to the base cost.” These are typical statements from the old world when sales were purely transactional. The mantra then was “I give you a product x and you give me y dollars.” In a context where demand outweighed supply, where customers’ demands were unsophisticated, or where competitors were more or less analogous and technology not widespread, this might have been a sustainable approach. Not today. The time has come for a change.

The most successful firms are those that have as their number one priority a total comprehension of the value perceived by their customers combined with innovative approaches to monetization.

One of the first things they are quite clear on is that price is the main profit driver.

Once companies understand the power of pricing, they next ask themselves which levers to activate to improve their monetization skills. The answer to this question is that there is not a single pricing lever, but several levers that can potentially be activated, as indicated in the Pricing Framework presented here (Figure 1). These levers can be assigned into four categories.

The first category is related to Price Strategy and contains several facets, such as the revenue model, positioning, and differentiation. Moreover, the direction set by the company in relation to its monetization priorities is part of this first category. One of the issues to address is the question of whether the company would be prepared or reluctant to sacrifice market share in order to increase its profits. In the automotive industry until a few years ago, the answer to this question was a clear no: volume and market share ruled. Today, the view on this changed quite drastically.

The Pricing Framework - from price strategy to price steering

Figure 1: The Pricing Framework – from price strategy to price steering

The second category is about Price Setting. Price logic, portfolio pricing, and product and service pricing are key facets here. If we take price logic as an example, we will find several possible approaches, from cost-plus pricing to competitive pricing or value pricing, based on the pricing maturity of a company, as indicated in Figure 4.

Once the price strategy has been defined and prices are set, in the sales process we see prices moving from the initial list price to the final transactional price. This is the essence of the third category – called Price Implementation – which contains elements such as the terms and conditions provided by the company to its resellers and distribution partners, execution strategy, and price negotiation.

Finally, companies need to monitor and ensure that the target profitability is reached at the end of the year. To ensure this, Price Steering is needed, as indicated in the last category, where price controlling, price analytics, and price reporting come into play.

To ensure that pricing becomes an integral part of the company and is properly embedded, there is a supporting layer called Pricing Enablers. A clearly structured pricing organization, defined pricing processes (for example, those related to yearly price reviews and increases), pricing IT systems, and pricing skills are all relevant enablers.

To demonstrate the many diverse pricing levers companies can activate, review the examples displayed in Figure 2 and where their typical profit impact is shown. These elements can vary from industry to industry and in terms of single elements and profit impact. However, the same key learning holds true for all industries: to become more profitable, there is a single, standalone element to be activated on the revenue side. Several pricing levers can and should be optimized and the sum of the impact each of them generates can result in substantial profit improvement.

Pricing Framework: Key Elements and Profit Impact

Figure 2: Pricing Framework: Key Elements and Profit Impact

Triggers of the Price Model Revolution

In the last several years, we observed companies changing their monetization approaches. The most profitable companies were capable of assessing where value was coming from in the eyes of their clients and adapting their monetization approaches accordingly – creating a sustainable competitive advantage.

The period of the 2020-2022 pandemic gave a further boost to change and digitization, opening businesses up to pricing and new models of revenue and removing barriers that previously seemed impossible to overcome.

The basis of this ground-breaking change in the way companies monetize the value they provide to their customers is comprised of particular triggers that we have organized into four groups: these are the accelerators of the price model revolution (Figure 3). They are now and will increasingly change the way firms extract value from the market.

The four triggers of the Price Model Revolution

Figure 3: The four triggers of the Price Model Revolution

The technological innovation of the last few years is the first trigger: it has laid the bases for raising pricing to a new level: digitization, cloud computing, the Internet of Things (IoT), autonomous systems, robotic process automation (RPA), and augmented reality. New cloud applications or digital pricing are often the prerequisites for holistic, data-oriented price management.

Data science progress is the second trigger: there are new quantities and quality of data that create completely new potentials for setting prices. Think of the huge quantities of big data now available and how these data can provide real-time elasticity regarding individual products or optimal discounts thanks to artificial intelligence. What data science can generate today in terms of knowledge in the field of pricing seemed like science fiction only a few years ago.

Today, this also happens within new ecosystems, the third trigger, centered on the sharing or repeated use of products rather than the purchase or possession of products. This type of ecosystem requires new pricing models that did not exist in the old world of transactional pricing.

Marketing of the future, or Marketing 5.0, concludes the series of the four triggers: hyper-personalization, timidly initiated with the introduction of revenue management systems in the service sector, assumes new dimensions thanks to the happy combination of technological innovation and progress in data science. The same is true of inspirations coming from the behavioral sciences and agility in marketing.

These four triggers are the basis of the Price Model Revolution.

The Pricing Model Revolution

The transactional model based on the possession of a product is a thing of the past – an inferior pricing model in many cases. New and more innovative price models focusing instead on the monetization of use or the result produced by the product have proven clearly superior. Their introduction has allowed companies undergoing crisis to reinvent monetization, doing away with resistance to purchasing and welcoming the customer’s readiness to pay. How then is the management of this most important profit driver changing?

In Figure 4, we see how pricing has evolved. Companies using basic pricing are the least profitable. Here we find the absence of any consistent pricing logic: the same price is maintained for a long period. With cost-plus pricing, the price setting is purely based on internal reasoning and calculations: a target margin is added to the cost, which equals the requested price. It is easy to calculate if the cost structure is solid, but again, it is limited to an internal perspective that ignores competitors and customers. Although competitor pricing does look further, it ignores the value “perceived” by its customers. All this is taken into consideration in value pricing, which is the most complete and promising approach of all those described up to now.

Evolution of Pricing - from basic pricing to advanced monetization

Figure 4: Evolution of Pricing – from basic pricing to advanced monetization

It is with the Price Model Revolution that we attain the Olympus of Pricing. It represents the evolution of pricing based on value, and pricing strategy that grows and becomes more sophisticated thanks to new approaches to monetization which, in an innovative way, create a firm competitive edge.

Elements that denote innovative monetization approaches and represent key pillars of a company’s competitive advantage are, for example:

  1. Pay per use
  2. Subscription
  3. Outcome-based pricing
  4. Psychological pricing
  5. Dynamic pricing
  6. Pricing based on artificial intelligence
  7. Freemium
  8. Sympathetic pricing
  9. Participative pricing
  10. Neuropricing

These new approaches to monetization are not limited to certain industries or geographical areas. They are all-pervasive and will continue to evolve, increasingly changing the rules of the trading game. They create transparency in terms of customer needs, product use, and readiness to pay that has never been available previously. Products are transformed into services. Their value is translated into measurable units of performance.

The Pricing Model Revolution establishes a strategic imperative: a new way of pricing is here and it is the new and unstoppable source of competitive advantage.

The Pricing Model Revolution

Danilo Zatta’s book The Pricing Model Revolution features the latest strategies, tactics, and best practices that you and your organization need to increase your performance with a detailed focus on monetization. His global, cross-industry experience, along with a great focus on qualitative and quantitative acumen, will lead you to help exceed your company’s goals.”

– Kevin Mitchell, President, The Professional Pricing Society

The Professional Pricing Society is the leading worldwide pricing idea marketplace where new and seasoned business professionals from all industries come together for learning, training, and networking while gaining actionable insights, new and refined skillsets, and earning pricing credentials.

Elevate your value by joining our global pricing membership and starting your pricing certification.

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