Pricing As A Key Source of Management Innovation

Pricing As A Key Source of Management Innovation

By Shlomo Maital

   Strategy guru Gary Hamel has for years preached that innovating business designs can be a far more powerful source of competitive advantage than mere product innovation. I have echoed this.  But it emerges that it is far harder to change a company’s business design — the way it prices, markets, produces, sells, finances, and organizes its supply chain — than to change  its products.

    Today’s Global New York Times has a good example of how pricing policy can be a key source of innovation.  [1]   Kevin O’Brien reports that when TeliaSonera, the Nordic telecom, turned on the world’s fastest network last December, based on a technology known as LTE Long Term Evolution (successor to 3G and WiFi, and WiMAX), customers increased their consumption of data flow by ten times.  Conclusion:  The days of “all you can eat”, or flat-rate pricing by telecoms, are over.   To keep mobile profitable in the long run, telecoms and mobile operators are considering, like TeliaSonera, new pricing plans with download limits, based on actual consumption.  TeliaSonera thought hard about pricing even before introducing its LTE technology. 

     It is interesting that there is an ‘eskimo’ phenomenon here.  After one telecom revolutionizes its pricing, it may be that many others will follow quickly — as Paul Samuelson once said about how economists follow the herd:  When one Eskimo (economist) in a row turns, so do all of them.  

     What are the implications of the new pricing policy?  Are there opportunities here?  How will it affect consumers?  How should consumers respond?     

     Once, it cost more to telecoms to calculate and send the bill for a long distance call, than to actually deliver the call.  That led to “all you can eat” pricing. That is changing.  According to Kenneth Frank, senior manager for Alcatel-Lucent, “there is going to be so much creativity about pricing. We are only seeing the beginning.”

    Innovators should ask:   Can competitive advantage be gained by changing and innovating pricing policy in my industry?  How?  When?  Will others follow?