On the business of pricing

Two interesting articles came out this past week that provide interesting perspective on pricing models for service businesses.

One, in The Economist, declares that businesses need to get better at charging more. In a typical competitive market, firms are always looking to undercut rivals in order to secure business, which leads to ever-decreasing margins. Instead, many consultants are now advocating that firm pricing structures, tangible benefits, well-managed customer expectations and smart framing can boost asking prices and, in turn, the bottom line. Finding differentiators is an effective counterpoint to price competitiveness that leads to higher grosses.

The other article takes this notion and runs with it. In the New York Times, Adam Davidson asks, What’s an idea worth? He then explores companies that have pushed themselves away from hourly billing into business models that value expertise over pure labor. By identifying a niche or selling a targeted execution, firms can balance predictable costs with more valuable, and thus pricier, customer acquisitions. An important takeaway here is that hourly billing dates to the 1950s—perhaps revealing that it, like many other twentieth-century business paradigms, is approaching the end of its usefulness.

“It’s clear that the fundamental nature of work has changed,” writes Davidson. “In today’s austere age many businesses cannot depend on rising sales volumes to lift their profits,” notes The Economist. Both pieces point to the same conclusion: selling more specific, high-quality services improves both profitability and customer satisfaction.