After the last several posts, I shared significant information and examples about measuring and determining buyer experiences through use of the Buyer Utility Map. After you’ve asked the important questions about how buyers experience your product or service, you’re now ready to do the work of pricing your product or service.
Blue Ocean Strategists often use a tool to assist in strategic pricing of a product or service. The tool assist product managers and strategists find the right price for that hard fought innovation. Often times, it is not the lowest price. When you launch or innovate into blue ocean waters, price pressures are not a common problem.
There are two steps in the tool’s use.
Step One: Identify the Price Corridor of the Target Mass
Sounds confusing but it isn’t all that complicated. Typically, companies look to the pricing of competitors, perceived competitors or the pricing of industry wide offerings. This is an appropriate part of the first step and it is where most companies stop. They simply price their offering lower or higher based on perceived value and narrative.
The path to blue ocean pricing calls for a look outside industry boundaries. You’ve noticed or will notice this is a common theme in blue ocean strategy. This in terms of categories, not products or services.
The two categories: those that take different forms but perform the same function and those that take different forms and functions but share the same overall objective.
Different Form/Same Function
Consider the overnight business trip involving a drive of four hours or so. Compare that to the original mission of Southwest Airlines. A comparable in cost expense outlay with an advantage of convenience, speed, and no overnight travel in many cases. Founder Herb Kelleher knew travel was ripe for innovation. Southwest kept costs low. It flew just one kind of plane, the Boeing 737, to make maintenance simpler and cheaper. It gave out peanuts instead of meals. There were no assigned seats. It operated from less-congested secondary airports to avoid money-burning delays. Southwest turned a profit in 1973 and hasn’t looked back.
Southwest filled a huge new blue ocean with revenue by providing a different alternative that accomplished the same function as driving.
Different Form and Function/Same Objective
Consider VRBO or Airbnb and overnight stays for business or pleasure. At one point in recent history, most people would have answered polls regarding whether or not they would book, stay, and be happy in a home of a stranger for an important trip with a resounding NO. This is no longer the case. The Airbnb experience provides the same objective as a hotel stay. A place to sleep, dine, store luggage, freshen up, etc. It is entirely different in form and function.
These services rose out of the necessity to meet consumer demand in new ways. Innovators utilized methods available to you in the Buyer Utility Map to arrive at innovative products and services. The question becomes, how does one price these new offerings?
In simple terms, the price corridor is the range that captures the primary MASS of buyers. The image below is a sample used for a Telehealth client. You see a grid showing Upper Pricing Limits and Lower Pricing Limits. The horizontal axis shows categories for Same Form and Function/ Different Form and Same Function and Different Form and Function with the Same Objective.
In the case above, options for securing provider appointments via Telehealth platforms are laid out buy category and price for the patient. Some are subscription models, some are concierge medicine program and others relate to typical insurance and medicaid type coverage.
You find that the higher priced offerings are generally those that are most difficult to replicate. Concierge Medicine for instance is high priced, exclusive in nature, generally referral only, and limited in its offerings. While state supported healthcare is low priced, it is still exclusive by nature of its income qualifiers and age qualifiers. All the options are associated with delivery treatment for health care issues.
Step Two: Specify a Level within the Price Corridor
How might the tool help leaders determine the highest price without instantly inviting competition? There are two primary factors. One: How is the product or service protected legally via patents or copyrights? Two: What is the degree to which the company own exclusive assets, core capabilities, or production rights or design patents? A common example is Dyson. Through patents and difficult to replicate production and service capabilities, Dyson has been able to charge premium pricing for its products since their introduction.
If your offering doesn’t have the protections listed above or similar ones not listed, you should be pricing in the middle of the price corridor.
In the case of Southwest Airlines, their service wasn’t patentable or exclusive or protectable so pricing fell in the lower priced corridor to appeal to as much audience as possible.
The price corridor of the target mass signal not just the pricing zone of the new audience you wish to pursue but also provides signals about how you might price offerings after launch or into innovation phases.
If you have questions about use of any of the tools provided via Blue Ocean Strategy, I’m passionate about those conversations. I offer a free hour-long Blue Ocean Strategy Zoom or WhatsApp call to anyone interested in a chat about their work.
Sherman G. Mohr is an Insead Certified Blue Ocean Strategist residing in Nashville, TN. He’s a Co-Founder of technology and marketing firms in spirits, wine, beer, online communities, healthcare, and more.