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The average American spends $ 384 a year on dental care between expenses and insurance costs. That's about $ 10,000 for dental care in three decades, in addition to the effort of scheduling appointments, getting to them, waiting, and the pain of care – a pain point if there ever was one.

Now imagine that you are the CEO of an oral care or medical device company. They invent an amazing toothbrush that detects plaque and cavities before dentists or patients do. With the knowledge from this book, your company will make it intelligent and networked. It guides the patient while brushing and plans a dentist appointment if necessary. Your toothbrush, we call it Smart Connect XL3000, keeps customers' teeth so clean that the cost of dental care is halved and the time spent on appointments is reduced. Assume that the production costs $ 300 and takes five years as long as the toothbrush head is replaced every six weeks. At what price would you sell the Smart Connect XL3000?

Before you think about your pricing strategy, be it $ 500 or $ 5,000, be it with a gross margin of 50 percent or 20 percent more than the competition, keep in mind that it's about more than price. For our networked toothbrush or network strategy, the overall task is to develop a sales model.

Price strategies in the course of time

Consider the price trend in four episodes. The first episode is bargaining, which is still common in many bazaars. The seller does not announce a price in advance and haggles with every potential customer.

In the second episode, prices are published, e.g. B. those printed on articles in a supermarket, listed in catalogs of mail order companies or displayed on billboards. The prices quoted simplify transactions and increase convenience and efficiency. However, they enforce uniformity between customers. If Selena is willing to pay $ 500 for a phone, but Jackson is only willing to pay $ 300, price discrimination between the two is difficult. If a retailer has only one phone in stock, it may make sense to increase the price. However, this is often not possible if the price is given.

With the arrival of the online marketplace, we started a third episode. It became possible to adjust prices dynamically and intelligently. As consumers, we know airlines that do this best and are sometimes upset about them. A flight from Philadelphia to Boston can go from $ 99 one day to over $ 400 the next. This reflects the availability of seats and the ability of airlines to identify us as likely business travelers given our travel time. The Internet also enables more complex pricing schemes such as customer loyalty programs or group purchases.

Despite these differences, from bargaining at the bazaar to dynamic online pricing, traditional revenue models retain three limitations:

Limited information: Given the episodic nature of the traditional (unrelated) business transaction, buyers and sellers have to agree on a price, be it for a toothbrush or medication. The problem is that the value the buyer will get from this transaction is still unknown at this point. Will a new connected toothbrush really reduce my need for dental services?

Limited trust: One solution to dealing with limited information is to delay the final pricing decision until more information is available. For example, the toothbrush manufacturer could require the customer to pay an additional $ 500 if their teeth remain healthy. The problem with this solution is that in the event of a cavity, the customer blames the toothbrush and the manufacturer for poor cleaning behavior. Without any monitoring data, the conflicting interests of the buyer and the supplier will undermine the trust between them.

Transactional friction: Even if we could overcome the limited trust and find a way to determine whether the customer's teeth deterioration was due to poor brushing or poor product performance, we still face the problem that the customer value toothbrush every day pulls. Traditionally, however, paying daily is a very expensive practice. Each transaction requires an administrative burden for payment processing, which is likely to separate the time the customer is paid from the time the value is derived. With the advances in connectivity and the resulting formation of connected relationships, as explained in our book, we have now introduced a fourth price sequence.

What is new in networked strategies?

In this fourth episode of pricing, the three constraints just discussed are overcome by longer-lasting, connected relationships that are facilitated by high-bandwidth information exchange. It is possible to use a number of additional variables as part of the earnings model. In other words, the price can now depend on factors that previously could not be used to influence the price decision. This includes information about the following:

• When the product was used
• Where it was used
• Who used it
• What are the benefits?
• What problems did you encounter while using?

In short, the resulting revenue models can now be tailored to the specific application. As a result, the related relationship enables the company to overcome the three limitations previously discussed in the following ways:

The limited information problem can be overcome by delaying payments until more information is available. The most common resulting earnings model is called pay-for-performance. Payments are delayed until further information on the user benefits is known.

The problem of limited trust can be overcome as a constant flow of information enables the monitoring of measures taken by two parties with conflicting interests. Such a check is also necessary for the pay-for-performance model.

Due to the low transaction costs, there is no reason to group all financial transactions into one payment, as is common in episodic relationships. Instead, we can use revenue models like pay-per-use (pay every time the product is used).

Networked strategies therefore enable us to create completely new revenue models. For our toothbrush, the price can depend on how many minutes the brush was used per day, how many different customers used the brush (hopefully with different brush heads) or to what extent cavities could be avoided. In other words, the constant connection and the associated flow of information enable us to increase the dimensionality of the price range. No more price is printed on the box. There are now many different options for revenue models, including different ones for different segments.

Contribution to the Branding Strategy Insider by: Nicolaj Siggelkow and Christian Terweisch. Extract from the networked strategy: Establishing continuous customer relationships for competitive advantages (Harvard Business Review Press, May 21, 2019) Copyright 2019 by Harvard Business School Publishing Corporation. All rights reserved.

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