Co-production, co-creation, and pricing

Derivative Proposition 6

Providing service co-production opportunities and resources consistent with the customer’s desired level of involvement leads to improved competitive advantage through enhanced customer experience.

Only casual observation of the American retail landscape is needed to see the pervasive presence of price competition, especially with the lowering of search costs via the Internet (Alba et al. 1997; Bakos 1997; Gourville and Moon 2004; Lynch and Ariely 2000). Does S-D logic provide any insights for retailers and others on howto more effectively compete on the price dimension? This is important because only through lower costs or enhanced revenues can a firm improve its financial performance. We know analytically that price per unit multiplied by units sold equal revenue. One could argue that if superior service strategies are to yield improved financial returns, then customers should be willing to pay a higher price per unit of service or to purchase more service. While logically correct, this does not inform the marketer about how to achieve better financial returns through superior service strategies. Importantly, S-D logic provides the conceptual tools that can offer insight into the “how” issue.

While it is generally understood that organizations should proactively link co-production and pricing strategies, S-D logic implies extending this price co-production (Lusch and Vargo 2006) link to the firm’s value proposition. A value proposition can be thought of as a promise the seller makes that value-in-exchange will be linked to value-in-use. When a customer exchanges money with a seller s/he is implicitly assuming the value-in-exchange will at least result in value-in-use that meets or exceeds the value-in-exchange. A co-produced value proposition can make the price contingent upon the quality of service experience or other agreed upon output. Sawhney (2006) refers to this as gain sharing or risk and reward sharing. Here the value in exchange (price) is tied to the value realized by the customer. Consequently, gainsharing or risk-based pricing could be a part of developing a service strategy that links financial returns to superior service. If both buyer and seller have something at risk and something to gain, then collaboration will be much more fruitful.

Can a retailer use gain-sharing or risk-based pricing? We argue affirmatively. Consider an example of a retail buyer collaborating with a vendor on a merchandising program. The program might involve a set of integrated services that are tied to value-network management processes – for example, customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, supplier relationship management, product development, and returns management (Lambert and Garcia-Dastugue 2006) – involving the retailer, its vendors, and other value-network partners. Adopting “gain sharing or risk-based” pricing, the retailer would pay a price on the basis of the quality and level of service provided and sales revenue achieved. However, for this approach to be successful, the retail buyer and the vendor (and perhaps other value-network partners) should co-create the value proposition. This co-created value proposition would increase the chances of a win–win situation in a field where intense negotiations have left many vendors feeling underappreciated.

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