BCG Henderson Institute

Imagine if your company could measure, customize, and charge for — in real time — the value your products or services create for each customer. Seized to its fullest extent, such an opportunity would enable you to provide more value to more customers and still earn more money.

Progressive pricing is turning that idea into reality, one that more sensibly aligns with today’s digital products and services than traditional industrial-era pricing models could ever do. This innovative approach — already embedded in the sharing economy and in other sectors such as financial services — scales prices up or down on the basis of the value an individual customer derives. While progressive pricing might sound too good to be true — even a violation of the rules of traditional economics — technological advancements and the rules of digital economics are already making it possible. Indeed, the relationship between firms and customers is shifting so quickly and fundamentally that this approach will soon be a competitive necessity, not merely an intriguing alternative, as companies make the measurement of discrete customer value a core competence.

We use the term “progressive” as it’s used in contexts such as tax systems. But unlike taxes, the levels of prices under progressive pricing are value-based, not means-based. Think of the price that a customer pays as an investment in a desired level of value. Each paying customer receives a proportional return on that investment. The prices align properly to value without penalizing customers — by denying access to some customers because of an artificially high price barrier or by charging some customers their maximum willingness to pay while others enjoy a big surplus (the difference between the value they derive and the price they pay).

At first glance, progressive pricing seems to violate the rules of traditional economics, which assume that customers buying the same product or service will pay the same price. But today’s technologies and the pervasiveness of data have put an end to “same.” Firms now can and do differentiate their products and services by individual customer and differentiate their prices accordingly.

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