Another Creative Pricing Scheme

It is not often that you see companies using really unusual pricing to build future business. Here is one that I like.


Every price has three and, usually four, components: the Benefit Package, the Basis of Charge, the List price and usually some Optional Components of price. The Benefit Package includes all of the Function, Reliability and Convenience benefits associated with the main product. The Basis of Charge is the way the company quantifies the unit of sale that it prices with the List Price, which is the stated price per unit of product sold. The Optional Components of price enable the company to leave the List Price unchanged, but to alter the value the company offers the customer by changing Functions, Reliability or Convenience benefits beyond those of the main product. The most creative pricing schemes usually involve the Optional Components of price.


Recently, we described one of these Optional Components of price, a Call, offered by Continental Airlines. In this blog, we will describe a “Put” offered by Best Buy. A Put is an Optional Component of price that enables the customer to sell back a product to the seller at a stated price in the future.


Best Buy recently introduced the Buy-Back program for various electronic gadgets it sells. This program adds a fee to the original List price of the product. In return for that fee, the customer gets the right to bring the product back for up to two years for a return value of a stated percentage of the original List price of the product. These percentages run from 20% to 50%, depending on the time of the return. The value of the return itself comes in the form of a Best Buy gift card. Best Buy hopes the customer will use this gift card to purchase an upgrade on the product that the consumer returns.


This Put may be attractive to consumers concerned about the speed of technological innovation in electronic gadgets. The Put effectively reduces the future price of purchasing a new electronic gadget. It leaves the current List prices and future List prices unchanged. It also increases the odds that Best Buy will be the retailer who delivers the new technologically-advanced product.

A Very Rare Form of Pricing

Recently, Continental Airlines introduced a new service called “FareLock.” This new service gives travelers three days, or a week, to decide whether to buy a ticket and avoid a fare increase or the risk that the passenger’s flight will sell out. In return, Continental plans to charge a flat fee of $5 for a three day hold and $9 for a one week hold. Continental is offering its passengers a Call. For a fee, the passenger has the right to buy the ticket at today’s price for a few days into the future. This is a very rare form of pricing outside of the securities market.

Every price has at least three components. Most have four. (See “Audio Tip #113: Tools to Change Pricing” on StrategyStreet.com.) The first of these components is the benefit package that the price offers. The second is the basis of charge, that is, how the company quantifies in currency what it charges for a unit of the product. The units can be a package, an individual item, a unit of time, and so forth. The third component is the list price of the product. Virtually all products also have what we call optional components, the fourth component. These optional components may, but do not have to, be a part of the product price. Optional price components include various discounts, fees, coupons and other methods of conveying a change in effective price, either an increase or a decrease, to the customer. A Call is one of the optional components of price. It occurs only rarely.

Here are some other examples:

* Some colleges have used the Call in the form of a fixed tuition price for any student returning for the four years of the student’s education. This pricing mechanism increases the college’s retention rates. (See “Audio Tip #142: Defensive Pricing Guidelines” on StrategyStreet.com.)

* There are also contingent Calls. Waterford Development Corporation was dealing with a difficult real estate market. It offered to have homes re-appraised two years after the date the transaction closed. If, after two years, the price of the home dropped, the company promised to write the buyer a check for up to 15% of the original sales price. With this Call, the customer gained the right to live in the house and yet pay a lower effective price for the house if the market should decline in the next two years. (See “Audio Tip #151: Changing Performance and Price Together” on StrategyStreet.com.)

* A discount broker, in an effort to attract more high-volume traders, offered a Call. This broker charged the customer only a single commission for multiple trades of the same stock on the same side of the market on the same day.