Digitisation fosters price differentiation

7 March 2018. HSG President Prof. Dr. Thomas Bieger welcomed the large audience to Christoph Franz's inaugural lecture. The authority on various industries, he said, had a wide variety of ties to the University of St.Gallen. "He is a member of the HSG Advisory Board and involved in teaching. Thus he lectures at various levels of university education and plays a part in HSG congresses and seminars." In addition, he also conducts research and regularly co-authors popular-science works and academic publications. "We're grateful to Christoph Franz for his commitment to the HSG," said the President at the end of his welcoming address.

Price differentiation deserves more attention
Price differentiation was an issue that was particularly dear to him, emphasised Christoph Franz at the start of his speech. Time and again in the course of his professional career, he had noticed how in a wide variety of industries, people argued a great deal about personnel, material and other costs, but much too little about price differentiation, which offered many opportunities, which is why it clearly deserved more attention. There was no panacea, however. "Each industry has to develop its own strategies."

The idea of price differentiation was not new but well-known from oriental bazaar merchants, explained the honorary professor. "They try to get that maximum price out of each of their customers which the latter are willing to pay." However, current methods of price differentiation had only become possible through digitisation in many industries. The travel industry had made use of the potential of price strategies at a relatively early stage, which manifested itself in price reductions for groups, for example, or cheaper tickets for early bookers or price differentiation on the basis of predicted demand.

The significance of computer-controlled pricing had resulted in dramatic paradigm change in certain areas. "But transport companies must not only change prices in their systems night after night, but also have to check what prices their competitors currently offer on which routes. To ensure that they are not undercut, they conversely have to try to identify the competitors which enquire about prices in their system in order to show them the wrong prices there if possible."

Gathering information behind the scenes
Quite a lot was going on behind the scenes with regard to price strategies without customers as much as noticing. Christoph Franz illustrated his words with the example of a customer who booked a trip on a German portal in order to get a lower price than in Switzerland. "Now the portal recognises, though, that the enquiry is coming from Switzerland and will automatically indicate a higher booking price than would be the case with a customer from Germany." It also happened that a supplier differentiated prices between an iPhone user and a simple internet user. "In this case it is assumed that the owner of an expensive mobile phone is willing to pay more for his product than a potential customer who only has a simple internet connection."

Whereas the travel industry used every possible possibility of increasing efficiency, other industries were still in their infancy in this respect. This also included the pharmaceutical industry, for drugs had a great potential for innovative pricing. Pharmaceuticals were increasingly tested in "pay for performance" models. Such models aimed to improve care quality in that producers would only be paid for their drugs if patients actually profited from them.

The honorary professor admitted that individualised pricing was controversial. Critics deprecated unequal treatment and computer-controlled "spying" on consumer behaviour without customers being able to notice it. Christoph Franz was convinced, however, that price differentiation would become more and more important in the wake of digitisation. "The societal discussion will continue and learning processes will be required, but the trend towards price differentiation will clearly become stronger."

Conversant with various industries
Christoph Franz studied business engineering and obtained his doctor’s degree from TU Darmstadt. After working for Lufthansa and Deutsche Bahn, he became CEO of Swiss in 2004. After successfully turning this airline around, he joined Lufthansa in 2009 and became Chief Executive Officer in 2011. In the same year, he was appointed to the board of directors of Roche, which he has chaired full-time since 2014. In addition, he is a director of the Zurich Insurance Group and of Stadler Rail, a trustee of the Ernst Göhner Foundation, of Avenir Suisse and the Lucerne Festival, as well as a member of the Assembly of the International Committee of the Red Cross (ICRC).