Service innovation: converting Pareto loss into revenue

Abstract

Consumers' choices depend on the net value they get after taking into account both monetary and non-monetary costs incurred from the purchase. This paper looks at the need to revise the understanding of value relating to price, that is replacing consumer surplus with net value and incorporating price and non-price outlays into the expected outlay to gain a better understanding of buyers' choices and the role of price within that choice. The term Pareto loss was coined to describe the situation where neither the buyer nor the seller benefits from the non-monetary costs incurred by the buyer. The ability to identify Pareto losses in a firm's service enables the firm to innovate, resulting in its ability to increase price, increase demand or improve customer satisfaction. Furthermore, technology has given rise to new distribution channels for selling, thus different Pareto losses exist for different channels and converting such Pareto losses would give rise to many permutations in pricing.