How To Align Offering Strategy With Pricing Strategy
If we are reincarnated, I hope I come back as a physicist, perhaps a theoretical astrophysicist. I would love a life thinking those lofty thoughts. In this life, I love talking about this topic, aligning offering strategy with pricing strategy, because it is directly analogous to two core concepts in Physics. In the 19th century James Clerk Maxwell found that electricity and magnetism are two facets of the same force: electromagnetism. In the 20th century Albert Einstein found that space and time are two facets of the same reality: spacetime. The key to aligning offering and pricing strategy is that the two concepts are one. We call it Price-Offer Design.
Let’s start with a simple question: Why do we buy anything? We buy things because in our minds the value of the thing is greater than the value of the money we pay. The story is the same whether the offering is a chocolate bar, a new software product or optimization services. Note also that sometimes you want a chocolate bar, and other times you don’t. The value of all these offerings may be high to some buyers and low to others, or high at one time and low at another. If I am feeling good with my diet, I am unlikely to value a chocolate bar. If I am looking to solve a CRM problem and someone has accounting software, I am unlikely to be interested. If my plant is already running at capacity, optimization may have little value to me.
We call this value segmentation, and it is instrumental to offering design. For our purposes here, let’s look at time based value segmentation and price-offer design. TSIA uses the LAER model to explain customer engagement, as follows:
LAER Engagement Model
The LAER engagement model is particularly apropos in a XaaS environment where value must be proven over time in order to grow and sustain revenues. In this context, the offering and pricing must dynamically change throughout. We call it Dynamic Pricing. In the simplest view, consider how the buying center changes. In addition, the value prop, how it is justified and the pricing mechanisms for capture also change. LAER demands Dynamic Pricing at each stage, where overall revenue and margin are optimized through proof of value rather than winning the feature war or maximizing services rates. The following chart illustrates an example of Dynamic Pricing across the engagement lifecycle.
Aligning pricing strategy with offering strategy in this case recognizes the changes the customer perceived value, your pricing power, and the customer’s price sensitivity at each stage. At launch the product itself may hold most of the value, but through the cycle the value of the services component grows and becomes a primary driver of retention and recurring revenue.
To implement Dynamic Pricing, particularly in a complex, B2B sales environment, requires systems enablement, employing consumption analytics and predictive modeling. This puts value and pricing power in the hands of sales in a way that has not existed before.
Today’s space telescopes and super computers permit astrophysicists to contemplate hundreds of billions of galaxies with hundreds of billions of stars each, the big bang as a recurring event and 11 dimensional spacetime. Likewise the alignment of offering and pricing strategy is being reimagined through the lens of technology.