Top Pricing Challenge among Tech Services Leaders
Among business leaders at the 2018 Technology Services World conference the top issue – in both priority and frequency – is choosing between Cost Based, Market Based and Value Based Pricing models. Other top issues included managing pricing globally, giving away services and monetizing new and repackaged offerings.
The survey got a response by 28 managers from as many different companies, including hardware companies like Cisco and Juniper Networks, software companies like Microsoft and Salesforce, and VARs like Dimension Data. The managers were among 75 participants in a presentation by Value and Pricing Partners titled Growing Revenues through Improved Price Performance.
Of course, everyone knows that Value Based Pricing is the model that delivers the highest margins. That said, in a medium to large sized tech company with 30 years of history, where do you start?
- How do you choose whether Value Based Pricing is the right approach?
- Where do you start when you have a portfolio of hundreds of offerings, perhaps more?
- What changes must be made to processes and systems to transition from your legacy pricing process to a new approach?
Portfolio Approach to Pricing
Choosing between pricing models is a complex decision because one-size-fits-all is not the solution. Different offerings require different approaches to pricing, depending on degree of differentiation and degree of productization. The following illustration shows a portfolio of products and services, and which of these are candidates for Cost Based, Market Based, Value Based or Outcome Based pricing. Outcome based pricing is a subset of value based pricing where the price received is directly tied to some value metric.
Portfolio modeling is a useful approach to deciding where to focus your Value Based Pricing efforts. Some purists would argue that Value Based Pricing should be applied across the board. In many cases, however, that approach is simply not practically doable. For most companies, at this time, the goal is to apply a value based approach where it has the potential to have the greatest strategic and financial impact on the firm. That said, I can very well see a future, perhaps 10-20 years out, where systems enablement permits all pricing to be value based.
Degrees of Productization
A second consideration, also made evident in the illustration above, is that Value Based Pricing is implemented differently depending degree of productization. For services with offers having little packaging, e.g. SOW based, value pricing is largely implemented by the sales organization. For services that are highly packaged, pricing is determined by the product management organization. So exactly how value pricing capabilities should be developed depends on the part of the portfolio to be priced.
One more question is: What kind of supporting infrastructure do organizations need to enable value pricing? A change in pricing methodology involves changing how pricing is done and that requires an enabling infrastructure. We categorize it into five elements:
- Value and Competitor Information System – the raw material for making pricing decisions
- Price Planning System – Connecting pricing to the business plan
- Sales Effectiveness System – Communicates price and policies to sales and facilitates negotiation
- Resource Allocation and Cost System – Aligns investments with value and assures profitability
- Performance measurement system – In process and end result measures of how pricing is working
It is indeed remarkable how much a new pricing model can impact revenues and margins. We have seen improvements of 20% or more in many cases. Getting there requires some effort in picking your spots, getting the right people engaged and providing the infrastructure to support them. The ROI, however, can be considerable.