Price carriers - the lego bricks for Pricing
Last month we discussed the advantages and disadvantages of the different price models - these are the full set of prices and policies to define how much the customer will pay. Read the full article here to understand upfront pricing, subscription pricing, pay per use pricing and outcome based pricing.
This month we focus on the price carriers for your business model. Price Carriers are the building blocks of price models, the things that “carry” the price, that when multiplied by a ‘price per unit’ give you the price charged.
Price carriers often might feel intuitive, but they don't need to be. Have you ever thought about buying jeans based on how many square meters of denim was used to produce it? Or buying books based on the number of pages it contains? While in practice one could do it, they are not common practice. On one hand, your pricing should factor in what your customers are actually willing to pay you, generally based on the value they receive from your offer. On the other hand, your costs (investment and operating) sets a floor on how much you need to charge to make a profit and have a sustainable business model.
Let’s review the most common carriers:
Upfront prices, or “one-and-done” payments for products or services. For hardware this is the item itself (e.g. a hairdryer, a piece of equipment), but is also used for software and services (e.g. a perpetual software license, a train ticket). The price is often adjusted based on the pack size (e.g. number of units in the pack, a kilo, a liter).
Subscription prices are a set of pre-defined payments for the use of the product or service for a fixed period of time. Common subscription price carriers include the duration and number of users (named, active, or total), and may be changed by the level of technical performance (speed, accuracy, number of allowed integrations) and the amount of space reserved. Prices of subscriptions can be set up as flat rates (e.g. ‘all-you-can-eat’, maintenance contract), as tiered membership (access to different features & modules) and may include up-sell options for additional features, storage space, etc.
Pay-per-use prices, also known as usage-based pricing or pay-as-you-go, are payments set after the usage: typically PPU price carriers include the number of transactions, number of logins/connections, the amount of storage space used, amount of service consumed etc. The price carriers here are often the same as for subscriptions, but they are estimated after the fact.
Outcome prices are based on the result of the product or service delivered. Prices in this case are based on Key Performance Indicators that directly link to outcomes or value that the customer receives from the solution. Examples include sometimes include sales volumes, turnover, profit, employee engagement, production throughput, etc.
Which price carriers to use is a key decision facing all companies. We find it helpful to evaluate price carriers using five dimensions, each considered from the perspective of the customer AND the supplier:
Four factors, assessed for both the customer and the supplier, should be used to evaluate which price carriers are optimal.
How is value (reward) shared between the two parties?
How much effort & investment is needed to create the value?
How is value creation/capture risk controlled and shared (upside as well as down-side risk)?
How is the value shared over time?
How practical & attractive is the price carrier?
The simplified graphic shows how the first four dimensions define value delivery and capture for the overall solution. While the total value created and the investment and effort needed to realize the value are mostly defined by the specifics of the offer (which can and should be carefully designed), which price carriers are used will influence the value, investment, time-to-value and risk taken by the supplier. And of course, that will influence the impact on the customer. Usually, it makes sense to build a pricing model using a mix of price carriers to balance the four considerations.
As you think through all this and consider what’s the best option for your business, here’s a handy step-by-step process for you to follow:
Define a specific offer, for a given customer, and compared to their ‘next best alternative’. It is much easier to start from a very specific scenario.
What’s the value profile of your offer overall (value, effort & investment required, risk, time-to-value)? This sets the overall frame for how these are shared between you and the customer. See a previous blog about holistic value.
Which price carriers could make sense? Brainstorm on all the possible options, considering all the four different types of price carriers.
Assess the most promising price carriers against each of the five dimensions. Which ones show the most promise in balancing each of the different factors?
Build out a specific offer and assess how it is likely to be accepted by the customer and by yourselves. Try to take the customer’s perspective: they are likely to evaluate things differently from you. Write down your hypotheses so they can be evaluated later.
Build out offers to address different customer segments, including good/better/best options and different use cases
Validate the customer hypotheses by talking to customers. But also, assess the implications for yourselves: for example, the appropriate level of complexity will depend on multiple factors.
The above steps are part of our ABCD (Ambition-Blueprint-Check-Deploy) process for pricing innovative solutions that work for teams of all sizes. You can find out more about the approach at www.ideal-price.com.
Want to learn more? join our next Free webinar with Diana Coelho & Ian Tidswell on February 22, 16h CET, and learn how to identify and select the price carriers that will work for you. To learn more about the event and register CLICK on the button below.
