Ibbaka builds its work on value-based pricing. In essence, value-based pricing advocates basing price on the differentiated value you create for your customers. Differentiated means the value you create relative to alternatives. The critical question though, is who are you creating value for? How you answer this question impacts your pricing and go-to-market strategy.
Before we dig into this, let’s take a quick look at differentiation value. In our seminars we often use the below figure to pull together ideas about economic value, differentiation and how value is created for customers (this slide comes from a seminar we recently led for WaterTAP in Toronto).
Basically, your value is the value of the commoditized part of your offer (which is determined by the market) plus the value of your positive value drivers (note the six different types) less the value of your negative value drivers (your unique costs and shortcomings when compared to the alternative). Your negative value drivers are the alternative’s positive value drivers.
This approach has its roots in the work of Tom Nagle and is described in his classic book The Strategy and Tactics of Pricing, now in its Sixth Edition, which was co-authored with Georg Müller. Ibbaka has evolved this approach by weaving in emotional value drivers. Even in B2B, emotion plays a critical role in the perception of value and willingness to pay.
One critical question that is often overlooked is “Who is the value being created for?”
This sounds like a simple question, but unpacking this reveals some important challenges that can impact your pricing strategy. Who gets value? How do they get value? Who pays?
The first step in unpacking this is to build a stakeholder map for your solution. A stakeholder map shows all of the decision makers and influencers involved. Traditionally the stakeholder map was done for the buying process. This is no longer enough. For subscription pricing models, or viral adoption models, it is important to create value for end users and even beyond for the larger community. Many companies track the use of software closely and phase out software that is not used. To win in subscription markets one needs to create and communicate value well beyond the sales process.
Buying is shaped by external influences, often filtered through search or accessed through social media (though conferences and peer-to-peer relationships remain important.) There is a feed forward loop directly from the influencer crowd to the community of users crowd.
There is also a feedback loop from the community of users to the influencers. The influencers are generally aware of how adoption is going for different users, and how this is impacting the business and the personal experiences of individuals.
Value perception and delivery has to be managed across the cycle of Influencer-Buyer-User. How this is done will have a big impact on how prices are set and the impact of pricing on renewals and the ability to ensure renewals and expansion.
One reason this can be so challenging is that positive and negative value drivers can impact different stakeholders in different ways. The pattern shown below is quite common. The business buyer and end user are quite well aligned, on both economic and emotional value drivers. This is not always the case of course. There can also be serious disconnects here, as was true in the early days of the CRM (Customer Relationship Management) market, where sales people felt that the CRM was being used by sales managers to micro manage them, without providing them with any real value. But the goal of product design should be to get at least this minimum level of alignment. This is one reason for the current upsurge in interest in UX (user experience) which is generally focussed on end-user success.
There are other stakeholders that are more ambivalent about this offer. The CFO to begin with. Although the CFO can appreciate the impact of the solution on revenue and performance she is even more concerned about the implications on costs and any capital investment required. She is also held accountable for security and sees change as a risk. IT sees no real benefit. Just another business application slipping out of its control when it could just as well be handled (they insist) by the existing ERP (Enterprise Resource Planning) system. Meanwhile, procurement mainly sees the costs and the risk of making a bad buying system. Procurement is used to working closely with the business buyers though, and have some appreciation of the performance implications and want to be part of the business leadership in the company.
Knowing who gets value within the organization, how they get value, and who they influence is a foundation for pricing work.
In the coming years, many companies are also going to need to think about the impact of their solutions on the larger community. There is growing pressure to force organizations to be accountable for negative externalities (a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved). On the other hand, organizations are also taking credit for positive externalities. This is reflected in the rise of corporate social responsibility functions at major companies and is behind the ideas of the circular economy. We are seeing a trend where leading companies are thinking harder about externalities, the impact of their solutions on society at large, and looking at ways to price in order to enhance positive externalities and to reduce negative externalities.