In August, Majid Iqbal visited Vancouver to give a talk at the Value Innovation and Pricing Vancouver Meetup. We invited him up for three reasons.
Services are a growing focus for innovation, understanding their design, how they create value, and how to price them is mission critical for many companies.
Majid’s work makes deep use of patterns and uses them to organize and generate services.
Majid proposes a novel way to integrate value (which he refers to as outcomes) with price and the quality of pricing experience.
These three themes are all critical to our work at Ibbaka.
Majid is the author of the important new book Thinking in Services (BIS 2018). The book sets out a compelling approach to services. It begins with a definition that helps us think more clearly: “Services are performances and affordances producing outcomes that satisfy a set of customer needs.” That services are both affordances (making something available, this is the sense in which Software as a Service is a service) and performances (doing something that provides a desired outcome, like cooking a meal or designing a pricing model) is the key to their nature, and the source of much confusion. How you think about pricing an affordance and a performance is often different, but most services combine the two.
The book goes on to identify the patterns and promises associated with services and provides a 16x frame that can be used to design a service and weave stories through it.
All of this is compelling and worth close study and application, but one of the things that caught our attention is that it proposes a way to factor customer experience into price.
Customer experience is emerging as one of the key drivers of value. Recent research from Watermark Consulting “2019 Customer Experience ROI Study” found that customer experience leaders outperform the market.
This opens the question
How does customer experience impact pricing?
Answering this question is going to be critical to organizations looking to make significant investments in customer experience. Majid Iqbal provides an approach to doing this with his O-P/E=N or OPEN model.
Let’s start by seeing how he defines his terms.
O is Outcomes. Going back to the definition of a service, a key aspect is that services are “producing outcomes that satisfy a set of customer needs.” For this to work as an equation, the outcomes have to be quantifiable. There are many ways to go about doing this. At Ibbaka we often use Tom Nagle’s Economic Value Estimation or EVE. In healthcare, Quality Adjusted Life Years (QALYs) is sometimes used as a quantitative metric. In some cases, one even designs a value metric as part of the pricing work. This metric is then used to communicate value in sales and to measure value delivery by customer success.
P is Price. The trick here is to frame price and outcomes in a way that they can be connected. This is another way of stating Ibbaka’s mantra that value drivers determine value metrics (the Outcomes) and that pricing metrics should track value metrics.
E is Experience. The customer experience puts price in context. See below for more on the implications of dividing Price by Experience. This is the key to Majid Iqbal’s proposal on how to work customer experience into value. Having metrics to track experience is just as important as having metrics to measure outcomes.
N is the Net Value. In the full Thinking in Services model one has to think through both net value for the customer (Nm) and the net value for the service provider (Nv). The net value is the value of the outcomes less the price adjusted for the customer experience.
So what does it mean to divide Price by Experience? Basically, a high quality customer experience, where E > 1, the effective price is lower (you are dividing by a number greater than one). An investment in better customer service is rewarded with more pricing power.
When the vendor provides an inferior customer experience, E < 1. Dividing by a number smaller than one, makes the numerator, the effective price, higher. Another way of thinking about this is that an inferior customer experience decreases pricing power.
The provider needs to decide if investments in customer experience can be recouped through higher prices. The buyer needs to be persuaded that the better customer experience is worth the higher price.
Of course this is not all there is to customer experience. Offering a better customer experience can also reduce costs by eliminating support calls. In subscription business models, good customer experiences have been shown to reduce churn, and, for other services, they drive repeat use. There are a lot of ways that customer experience impacts the business.
The power of the Thinking in Services approach is that it ties together so many aspects of a service and shows how they connect together. This is central to service design. The O-P/E=N equation shown above is an example of this. At Ibbaka we are still working on how to work this approach into our work on market segmentation, customer targeting and pricing design. Having an integrated approach to thinking in services is a great help in this work.