Outcome- based pricing Exploring an ‘everything as a service’ model

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Outcomebased pricing
Exploring an ‘everything as
a service’ model
Outcome-based pricing:
Exploring an ‘everything as a service’ model
By Colin Carroll and Mark Haller
In many companies, pricing strategies vary by product
line, region or segment. Revenue models, however, are
more static. The pricing mechanism is considered fixed,
as opposed to another variable in the price optimization
process.
What if you could base your pricing not on your specific
product or service, but on the results your customers
get from using your offering? Companies in industries
as diverse as office equipment and aerospace
manufacturing are experimenting with new “outcomebased” pricing models that offer just what the name
implies: pricing of products and services based not on
shipped units, but on the results they deliver to
customers.
The concept has analogs in the software industry, where
“as-a-service” models have disrupted the traditional
packaged and on-premise applications market. That
model, however, is based primarily on a standard
monthly hosting fee. Outcome-based pricing involves
invoicing for results –quantifiable outcomes – as
opposed to utilization or consumption.
For example, instead of purchasing a copier and ink
cartridges, a company pays for each page the copier
produces. Instead of buying a jet engine, an airline pays
per hour of engine uptime. A mining company migrates
from buying drill bits to paying per drilled meter; a
drugstore chain buys monthly lighting services instead
of light bulbs. Call it “everything-as-a-service,” where
“everything” is any bundle of products and services
deployed to support your desired outcome.
Outcome-based pricing generally works best in
businesses that sell some combination of products,
parts, and service. Fees for the initial product, the
consumables required to run it, and a maintenance
contract are replaced with a single monthly fee based on
a negotiated baseline of outcomes. The seller transitions
from selling a product supported by services to selling a
service supported by products, based on the tangible
value it provides to the customer.
Customers like this concept because it effectively
transfers operating risk from the buyer to the seller. If
the copier isn't working, the customer doesn’t pay.
Sellers like the model because it creates barriers to
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switching and effectively locks in profitable post-sale
parts and maintenance offerings. For many companies,
outcome-based pricing presents an opportunity to turn
services from a service cost into a valued part of the
offering.
Prerequisites: Good data, better
forecasting
Outcome-based pricing is poised to get a jolt from the
rapid rise of Internet-connected devices. As
manufacturers embed connectivity and intelligence in
everything from automobile engines to electricity
meters, they are finding new ways to track usage and
consumption. Combining this data with predictive
analytics, companies can begin to forecast how their
products are used by different customers, in different
areas, at different times.
That’s one key to successful outcome-based pricing: the
ability to accurately predict a customer’s consumption
in order to set per-outcome pricing that benefits both
buyer and seller.
Pricing based on customer outcomes has the potential
to turn the buyer/seller relationship into more of a
partnership, because both sides are working toward
common objectives. The seller is motivated to drive
efficiency and positive outcomes – because the more
successful the customer is, the more revenue it
generates.
Consider a warehouse that used to buy lift trucks but
now pays a fixed fee for 500 daily “lifts.” Beyond
efficiently meeting the lift requirement, the lift truck
supplier has an opportunity to provide suggestions
about warehouse design, stock location and logistics
processes – using the data it collects from the lift trucks
operating in each warehouse. The buyer/seller
relationship migrates from zero-sum price negotiation
to efficiency-driving collaboration.
In this way the seller captures a greater share of its
innovation, as the features of its trucks and logistics
lower its cost to deliver the 500 lifts. Contrast this with
the lift truck salesman’s traditional pitch to the
warehouse purchasing manager who, when told that the
supplier’s trucks are 30% more efficient than
competitors, shrugs and says, “Just match the price if
you want to win the order.”
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Understanding and shaping
behavior
The transition to outcome-based pricing certainly has
its challenges. The model requires a sophisticated
contracting capability, the ability to learn from
mistakes, and changes to processes from analytics to
invoicing. When production or consumption varies
from the expected forecast, for example, conflicts can
arise between the buyer and seller over the root cause of
the unexpected results. Also, attempting to design the
new model without a clear understanding of the usage
behavior of the customers (even to programmatically
incent good behavior) can also lead to seller pain. These
challenges are manageable considering the benefits that
outcome-based pricing can provide.
As companies across many industries look for ways to
respond to rapid commoditization, outcome-based
pricing models should continue to accelerate. A pricing
model that adds value for customers will help
companies improve margins and create higher barriers
to switching. Outcome-based models can be true gamechangers leading to outsized market share and profits.
Companies that can establish a foothold in their
industry with more innovative, service-oriented
approaches to pricing stand to gain a critical advantage
against slower-moving competitors. Beyond that carrot,
every company should consider an outcome-based
model, if only as a precaution to waking up one day to
find it’s being done to you.
About the authors
Colin Carroll is a director in PwC’s Pricing & Profitability practice.
Mark Haller is a partner who leads PwC’s Pricing & Profitability practice.
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