Value Delivery Patterns Shape Your Pricing Choices
In recent work, we have found that when you deliver value is as important as how you deliver value. The when becomes a critical input into designing your pricing model. Working with a large B2B SaaS company that has a long implementation and configuration cycle, we uncovered contradictions between their pricing and how the customer was getting value. Basically, this led to internal tensions between sales, finance, the implementation team and customer success.
This company manages time to capture implementation costs (how many months will it take until revenue collected exceeds investment in implementation), with a target to capture these within four months. It is a good idea to track these formally. They are as important as your customer acquisition costs (CAC).
In the above figure, Vendor Position is Revenue less Vendor Investment, Customer Position is Value less Customer investment. The calculation of Customer Value is an important area that deserves a lot more discussion.
There a several ways the company can resolve these tensions. Perhaps the best is to redesign the solution and implementation procedures in order to start providing value to the customer earlier. One generally learns a lot about a company when implementing a major SaaS solution. Can these insights be turned into something the customer will value? Time to value should be a key design metric. More generally, the pricing model may need to be rethought to better align revenue capture with value to the customer (V2C).
This work led us to start asking about the different ways in which V2C is distributed over time and how this could impact pricing model design. Looking at our own work, and doing a scan of some common SaaS business models, we found a number of different patterns.
The simplest case is where the value to customer grows linearly over time. In reality, we think this is rare, but a lot of pricing models assume this.
More common is the standard S curve in which it takes for the value engine to kick in, but once it does, value builds quickly, only to reach a plateau. This is the most common B2B SaaS model and is typical of everything from market automation to HR applications.
The challenge here is that humans are more attentive to change than steady state and tend to be future looking. ‘What will you do for me next?’ Under this pattern, value perception (how much value the customer believes you are delivering) can decline rapidly making renewals more difficult.
The inverse of this, sometimes referred to as a Z curve, can also happen. This is most common when software is adopted to address an urgent need, but once the problem is addressed it goes away.
In this case, a subscription model may be your enemy. Rather than looking for a long-term subscription, consider bundling the software into a consulting offering, with a long-tail to gather the information that will feed future engagements. This is the model, we currently use at Ibbaka, as our work is very much around understanding market structure and then designing a pricing model that fits the market.
In some cases, value to customer is periodic. The periodicity can be seasonal or driven by industry cycles.
Pricing offers that have periodic value delivery can be tricky. The first thing to do here is to get a deep understanding of what drives the value cycles. Ideally, you want to time renewals as the customer is climbing the value curve. You may also want to consider models that use surge pricing of some form. Well-timed communication with the customer and close monitoring of external factors that drive value are critical to successfully managing this pattern.
Pulling this together, one can map value distribution patterns to pricing models as follows.
When looking at the distribution of value to customer over time, ask yourself the following questions.
- Think services, not products – services unfold over time and help put a temporal framework on value (customer journey maps are a good way to do this)
- Start with value to the customer
- Understand how value to the customer unfolds over time
- Map your costs over time as well
- Then design pricing to keep value delivery and value capture aligned
Interested in pricing issues? You can take this survey on Value Innovation and Pricing Insights from CEOs.
Todd talked to us about what exactly “product led” means, how a product-led strategy extends way beyond acquisition, and how the less-is-more concept can make a big difference.