Does selling outcomes (vs SKUs) give more pricing power?
We’ve been talking about taking out the complexity of doing business with our respective companies and doing that by selling outcomes instead of individual products and services. This helps our customers navigate this hyper-changing world. Does it give us more pricing power? Can we be transparent about the details of an offer without reverting back to cost+ pricing strategy?
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Hi Jason -- I noticed TSIA's research suggests that a tighter offer/market fit will lead to more pricing power. The stronger the match, the stronger the pricing power. Thus it seems doing more market discovery and working towards more outcome aligned pricing would be the way to go. Laura Fay's conference session around this at TSIA World: Interact 2022 - Orlando (XaaS Pricing Models and Trends Session) talked about this a bit more.
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Hi Jason - in my experience creating outcome-based services, I would say "absolutely, yes, it will give you more pricing power and, yes, you must be transparent about the details of the offer." There is of course a lot to unpack here. "Pricing power" could mean anything from protecting a current premium price, slowing the erosion of a price, or unlocking net-new pricing highs. It really would depend on your specific context. Similarly "being transparent" can mean quite a few things, from sharing your cost structure with a client to creating financially-backed and enforceable service level agreements. Hope that helps and hope you are having success in your efforts to transition to selling outcomes.
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@Patrick McGowan @JasminePilar Thanks for the response. You're right that each of these elements could mean different things depending on where you're starting from. Are your sales people giving things away? Are your prices too low for the cost inputs? That's a good point.
It seems to me that if you're starting with outcomes, and working backwards from there to show products and services individually, you won't get the buyer comparing your overall offer to those of your competitors line by line. And this is where the "pricing power" comes from.
Put another way, whether you're defending standard prices or pushing for new pricing highs, you can show that the whole is greater than the sum of its parts. An outcome. Does that sound right?
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That's exactly right, @JasonSeals, you can show the whole is greater than the sum of parts. Additionally, I recommend leveraging and embracing line-by-line comparisons when bringing an outcome-based offer to market. Traditional offers will have traditional lines, allowing for - at best - incremental differentiation. Outcome-based offers introduce completely new capabilities and metrics, dramatically shifting the comparison points buyers care about. It's an opportunity to re-write (or significantly influence) what matters to buyers. Your competitors won't be able to match the new line-items or comparison points and you'll win.
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@Patrick McGowan, interesting comments you shared and they make intuitive sense. Would you have any examples you could share to help illustrate?
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@DougCaviness, here are a few examples, abstracted from some real world use cases. I hope they serve as useful illustrations, covering a few different contexts and industries.
Company ABC develops an eCommerce software, providing traditional functionality (e.g. store front, content management, pricing, personalization, sales & promotions, abandoned cart recovery). ABC initially differentiated by shifting to a SaaS model and outpaced competition with attractive, financially-backed service levels (e.g. 99% uptime + specific recovery point objectives). The competition eventually caught up in the shift to SaaS. Now, ABC is introducing an outcome-based offer guaranteeing: 1) abandoned cart reduction; 2) avg. value per cart increase; and 3) return purchase increase. This new outcome-based offer includes ABC's existing SaaS service levels and bundles its professional services (e.g. abandoned cart recovery optimization). The offer takes ABC's pricing premium to new levels and includes a revenue share model. To the key points in this thread: increased pricing power = yes; offer detail transparency = yes; shifted buying requirements = yes.
Company XYZ manufactures equipment which is utilized in the technical laboratories of various industrial manufacturing facilities. XYZ initially differentiated via field and professional services and outpaced competition with clear, well-priced and contractually-obligated service packages (e.g. installation, extended warranty, preventative + predictive maintenance). The competition eventually followed suit with similar programs. Now, XYZ is introducing an outcome-based offer guaranteeing: 1) availability; 2) throughput; and 3) continuous measurement accuracy. This new outcome-based offer simultaneously extends XYZ's traditional programs (e.g. 10 year warranty becomes 15 year) while introducing net-new capabilities (e.g. automation and machine learning). The offer maintains XYZ's price premium while extending contract length and customer lifetime value (as it comes with full-cycle cradle to grave of the equipment, including upgrades, replacements and renewals). To the key points in this thread: increased pricing power = yes; offer detail transparency = yes; shifted buying requirements = yes.
Company 123 manufactures and distributes an input ingredient that is utilized in industry-specific manufacturing processes. 123 historically differentiated via "better product" and "superior service" (i.e. the product was functionally superior and experts in the field were more experienced and knowledgeable). Other entrants eventually penetrated key market segments by undercutting price (and sacrificing product quality and service); this has resulted in commoditization and downward pricing pressure. Now, 123 is introducing an outcome-based offer: instead of selling its ingredient by weight (with support services included), 123 will install connected sensors and equipment, use data science and analytics to optimize ingredient dosing and guarantee specific service and performance levels. The offer is priced relative to the rate of manufacturing and is backed by a performance guarantee of the unit operation its ingredient supports. This new outcome-based offer re-packages 123's traditional capabilities (manufacturing, distribution and technical service) and integrates them side-by-side with net-new capabilities (data science and automation). The offer maintains 123's price premium, shifts the customer relationship from "commodity supplier" to "solution partner and provider", extends contract length and value, and increases profit margin (because the new solution lowers to cost of sales and cost of service while affording opportunities for additional supply chain optimization). To the key points in this thread: increased pricing power = yes; offer detail transparency = yes; shifted buying requirements = yes.
Hope that helps!
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@Patrick McGowan , great illustrations and thanks for sharing!
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