Most pricing work has been on pricing products and services that are delivered one at a time, like hotel reservations or airline tickets. The economy is changing though, and many things that were once thought of a products are being repackaged as services. How will this impact pricing and packaging?

The range of things being delivered as services is astonishing. The classic story in pricing circles is of course the shift from aircraft engines to leasing power by the hour, where the airline only pays for the time the engine is powering the plane. Many of us now use car services of some form rather than buying a car, my millennial children doubt that they will ever want to own a car. One of the most interesting ideas is to see if concepts from services and service design can be used to change how we price antibiotics as a way to address the growing problem of antimicrobial resistance (AMR) and ‘superbugs’ (more on this in a follow up post).

Value Over Time

The big difference between pricing one time sales and pricing services is that one has to be very aware of how value is distributed over time. This is not a question we often ask ourselves, but when one moves from providing a product that is sold with a one time price to a service where the price is generally based on some form of subscription it becomes the question. Value-based pricing has to expand to include an understanding of value over time.

The standard model for the change from product to services pricing comes from Tien Tzuo in his excellent book Subscribed. 

Tien Tzuo does not make this explicit, but if you think about it, services and experiences unfold over time. The value to the customer (V2C), also changes over time. As we know from our research into how customers perceive value, economic, emotional and for many businesses community value drivers are all critical to market segmentation and pricing. For these value drivers to be effective, they have to be sustained. It is hard to build a subscription model for services that only have value for a short period of time. On the other hand, if the product delivers value over a long period, especially if that value increases over time, then a subscription model may be the best way to communicate, capture and sustain value.

Many data driven applications are an example of services where value grows over time. The more data available to analyse, or to use in training the machine learning AI, the deeper the insights and better the predictions. The longer the time series, the better one can see trends. This is true of the Ibbaka Talent Platform, where the long-term patterns of skill and capability development, when available, can provide insights into future potential.

Value Over Time Patterns

We have written elsewhere on the different patterns for value over time and how these shape pricing choices. These can be summarized in a simple table.

Our initial work on value over time and pricing focussed on the economic value. Recent work combining value and customer journey maps has found that there can be disconnects between economic value and emotional value. When this happens it complicates everything from value communication, to customer success, to the design of the pricing model.

In some cases, emotional value is experienced as high when a solution is first adopted. But then reality sets in, there is disappointment, or over time the solution just fades into the background of work. Some of us were pretty excited when Slack emerged as a communication tool. It is pretty hard to get excited about Slack today, but I have no doubt that the economic value it offers has grown, and that it grows over time.

On the other hand, in some cases the emotional value grows with time so that you cannot imagine living without a solution, even if it has become a bit threadbare. The best solutions are like old slippers, they may look a bit worn with use, but they have worn to the shape of your foot. Which of your software solutions are old friends like this?

Pricing and price negotiation get a lot more difficult when there is a disconnect between the emotional and economic. The first step in addressing this is to analyze it and see what the situation is for your service.

If emotional value comes first, and economic value trails along later, then you need to make sure that your subscribers will stick around until they experience the emotional value and do not churn out early. This means selling long term commitments and then providing customer success that makes sure the economic value is starting to surface before the renewal is due.

If economic value comes first, and emotional value comes with experience and use, then sales become more difficult. The best way to overcome this is with an enthusiastic customer community and reference customers who will sing your praises. Make sure you hold back some functionality to upsell once the emotional bond has been established.

Of course in the real world things get even more complicated. Value over time can differ by segment and can even differ across stakeholders in the same company. Apply value over time analysis at the segment and stakeholder levels to design the best value communication and pricing strategy.

Impact on Willingness to Pay (WTP)

Willingness to Pay (WTP) will be highest when both economic and emotional value come early. If at all possible make sure that at least some part of your offer does this, even if you need to bundle in some professional services to achieve this.

When either emotional or economic value comes first, or when it is experienced differently by different stakeholders, WTP can be much more difficult to establish.

When economic value comes in later on, keep entry prices low and design pricing that grows in line with value.

When it is emotional value that lags behind, keep back some high value parts of the offer to layer in once the emotional connection has been established.

If both emotional and economic value take time to establish, you need to find ways to build a relationship and consider long unpaid trials. This is unfortunate, but there will always be some solutions for which this is true, and over time, once value is established, these can be very sticky as it is hard for other vendors to wait out the incubation period.

Ibbaka can help you map emotional and economic value over time and to use this as an input into pricing design. Check out Ibbaka Market and the problems we solve.