Core Concepts: Pricing Metric
Rashaqa Rahman is a Principal Consultant at Ibbaka. See her Skill Profile on Ibbaka Talent.
Definition: Pricing Metric
A pricing metric is the unit of consumption for which the buyer pays. An example of a pricing metric is dollars per litre for purchasing fuel.
How to choose a pricing metric
Choosing a pricing metric is one of the most important steps in designing value-based pricing. The pricing metric should help the buyer understand what they are buying and how it will create value for them. Before choosing a pricing metric one should understand how the product or service creates value for the customer. The pricing metric (unit by which the customer pays) should track the value metric (unit by which the customer derives value).
When the pricing metric is also a value metric, it makes value communication, value delivery and value documentation much simpler. A good example of this is Roll Royce’s Power by the Hour pricing. In this example, Rolls Royce changed their pricing model in 1962 to allow airlines to lease their jet engines and pay by only the number of hours the engine was in operation, rather than having to buy the engines outright. For an airlines, the engine is revenue generating only during the hours that it is in operation. By having a pricing metric that tracked the number of hours the engine was in operation, Rolls Royce transferred risk of ownership from the airlines to the Rolls Royce and created a very successful pricing model that transformed the industry.
Here is the classic set of filters used in deciding on a pricing metric (from Tom Nagle’s The Strategy and Tactics of Pricing).
Choosing a pricing metric from The Strategy and Tactics of Pricing 6th Edition by Thomas Nagle and Georg Muller
When choosing a pricing metric consider the following
Start by understanding how different groups of customers (customer segments) derive value from your product or service
Target the segments where you create the most value
Select a pricing metric that tracks value across these customer segments
Select a pricing metric that is easy to measure and enforce
Ensure the pricing metric aligns with customer value creation
For more information see How to choose a pricing metric.
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