Who benefits from good pricing?

Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.

Ibbaka speaks with a lot of people about value and pricing. Sometimes, when people hear that we are pricing experts, they assume that we are out to gouge buyers or find some way to trick them into paying higher prices. A few of the companies that approach us are even looking for this. But most are not.

There is a perception that the pricing function is in a battle with the procurement function. Pricing is trying to drive up price and perceived differentiation. Procurement’s goal is to wipe out differentiation and push prices as low as possible. This approach by pricing and procurement, when successful, leads to less innovation and lower long-term value creation for both sides.

At Ibbaka, our goal is to take pricing in a different direction. We design pricing models that align buyer and seller around value, long-term value, and value that builds across the customer journey. And we make sure that the seller gets fair compensation for what they are providing.

This approach is not for everyone. It is not how one optimizes transactional pricing. It does not work for offers that have no differentiation and are easily substituted. But if you are a company focused on your customers, creating differentiated value, and you are in it for the long term, then we want to work with you.

What does good pricing look like?

So what does good pricing look like?

1. It is aligned with strategic goals
   Some examples of strategic goals are
   - Increase revenues
   - Improve profit margins
   - Grow category share
   - Expand a category
   - Establish a new category
   - Grow the lifetime value of the customer base (LTV)
   - Improve unit economics like LTV/CAC (Customer Acquisition Costs) or months to recover CAC
   - Manage demand
   Pricing cannot accomplish all of these at the same time, so choices are necessary.

2. It aligns price and value over time
   Pricing model design connects value metrics to pricing metrics. The value metric is the unit of consumption by which a customer gets value. The pricing metric is the unit of consumption for which the customer is charged. Connecting pricing and value metrics is the best way to get buyer and seller aligned.
   Value changes over time and the way value is delivered can change over the customer journey. Designing a pricing model to reflect this is one of the biggest challenges to a pricing design expert. There is a lot of market pressure to shorten the time to value and to make sure that value builds, or at least is sustained over time.

3. It helps select the customer who will get the most value and who has the highest willingness to pay (WTP)
   In most markets, one does not want to sell to every last possible customer, and trying to do so will erode margins. Good pricing helps buyers self select both the package that will give them the most value over time and it discourages buyers that are a poor fit from making a purchase.

4. It encourages behaviors that reduce the cost to serve
   Customers can do things that drive up costs. Well-designed pricing can guide users away from high-cost, low-value choices. In many cases, users do not know how their actions impact costs and they can be guided towards the high-value, low-cost choices (which gives the seller more pricing options).

An emerging concern is social, or community value. This is value, economic or otherwise, that adheres to someone other than the buyer or seller. Technically, these are positive externalities (benefits to the wider community) and negative externalities (costs to the wider community).

One obvious thing to consider is pollution and GHG emissions. The United Nations Sustainable Development Goals (this link goes to the goals on the Go.Frameworks server) are another good guide to where to look for community value.

What are the outcomes of good pricing?

The impact of pricing needs to be measured across time and at each step in the customer journey. The outcomes should align with the goals (as we noted above, pricing can be designed to support many different goals but it cannot support all goals at the same time).

We should also look for unexpected outcomes, good and bad. Pricing is part of a complex adaptive system, which means that the outcomes can be difficult to predict ahead of time and that pricing needs to evolve in response to the market and to its own impacts.

Many different systems can be used to track the outcomes of a pricing design.

• For solutions that include software (a growing number) the solution itself can be designed to collect data about value and pricing.

• The CRM can track the impact on pipeline metrics (more opportunities, higher conversion rates, faster velocity).

• Financial systems can track the impact on bookings, invoicing, collections, and revenue.

• Customer success platforms can be used to gather information about the value customers are receiving and how they feel about it.

• Operations systems can provide data that tracks the impact of pricing on operations.

• Pricing management systems do more than just manage prices and track the pocket price waterfall, they are a place to consolidate all the pricing data over time and provide basic optimization.

• Subscription management systems are a very useful way for defining and managing subscriptions, including those that include usage-based components.

• Configure Price Quote (CPQ) systems are currently focused on documenting the offer and using the configuration information to deliver a quote; this is about to change over the next few years as configuration managers will have the intelligence to design the configuration that delivers the most value for a customer and to configure the value model as well as the offer.

Ibbaka has designed the Value Pricing Dashboard to be a place where data from all of these systems can come together and measure the impact of pricing over time.

How do you get good pricing?

Given all the different things that need to be considered getting to good pricing is not easy and it is an ongoing adaptive process rather than a steady state. The basic steps to good pricing are as follows.

1. Get alignment on pricing goals (the alignment needs to include the executives, finance, product marketing and demand generation, sales, implementation, customer success, and operations)

2. Understand the value drivers and how to quantify them (for more on value drivers see What is value based pricing?)

3. Segment the market and choose target segments (a good segment is a set of potential customers that get value in the same way and that buy in the same way)

4. Develop the value model including the value metrics

5. Design a pricing model that connects the value metrics to the pricing metrics for the target segments and that incents the desired customer behaviors

6. Track outcomes over time, the value delivered over the customer journey, and the interactions with pricing

7. Evolve the value and pricing model in response to the market, competitor actions, changes to the solution, and the internal dynamics (which are quite often emergent properties of the system)

Implement Customer Value Management with the Ibbaka Value Pricing Dashboard

• Who benefits from good pricing (this post)

• How would you organize pricing challenges?

• What is in a price?

• Value-based pricing 2.0 goes beyond ringing the sales bell

• What is your target value ratio?

• The Value Pricing Dashboard will be where you integrate applications across the customer journey

• A value model will change your business 

• The customer journey is your guide to pricing communication

• Accelerate business growth with Ibbaka’s Value Pricing Dashboard

• Is your sales team blocked on delivering value?

• Pricing and value communication does not end with the sale

• Ibbaka Performance Announces World’s First Value Pricing Dashboard (Press Release)

• Usage-based pricing a complement and not a substitute