Pricing across maturity models

By: Steven Forth

Maturity models are enjoying their moment in the sun. Over the past thirty years, they have developed from a nerdy preoccupation of process and policy geeks (I used to be one of those but claim to be recovering), to a key organizational development tool, to an important marketing framework. Over the past few years, they have increasingly been used to shape pricing strategy.

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We mentioned this in our recent post Pricing your solution portfolio: Part 3 - Looking for Interactions and even referenced the Job Architecture Maturity Model in our post on Why your job architecture needs a competency model on our Talent blog.

This provoked some questions from our readers on just how to use a maturity model to inform your pricing strategy, and we try to answer these here.

Let’s start by asking what a maturity model is and how they have become so important. The current incarnation got its start back in the mid-1980s when it was realized that software development was expensive, complicated and that not all organizations do it well. This resulted in the Capability Maturity Model (or CMM) developed mostly by the Software Engineering Institute at Carnegie Mellon University. The initial work was mostly funded by the US defense sector, which realized how much it was coming to depend on software for all aspects of operations. The CMM is now the CMMI (Capability Maturity Model Integration) and has its own organization, the CMMI Institute. Those interested in maturity models can find a wealth of information there.

The original CMM was focused on process. Over the years this has shifted in many cases to a concern with outcomes, but let’s look at the initial idea. The archetypal maturity model moves across five stages from 1, no process, to 5 where processes are constantly being optimized. (This image comes from Sally Godfrey who is one of the world’s leading experts on maturity models.)

From their initial applications in software, engineering maturity models have branched out into all sorts of surprising areas. Here are some examples.

The research and advisory group Brandon Hall uses maturity models extensively. Here are two examples, a Learning Technology Maturity Model and a Team Performance Maturity Model.

OpenView Venture Partners and the Technology Services Industry Association (TSIA), both organizations that we work closely with, have each published maturity models for customer success. Understanding the business impact of customer success and how to monetize it is an important question for many organizations these days.

There are of course ‘pricing maturity models’, this one from the European Pricing Platform.

Paul Hunt and Jim Saunders have even written a pricing book organized around pricing maturity. See World Class Pricing: The Journey.

A close reading of maturity models (and there are hundreds of these available) suggests that they have been evolving from a focus on process to a greater concern with the outcomes each phase is meant to deliver to the organization. This maps quite well to emotional value drivers. At Ibbaka, we use Maslow’s hierarchy of human needs to organize emotional value drivers and understand their impact on pricing. Generally speaking, the higher the emotional value driver on Maslow’s hierarchy, the greater the pricing power.

So how can a maturity model help you with your pricing strategy? It all comes back to value.

Let’s assume there is a maturity model available for your solution. If there is not, then you should consider developing one. The value drivers at each level of the maturity model are going to be different, and this is true for both emotional and economic value drivers.

For emotional value drivers, the higher levels of the maturity model map quite well to the higher levels of Maslow’s hierarchy of human needs, and in our work we have found that there is more pricing power at the higher levels of maturity models.

With economic value drivers, the situation is a bit more complex. Here one has to go deep into how you are creating value for your customers and what new value is added at each stage of maturity. Keeping with the classic, process-oriented approach to maturity models, here is one possible mapping. Note that the value comes from moving from one level of the maturity model to the next.

Level 1 to Level 2: From random to managed.

Emotional Value Drivers cluster on basic functionality.

Economic Value Drivers are often weak at this point and focus on error or risk reduction. This transformation is necessary to set the stage for future value. If this is all your solution does, you are likely to struggle to claim a decent price.

Level 2 to Level 3: Moving from managed to defined.

Emotional Value Drivers cluster on security.

Economic Value Drivers are often based on efficiency. Improved efficiency can have many positive economic outcomes and it is worth working through all the different ways this can impact the customer business model. Improved efficiency is not limited to operating expense reduction. A more efficient pipeline can lead to higher revenues. Efficiency can also make current capital investments more productive, thereby delaying the need for further capital investments. Many innovations have their first impact at this transition.

Level 3 to Level 4: From defined to controlled.

Emotional Value Drivers cluster on security and self-esteem. Note that ‘community’ was skipped over. Process-oriented maturity models generally do not lead to community. This is not true with other types of maturity models. Maturity models built around the type of outcome often include emotional value drivers based on community.

Economic Value Drivers. Once a process in controlled it becomes predictable. This can be an economic value driver in its own right. Predictability does many things for a business. It makes resource allocation more efficient and helps rationalize investment. At present, most successful business solutions are focused on one form of control or another. This should not be the end-point. If you stop here, some smart competitor will find a way to take your customers from controlled to optimized.

Level 4 to Level 5: From controlled to optimized.

Emotional Value Drivers. We are finally getting to self-esteem and self-realization (at least for process nerds). It is unfortunate that so few business solutions (at least those realized in software) are actually able to do optimization. Optimization generally entails exploring complex design spaces and avoiding local optima, those traps that prevent us from getting from an acceptable solution to a better solution. This is still a hard problem for computers, even with AI, and most transitions from Level 4 to Level 5 require some level of professional services.

Economic Value Drivers. Optimization has greater potential for economic impact than the other stages combined. It generally takes a lot of work to quantify optimization value drivers, and many conversations with customers. But if you have helped a company move from one stage of a maturity model to another you will have built up the trust needed to have these conversations. This is where the greatest value is created, and it should be the destination that your customer success organization is designed to deliver.