Customer value and pricing scenarios (managing pricing in a time of uncertainty)
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Without customers there is no need to worry about how to design pricing. And our solutions have customers because they deliver value. Generally the value drivers for a solution are stable. They change only slowly, usually with the introduction of new functionality or the emergence of new business models in the customer base. Usually. But these are not the ‘usual’ times.
This post is the third in a series exploring pricing in a time of uncertainty.
Pricing under uncertainty and the need for usage based pricing
Scenario planning for pricing (managing through uncertainty)
Market dynamics and pricing scenarios (managing pricing in a time of uncertainty)
Here we explore how changes to customer value drivers drive different pricing scenarios.
Customer Value - The value graph
At the core of Ibbaka’s approach to value based pricing is the value graph. This graph connects value drivers to value metrics and value metrics to pricing metrics. Value drivers are how the customer gets value. Value metrics are the unit of consumption that tracks value. Pricing metrics are the unit in which the package of products, services and data is priced.
A simplified example. For a jet engine, the value drivers are the ability to power an aircraft with a minimal carbon footprint. The value metric is the number of miles flown/Green House Gas Emissions x Passengers Transported (value metrics can be complex).
We can expand this to connect value drivers to the market segmentation and the pricing metrics to a pricing model.
Market segmentation is critical here. Your market segmentation is the foundation of your pricing system. Pricing models are design for market segments. The value drivers most relevant to a segment are emphasized in the pricing model, through choice of pricing metrics and the use of value drivers as fences between different offers. See this post by Karen Chiang on Why good pricing strategy starts with market segmentation.
Normally this segmentation is stable. It has to be if it is to serve as the foundation for strategy. But when there are severe supply or demand shocks, as is the case today, customer value drivers can shift like sand, and the pricing models built around them crumble.
Before we go further, here is a very short primer on customer value drivers.
Economic, Emotional and Community Value Drivers
Value drivers come in three flavours, economic, emotional and community. Ibbaka writes a lot about value drivers, so we’ll just skim along the surface here. You can find more detail in Value drivers can impact your customer's balance sheet and Create value by focusing on what your customer values.
Economic value drivers can be organized into six categories:
Revenue
Operating Cost
Operating Capital
Capital Expenditures
Risk
Optionality
In asset heavy businesses, like many in the natural resources sector, one may want to look at the impact of your solution on the balance sheet.
For subscription business, it can be useful to frame value drivers in terms of their impact on unit economics such as customer lifetime value or customer acquisition costs and churn rate.
Emotional value drivers can be framed using Maslow’s hierarchy of human needs.
Self actualization
Self esteem
Community
Safety
Basic functions
In normal times, the higher you are selling on this hierarchy the more pricing power you have the greater the customer willingness to pay. As we shall see, though, we are not in normal times, now being the middle of April 2020.
Community value drivers are something we have recently added to our framework. We have added these in as our data was showing the Economic and Emotional value drivers alone were not enough to define market structure (in addition to value drivers, we also use the Buying Process as a dimension of market segmentation). Our initial taxonomy of community value drivers looks like this:
Social impact
Health and wellbeing
Rights and freedoms
Security and safety
Society advancements
Education
How value drivers are changing
We are currently researching how value drivers are changing across different industries and demand scenarios. You can help with this by participating in this survey. What scenarios are you planning for? Building a pricing action portfolio.
Back in 2008 we saw the following changes in many industries:
1. Cost value drivers trump revenue value drivers
When demand is contracting buyers do not value, or even believe in, revenue value drivers.
2. Operating capital value drivers take precedence over capital expenditure value drivers
Most companies are avoiding any capital investment but are desperate to conserve operating cashflow.
3. Risk becomes more important than optionality
People are running scared and are working to reduce risk any way they can.
4. Emotional value drivers are weighted more heavily
Relationships matter during a crisis, and relationships are fundamentally emotional and not just economic transactions. Self realization becomes less important than being part of a community and people seek security.
5. What happens with community value drivers?
We do not yet have a lot of experience with community value drivers. This is a new approach for us, one driven by our work with social enterprises and non profit organizations. Our hypothesis, which we are beginning to test, is that community value drivers become more important for all companies in a shocked market. Of the community value drivers we have identified, in the current situation it is Health and well being and Security and safety will be the most important.
Social impact
Health and wellbeing
Rights and freedoms
Security and safety
Society advancements
Education
Rethink your market segmentation
When customer perceptions of value change the market segmentation also changes. Now may not be the best time to do extensive surveys and complex analysis processes with your customers. But it is an important time to be building relationships. Reach out. Have conversations. And in those conversations listen for changes in how value is experienced. Use these insights to build a new, provisional market segmentation. See how value drivers are changing for each of your customers.
Much of the above assumes that the COVID 19 shock has been a negative. And it has for many companies. But not for all. Some business, such as home delivery and video conferencing, are booming. These differences matter in market segmentation, and therefore in pricing.
One pricing response to the COVID 19 crisis is to create a temporary package, only available for the next few months, that is positioned around the emotional value drivers of Community and Security and the community value drivers of health and wellbeing and security and safety. Find a temporary pricing metric that tracks the recutions you afford to operating costs and operating capital. If this package is distinct from your current offer, and hard to compare, so much the better. This is something you are offering your customers as a way to help in a troubled time.
