Reflections on pricing practice
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
I am back at Ibbaka after a three month leave. It is good to be back and to be talking with customers, diving into new proposals and working with the team on our software platforms Ibbaka Valio and Ibbaka Talio.
While I was recovering from surgery I had some time to step back, read, and think about some of the more important and emergent themes in pricing, and to do some deeper reading on pricing, innovation and related topics.
Before diving into these, I also had a chance to think about design in the context of healthcare. I documented this soon after getting out of the hospital.
Observations from a hospital bed. Pricing begins with value and value begins with design. One can see design in action in a hospital, from the gamification of breathing exercises, to the satisficing of a rope attached to a hospital bed, to conversations with technicians about the usability of different pieces of kit.
A sophisticated 3D X-Ray video was used to assess the success of my operation. The technicians told me that Brand A had more functionality and better specs but was very difficult to use and often led to errors. Brand B was missing some very advanced functions and had lower resolution, but was much easier to use and caused fewer errors. Brand A is more expensive than Brand B. The technicians recommend Brand B (for the user experience) while the hospital administrators (who do not use the equipment) buy Brand A over Brand B about two thirds of the time. Hmmm …
Thoughts on deep pricing issues
Pricing is going through a phase change as the economy shifts and new technologies come into play. I began my explorations by looking at two of the technology trends that will change how software is developed, used, implemented and how it creates value. I want on to do more reading (Gerald Smith Getting Price Right and Scott Page The Model Thinker and then started to think about how to organize the value drivers we use to build value models.
How would you price generic AI services?
AI is everywhere these days, in our cars, telling us what to read or watch, generating images (more on that below) … and most of these AIs run on a suite of generic AI services that anyone can access. I am using them to explore an AI for Open Games as one of my side projects. These generic AI services are provided by the large PaaS (Platform as a Service) vendors and a few additional companies with open source roots. How would you approach pricing these services?
How would you price content generation AIs?
I am celebrating my return to work by giving a talk at the Professional Pricing Society Fall Conference in San Francisco on October 20. Hope I will see you there. The talk is on Defining Talent to Price Innovation and the case study is Dall-E and Stable Diffusion. These applications for generating images from simple text strings have taken off over the summer. They will only be sustainable if they provide value and part of that value can be captured in price. In the PPS workshop we will collaborate to find ways to quantify the value of these AI services, identify value metrics and connect them to pricing metrics.
Another major trend that has been building is microservices, APIs, API gateways and the microservice economy. When does it make sense to unbundle a solution into microservices? How will microservices be priced? If a microservice economy does emerge it will change how we think about pricing, CPQ (Configure Price Quote) applications and business models generally.
Pricing Fundamentals - Review of Gerald Smith Getting Price Right and the 4Cs of Pricing
Medical leave gave me lots of time to read, so one of the things I did was to reread Gerald Smith’s excellent book Getting Price Right. Gerry does a great job explaining the 4Cs of pricing (Customer Value, Customer WTP, Competition, Cost) and the different pricing cultures (finance, sales, marketing). I included a bit of a rant on why I think the System 1 and System 2 thinking framing (from Tversky and Kahneman) is misleading and not supported by data or experience.
How the 4Cs of Pricing Interact
More on the four Cs (Customer Value, Customer WTP, Competition, Cost). One should not think of these independent of each other. They interact in important ways. Pricing work requires that we think about these interactions.
A lot of the work at Ibbaka is based on developing value models (systems of equations that estimate value) and using these to segment markets, design pricing and track value and price performance over time. We even have an app for that, Valio.
Scott Page’s excellent book The Model Thinker uses the handy acronym REDCAPE to explain the different ways models are used. All of these are relevant to the use of value models. Reason, Explain, Design, Communicate, Act, Predict and Explore.
How to organize an economic value model for pricing design
Value models are built from value drivers, an equation that describes the impact of a solution on a customer or customer segment. Value models combine several value driver equations and there are thousands of possible equations. How to organize these. I look at three different approaches. The standard approach, which looks at the impact on different parts of the profit and loss statement or balance sheet, an approach based on the variables shared in different equations and a metrics driven approach.
What will Q4 and 2023 bring for pricing?
So that was my summer. A lot of reading and thinking, a lot of dozing in the green light of the garden then walks and swims to rebuild strength. I hope you had a great summer and that the fall is going well. We are in the last quarter of the year and people are already making plans for 2023. Check out some thoughts on what SaaS companies need to do before they change their pricing.