Your Pricing Decisions are Shaped by Value Delivery Patterns
Karen Chiang is a Managing Partner at Ibbaka. See her Skill Profile on Ibbaka Talio.
In our most recent work, Ibbaka Valio was introduced to help organizations communicate the value of their offerings. B2B businesses now have a consistent way for their sales teams to help their buyers make a case for investment. We want innovative companies to be more successful with their new products, subscription models, and price performance. Customer Value Management has given our customers a solid way in which to drive revenue faster in the future.
So…how do we justify value to drive revenue for growth?
1) First, understanding value.
Ibbaka’s value cycle framework which place value understanding at the core is a starting point for answering this question.
Value Creation - Value is from the perspective of our customers and the way in which we create that value for them. People and businesses receive value in terms of economic, emotional, and community measures.
Value Communication - This is the way in which we communicate and articulate our value. This boils down to our value proposition. Remember that different stakeholders will experience value in their own specific ways. Our communication has to specifically map to our buyers and our value segments.
Value Delivery - This is the form in which value is delivered. When does the value get recognized as received by your customer.
Value Documentation - Our customers sometimes need help to quantify and document the value they are receiving. Having value documented serves as a reference to make a case for our customers to invest in us.
Value Capture - This really boils down to pricing. Ibbaka promotes value-based pricing. When we are able to quantify the positive impact we make for our customers, we gave a greater chance at capturing the work of our value.
2) Understand when value is being delivered.
Customers will want to be able to track returns on their investments early in the cycle. We have observed a number of B2B companies suffer early churn due to their inability to demonstrate quick value early in the customer journey. The diagram below represents a scenario where the vendor aims to capture its implemenation cost within four months of its interaction with its customers. Its customer however did not receive a positive return on investment until 11 months into the relationship. Further, it is took a full year before the value to the customer exceeded that of the vendor profitability. Taking note of not only our own position but our customers’ position on revenue, value and investments is important for expectation setting. In this scenario, if the customer is impatient and was expecting to realizing measured return on their investment well before the 11th month, churn is a risk and could be inevitable.
Time to value should be a key design metric as we design our packages as well as our pricing model. We need to better align revenue capture with value to the customer (V2C).
3) Consider Value to Customer (V2C) distribution patterns over a cycle of time.
There are for patterns we have observed: linear, back-loaded, front-loaded, and periodic.
The simplest scenario is where the customer value increases linearly over time. We believe that this is not common, however, many pricing models make this assumption.
More common is the standard S curve, in which it takes for the value engine to kick in, but once it does, value builds quickly, only to reach a plateau. This is the most common B2B SaaS model and is typical of everything from market automation to HR applications. The diagram shows that value is backloaded meaning that value is loaded in the latter part of the cycle. It is also expected that value may eventually level off.
Under this pattern, value perception (how much value the customer believes you deliver) can decline rapidly as customer may ask, what additional value are you delivering? This may make renewal conversations more difficult.
This inverse sometimes referred to as a Z curve, can also happen (front loaded). This is most common when software is adopted to address an urgent need, but once the problem is addressed, it goes away. In this case, value has been early delivered and consumed.
In some cases, ‘value to customer’ is periodic. The periodicity can be seasonal or driven by industry cycles.
Pricing offers that have periodic value delivery can be tricky. The first thing to do here is to get a deep understanding of what drives the value cycles.
Pulling this together, one can map value distribution patterns to pricing models as follows:
Do you want to align your product, pricing, marketing, and sales teams around value? Then, come check out Ibbaka Valio, our latest innovative pricing tool that communicates value and delivers the outcomes you desire.