When The Price (metric) is NOT Right
Three metrics you should know before you start changing prices
You know it’s possible to optimize your price point and still get it wrong. That is if you optimize pricing based on the wrong price metric.
TLDR. Good pricing strategies align the product’s price metric with either the customer’s usage or value metric. A killer pricing strategy aligns all three.
There are three types of metric you should know.
You will usually find a lot of consistency among competing vendors when it comes to price and usage metrics. Value metrics are a different story. Most companies don’t bother linking value to their price metrics. This is a missed opportunity for any company that wishes to truly differentiate from their competitors.
One reason why most companies don’t is because it takes commitment to a customer value strategy and are unconvinced that it is worth pursuing. My experience suggests otherwise.
Power-by-the-Hour
This is the most cited story in the pricing community. Quick version: Power-by-the-Hour (PBH) is a service agreement, primarily used in the aviation industry, where a customer (typically an airline) pays a fixed rate per flying hour for access to and maintenance of aircraft parts and components. This approach originated with Rolls-Royce's Viper engine in 1962 and has become a prevalent model for managing aircraft maintenance costs.
Let’s break this down to see why this is a perfect alignment of price, usage and value metrics.
Airlines value things that help them reduce cost per available seat mile (CASM). PBH enables them to pay for the engine only when it is working (and avoid paying when it is idle).
The price metric is easy to understand. Airlines value the predictability of their maintenance expense items. PBH eliminates the risk of unexpected maintenance costs due to engine-related mishaps.
More engine use directly correlates to more airline profit. In other words zero sales friction because the customer is incentivized to use more.
Coming up with a perfect alignment of price, usage, and value metrics can be difficult, but doable with a little customer value expertise. Next are two examples from my consulting work:
Specialty Roofing System
A company had an innovative residential roofing product that competed against traditional materials sold by the roll and by the box. This new product wasn’t packaged that way, so it was difficult for cost-conscious building contractors to compare them versus competing products.
We proposed using the value metric of “cost per square foot” because it aligned with how contractors manage their overall construction projections. Even better, it enabled our client to charge a premium price per square foot versus traditional materials because of other differentiating benefits like lower installation labor costs and higher quality (less maintenance costs).
Innovation Management Software
A software platform that helped enterprises and government agencies to better manage innovation projects sought our help to develop value-based pricing and packaging. After studying competitors and conducting in-depth qualitative interviews with customers, we recommended adjusting their pricing metrics from per administrative user/year to something that better aligned to customer usage and value: per innovation campaign. This enabled the sales team to improve both average annual contract value as well as retention.
Next Steps
Do you have a metrics issue to sort out? Please reach out to me for a FREE initial consultation. Schedule your session today