Creative Pricing – how to stay competitive and profitable in challenging times
- A car insurance company changes the calculation of its policy towards a usage-based payment that takes telemetric data as the basis of price calculation.
- Printer-manufacturers not any longer price per unit and sell toner separately but offer a printer subscription with subscriptions based on printing usage, including the delivery of toner.
- Women make use of clothing rental agreements on flashy and fashionable web-presences instead of buying fashion.
- Car manufacturers offer subsequent subscription of features like seat-heating during car usage.
- Postal Services offer “all you can send”-pricing with a fixed monthly subscription.
- Private Jets are rented in a shared usage model.
At SAP, we see our customers more and more questioning the way they do pricing. A simple change of the price is often not enough anymore to gain or even only retain competitive advantage. It is the pricing model itself, the monetization of the business, what’s being questioned.
Companies need to act now more than ever for three reasons:
- It is possible – Information Technology did provide the technical innovation for generating and using monetization data. This has been accelerated during the covid-pandemic with even more digital customer buying interaction both B2B and B2C.
- Supply Side friction from more fragmented and de-globalized markets made customer relationships more fragile, increasing the need for more customer stickiness and revenue predictability.
- Customers pockets are not as deep as they were – in times of slowing economic growth and high inflation rates put pressure on the right market segmentation, adjustment to buyer preference and monetization schemes with higher margins.
What are main benefits of business monetization, that drive this trend towards recurring, usage-based and more complex pricing?
- Higher margins through better alignment of a monetization with customer preferences and behavior
- Optimization of Customer Lifetime Value with monetization schemes for customers with a currently yet smaller budget
- Revenue and workload optimization for business with peaks or frequent changes in demand but fixed cost
- More predictable and stable customer relationships
Now, if there is so much opportunity in creative pricing – Let’s dive a bit deeper. What are the corresponding strategies and tactics that companies make use of?
I. Alignment with preference and behavior
This set of strategies aims at adjusting for the utility that our customer individually gains from our product or service.
- Pricing for unlimited usage, all-inclusive pricing: This adjusts to customers with a strong desire for comfort. It offers an opportunity for margin acceleration if the desire for comfort is higher than the accepted individual effort of estimating the real usage and cost of single purchases.
- Bundling or packaging: For customers grouped by preference and demand, all required components are bundled into a solution with a combined pricing or subscription. The customer preference is important to understand here to provide the right extent of bundling and to assess the optimal marginal pricing.
- A-la-carte pricing: This is the opposite of all-inclusive pricing for customers willing to precisely estimate their usage on the expense of comfort.
- Usage-based pricing: Similar to a-la-carte but with a price-differentiation by extent of usage. This can also be time-dependent, as an example from car rental Zipcar shows, that rents a car based on the time-interval of hours.
- Auctions: This allows for the precise selection of the buying with the highest preference and the according marginal price.
- Dynamic pricing: Here the price changes dynamically with changes in assumed preferences over time (season, daytime) or observed changes in demand (volume, other products or services sold in parallel)
- Bonus payments: Price sensitive customers with yet a significant CLV are intrigued by bonus payments based on volume.
II. Pricing for customers with small budget but significant Customer Lifetime Value
Many businesses need to provide offerings for customers with a small budget but high estimated CLV. Those customer groups could be younger people buying their first car or smaller businesses investing in the first equipment.
- Shared usage, Leasing or Rent: This requires a usage-metering concept and maintenance concept for physical goods shared.
- Installment-based payment agreement: The value of the customer relationship needs to overcompensate the cost of the installment scheme.
- Pre-payment: Attractive for customers with infrequent income.
- Fixed Pricing or Capped Pricing: Needs to be matched with estimated average usage or consumption.
- Time-based Price Options: Allows for balancing workload by incentivizing customer to more from preferred time to less preferred.
III. Events or frequent changes in demand
Business with strong seasonality, an extreme form would be a concert happening just once, monetize their product or service taking the seasonality into account. Also asset-based business with fixed capacity and cost that observe peak usage, want to use pricing to optimize workload.
- Packages: A complete solution wraps everything needed around the event or for the seasonal demand
- Volume rebates: Used to achieve a necessary base level of usage to cover fixed cost
- Progressive pricing: Price increases towards the event, providing an incentive to buy earlier
- Time-based pricing: Provides incentives for usage in off-peak times and charges higher for peak-times.
IV. Optimize the business with Subscriptions
Generally, the closer a monetization scheme aligns with customer preferences and customer lifetime value, the higher is the margin generated. But specifically, the subscription is an acknowledged way of combining several strategies to optimize the return on capital. Subscriptions consist of
- Differentiation by preference: Packaging and Bundling can be folded into subscriptions, when the product and a service for it is being brought together according to customer groups and their preferences.
- Maximum usage pricing: With the subscription covering maximum usage, the average return during the contract lifecycle is optimized versus multiple, single transactions with potentially varying pricing and additional cost of sales.
- Automatic renewal: The customer relationship can be easily maintained and eventually deepened due to the stickiness of a subscription contract.
- Usage-Data capturing: Subscription contracts allow for agreements on usage data capturing to help optimizing the service, product, or solution
What does this mean in relation to using Cloud ERP from SAP?
While the trend towards more creative pricing schemes and the accelerated use of subscriptions is inevitable, the requirements for managing this in the Cloud ERP systems are well understood by us at SAP. They strongly differ by
- complexity of transactions
- volume of transactions
- character of business (product-centric, service-centric, asset-centric, distribution-centric or combined solution)
- data needed to measure usage and consumption
- number of different sales channels
- payment preferences of customers
To cover all businesses requirements, SAP offers clearly standardized and preconfigured solutions – for every size of business in every industry. Check it out and become creative!