Adopting the wrong pricing model can cause a lot of problems, such as poor business decisions, excessive capital expenditure or reduced working capital. There is now more flexibility than ever in how products and services are priced, and this is another area where digital technology can help to transform businesses.
The right KPIs and pricing model can drive the right behavior and solution, whereas the wrong structure can inhibit innovation, cause lost opportunities or worse higher cost. The changing technology of the digital era has made consumption-based pricing more common, particularly for the provision of cloud-based services, but we have recently begun to see the growth of another approach: outcome-based pricing.
An outcome-based approach
Outcome-based pricing usually takes the form of a gain-share model or an incentive option that increases the payout as results improve, or both. When combined with a full service “stack” solution, each offers companies an opportunity for business transformation without investing significant capex—an investment that companies seldom want to make. Instead, this approach drives an operational cost (opex) model that more closely aligns cash outlays with the financial benefits in any reporting period.
For example, one approach is for a supplier to offer an upfront discount as part of a gain share model. If the service delivers improvements above a target level, then they earn the discount back and more depending on the results achieved. This kind of model can be used to drive significant improvement in areas such as accounts receivable where reducing the days-to-bill time by even a few days can make an important difference to working capital.
There are several key factors in making an outcome-based model successful:
Clear alignment with the goals of the business, built on sound and available data.
Access to the appropriate new technologies.
Agreed rules up front that will stand the test of an audit.
An agreement that the targets set represent material progress or improvement but still achievable. If the model is successfully structured then it will actually help to drive the adoption of new technology.
One last point is that the business—and not just its supplier—has to embrace and support the changes within their organization. One effective way to drive alignment is to ensure that key staff are properly incentivized to make these changes happen.
The CFO needs to play the role of executive sponsor, communicating to the business that change is happening, mobilizing resources as required and dealing with barriers as they arise. The CFO can set a tone that establishes that it is not only F&A incentives that need to be aligned with outcomes but also those of stakeholders who are part of the process both upstream and down.
With the right partners and communications structure within the organization, it is possible to take advantage of innovative pricing models to bring about business transformation without large, upfront investments.
To get started, I recommend the following:
Work with your internal Shared Services Center or outsourcer to find outcome-based approaches to pricing the service that will bring about the improvement.
Define the critical business outcomes you want to achieve.
Set and align targets and report on the progress.