Will digital transformation be the catalyst for adoption of new outcome-based pricing models?

Every day I find myself reading about the developments happening in business-to-consumer (B2C) pricing.

Here’s a sample of those that jumped out recently:

• Uber announced a feature that would allow more price-sensitive customers to wait longer for rides in exchange for cheaper fares.
• Disney recently pursued a similar approach, creating a “sneak peek” package of its new Pixar Pier for park-goers that are willing to pay a premium price point for the experience.
• The Massachusetts Bay Transportation Authority is piloting surge pricing across parking lots and creating event pricing for subway riders.

These developments highlight the growing momentum behind providing dynamic, value-based and outcome-based pricing models, a movement being driven by companies’ desires to provide personalized customer experiences at scale.

While this push has been most publicized and noteworthy in the B2C world, driven by the likes of Uber, Netflix and MoviePass, it also consistently permeates the complex business-to-business (B2B) IT products and services world that we focus on. “How do we shift from a cost-plus to value-based pricing model? Are companies really doing outcome-based pricing? Who is doing it well, and for what types of customers? How?” These are common questions vendors are trying to sort through as they change their businesses.

Often, we’ve heard that IT vendors are serious about making outcome-based pricing models work, but the customers are putting the brakes on these types of arrangements. Customers will ultimately balk at the variability and risk of an outcome-based arrangement at some stage of a deal negotiation and push vendors to offer predictable fixed-price engagements. Customers like the idea of not paying when an outcome is not achieved more than sharing the benefit of an outcome that is met, and somewhere in that trade-off the fallback becomes a traditional contractual arrangement.

What’s interesting is that based on recent research, this customer hesitance seems to be abating. In our 2H17 Digital Transformation Customer Research, we asked 165 global enterprises that are undertaking digital transformation initiatives to identify the pricing structures they’ve experienced, and outcome-based pricing emerged as the most common model globally.

As my colleague Jen Hamel points out in the report, “This indicates vendors have become more flexible and creative with pricing to convince clients to take the DT [digital transformation] leap but may see delayed ROI from DT skill investments as revenue depends on project success.”

As digital transformation continues to take root, the question of how vendors can shift to outcome-based pricing will only be asked more frequently, particularly as changes in the timing of revenue recognition from engagements impact vendors’ flexibility around resource investments. We are eager to watch (and to report) as best practices develop and new models emerge and would love to hear about what others think on this topic.

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