Outcome-Based Pricing

Table of Contents

    What is Outcome-Based Pricing?

    Outcome-based pricing is a strategy where the cost of a product or service is directly linked to the results or value it delivers to the customer, rather than being based on production costs or fixed fees. This way, customers pay in proportion to the tangible benefits they receive.

    For instance, in the software industry, a company might charge clients based on the efficiency gains or revenue increases realized through its application, rather than a flat subscription fee. Or a marketing agency might price its services based on the increase in sales or leads generated for a client’s business.

    The idea behind this approach is that it incentivizes the provider to enhance their product continually, as their revenue is directly tied to customer satisfaction and success. It tends to work well for companies that offer solutions that can be precisely measured in terms of outcomes, such as software, marketing, or consulting services.

    Synonyms

    • Outcomes-based contracting
    • Outcomes-based pricing model
    • Outcome-based monetization model
    • Success-based pricing

    Understanding Outcome-Based Pricing

    The core principles of outcome-based pricing are value alignment, risk sharing, measurable outcomes, and continuous improvement.

    • Pricing is structured around the tangible benefits the customer receives, so both the provider and the customer have aligned interests in achieving successful outcomes.
    • Both parties share the risks and rewards. If the desired outcomes are not achieved, the provider may receive reduced compensation, incentivizing them to deliver optimal results.
    • Clear, quantifiable metrics are established to assess success, such as cost savings, revenue growth, or efficiency improvements.
    • Providers are motivated to innovate and enhance their offerings because that’s how they consistently meet or exceed the agreed-upon outcomes.

    The focus shifts from the cost of delivering a product or service to the value it generates for the customer. This requires you to understand the customer’s initial state so you can measure accurately improvements, then determine which performance indicators (e.g., increased sales, reduced operational costs) reflect the value provided.

    With this pricing strategy, there are usually some aspects of tiered pricing as well. Companies generally develop a pricing structure that correlates with different levels of achieved business outcomes, so that higher value delivered results in higher compensation.

    Why Companies are Transitioning to Outcome-Based Pricing

    There’s a growing trend toward customer-led businesses because, from the customer’s perspective, there’s an increased demand for personalization and tangible results. That means modern companies have to align their revenue models with the value delivered to customers.

    Outcome-based contracts ensure vendors and their customers share common goals and are equally invested in the success of the project. If the company doesn’t deliver, they can’t get paid. If they don’t get paid, they don’t stay in business.

    In saturated markets, it also offers a unique selling proposition. Even if you do require some level of investment from the end user or client (which you should), it’s a lot lower risk for them, with a higher potential upside. And the ability to show tangible results makes it easier to communicate your value.

    On top of that, the rise of AI and data analytics enables the precise tracking and measurement of outcomes required for outcome-based models. Modern tech allows for real-time monitoring and adjustment, so both parties have an easy time assessing and reporting on performance metrics.

    Done properly, it can increase customer satisfaction, create a stronger relationship between you and your customers, incentivize your team, and increase customer lifetime value. And, of course, it’s easier to scale revenue when you’re motivated by delivering results.

    Industries Using Outcome-Based Pricing Models

    The main industries you’ll see outcome-based strategies are healthcare, tech, manufacturing, and professional services.

    Let’s take a look at how these industries are using outcome-based models to drive success and deliver value for both parties involved:

    Healthcare

    In the healthcare space, specific health outcomes, such as reduced hospital readmissions, improved chronic disease management, or enhanced patient satisfaction, are identified and agreed upon by payers and providers in what’s also referred to as value-based care.

    Providers systematically collect and analyze patient data to assess performance against those predefined outcomes. And reimbursement is tied to their achievement. As a provider, you might also receive bonuses for meeting or exceeding targets or face penalties for underperformance.

    For instance, digital physical therapy platform Sword Health transitioned to an outcome-based pricing model in 2024. They bill employer clients only when a participating employee’s health shows improvement, ensuring that payments are directly linked to positive health outcomes.

    In the pharmaceutical industry, Novartis has been a pioneer in value-based contracting, linking the pricing and reimbursement rates of its medicines to specific health outcomes. And AstraZeneca has moved to outcome-based agreements to transform how medicines are priced and reimbursed, particularly in the US.

    Technology and SaaS

    In the software industry, vendors and users collaboratively establish key business outcomes. These are generally either related to increased sales, reduced operational costs, or enhanced customer engagement. It could also be related to software adoption.

    From there, robust systems are implemented to monitor and assess the software’s performance against the agreed-upon metrics.

    As an example, Riskified specializes in fraud management and chargeback prevention for ecom companies. They only charge clients for successfully approved, fraud-free transactions. So, they’re only paid when their machine learning algorithms prevent fraud and increase sales.

    Another example: Back in 2023, Intercom launched a chatbot, Fin. Fin charges $0.99 per successful resolution, meaning clients pay solely for effective AI-driven customer service interactions. Fin’s model blends an outcome-based model with traditional usage-based pricing to emphasize the value delivered per interaction.

    Manufacturing

    In manufacturing, outcome-based models are closely intertwined with servitization. Manufacturers and customers look at metrics like increased efficiency, reduced downtime, or energy savings when determining where payment should be due. Then, Internet of Things (IoT) and data analytics monitor the product’s performance in real time.

    For instance, Hitachi offers a “train-as-a-service” model where they own and maintain the trains, and customers pay based on performance metrics such as on-time service and fleet availability. This approach converts capital expenses into operational expenses for customers, aligning costs with actual service performance.

    And Signify (formerly Philips Lighting) provides lighting solutions through a service contract that ensures continuous lighting performance. Amsterdam’s Schiphol Airport, they offer a five-year contract with no upfront investment, where Signify owns the maintenance and optimization of the lighting system, and the airport pays a monthly service fee covering energy and maintenance costs.

    Another interesting example is Rolls Royce. Rolls-Royce’s “Power by the Hour” program charges airlines based on the number of hours an engine operates. Airlines pay for engine performance and reliability, incentivizing Rolls-Royce to maintain high standards of service and efficiency.

    Consulting and marketing services

    The service industry has been using outcome-based pricing the longest. Lots of services translate well to this pricing model because customers value the results delivered more than the process used to deliver them.

    For example:

    • A marketing agency might tie their fees to campaign performance metrics like lead generation, sales conversions, or return on ad spend.
    • Some consulting firms structure their fees based on the achievement of specific business outcomes, such as cost reductions or revenue enhancements.

    Other examples include IT service providers offering a fixed monthly fee for managing and maintaining all of a company’s technology needs, or recruitment agencies charging after a candidate is placed, with a 6-month guarantee for retention.

    Technology Requirements for Outcome-Based Pricing

    The required technology for measurement depends on the exact outcomes you’re trying to measure and the complexity of the engagement.

    Here are some common types of tech that help enable outcome-based pricing:

    General performance tracking

    Platforms like Databox, Geckoboard, and Scoro offer customizable dashboards to monitor key performance indicators in real time to help with tracking and reporting on outcomes. And you can use them to benchmark performance before and after your engagement.

    Marketing and sales

    Tools like Salesforce or HubSpot track customer interactions, sales pipelines, and conversion rates, all of which are essential for measuring sales and marketing outcomes. For the sales process itself, CPQ (configure, price, quote) and billing software support dynamic pricing models like outcome-based pricing (so you can actually quote and bill for it).

    For marketing-specific services, platforms like Moz Pro provide solutions to improve website SEO, conduct site audits, and track keyword rankings, all of which are crucial for measuring and reporting on clients’ digital marketing success.

    Manufacturing

    In the manufacturing space, you need software tools that can help you run your operation and track your customers’ usage.

    For the former, that’s enterprise resource planning (ERP). ERP systems like NetSuite or SAP offer end-to-end business management solutions that track everything from supply chain and inventory to project management and customer relations. They can also generate reports on efficiency, productivity, and profitability in real time.

    And for tracking customer usage, you need Internet of Things (IoT) devices, which allow you to collect data from connected devices and analyze it for insights on product performance, usage patterns, customer behavior, and maintenance scheduling.

    Project management and client feedback

    Software like Asana or Trello tracks project milestones, deliverables, and timelines. If you’re running an agency or consultancy, this is how you keep your team on track and your clients aligned with your progress.

    Plus, many project management tools integrate with other software and platforms like CRM for seamless collaboration and reporting. And if you onboard your clients into the system when you begin working together, they can leave feedback right within the system.

    Integrated cloud software

    For transparent measurement of your specific deliverables, you might need to build reporting software into your workflow. This usually applies to SaaS companies — for example, Riskified would have to track how many fraudulent transactions they declined, how much revenue their clients saved by using their service, and several other app-specific metrics.

    It can also apply to servitized manufacturing businesses, and even agencies, though. A digital marketing agency might need to track how many leads their efforts generated, and a video production house would report on how many seconds of footage they shot. There are tools for both of these things, or you might build your own.

    Important Considerations for Implementing Outcome-Based Pricing

    The goal of outcome-based models is to foster a shared commitment between providers and clients to achieve successful outcomes. Whether or not that’s actually how the engagement works, however, depends on the ground rules.

    Some key factors to keep in mind:

    A bare minimum investment from the customer/client

    If they don’t have skin in the game, they’re a lot less likely to be invested in the success of the project. This is precisely why purely success-based pricing strategies tend not to work. The lack of initial investment means the client has no motivation to work towards a successful outcome.

    Instead of packaging your offer as “100% risk-free” for the customer, combine your outcome-based strategy with flat-rate pricing. Make sure they have to make some sort of upfront or ongoing investment, like the cost of the equipment or a monthly subscription/retainer.

    Clearly defined metrics

    The metrics you use have to be quantifiable and tied to a specific type of value. Anything you can measure with numbers and report on is fair game. And the closer to the money, the better.

    • Leads generated
    • User engagement
    • Website traffic
    • Time or cost savings
    • Efficiency gains (e.g., reduced customer service calls)
    • Increase in sales or revenue
    • Reaching certain milestones (e.g., number of subscribers, downloads, etc.)

    Make sure these metrics are defined and agreed upon by both parties before the project even begins. And set up a communication channel with your customers, so you can work together toward the goal.

    Profitability

    Of course, you’re still in business to make money. Profitability under an outcome-based model relies on your ability to deliver the outcome not only successfully, but within a reasonable timeframe and cost.

    This means carefully estimating the resources needed, setting realistic timelines, and actively monitoring progress to make sure you’re on track. Before you finalize your pricing strategy, make sure you have a clear understanding of your operating expenses, how resource-intensive your customers’ results are, and how much you need to charge to achieve your desired profit margin.

    Risk management

    Just like the traditional fixed-price model, an outcome-based pricing structure still carries some risks. However, since the focus is on delivering results rather than just completing a project, these risks may be different or more closely tied to your customers’ business outcomes.

    Some potential ones to consider:

    • Scope creep
    • Inaccurate upfront estimations
    • Customer satisfaction and expectations
    • Uncontrollable external factors, like regulatory changes

    To prevent disputes, there are a few essential contract elements to include:

    • Clearly defined outcomes and success metrics (plus how you will measure them)
    • A detailed timeline with milestones and their associated payments
    • A clear process for handling changes in scope or additional work requests
    • A dispute resolution mechanism, such as arbitration, to handle any conflicts that arise
    • A confidentiality agreement to protect sensitive information and data
    • A termination clause that outlines the conditions under which either party can end the contract

    An outcome-based project requires an airtight contract that outlines all of these things.

    People Also Ask

    How is an outcome-based pricing model used in SaaS?

    In the SaaS industry, outcome-based pricing aligns a customer’s payment with the tangible results achieved through the software’s use, such as increased revenue or enhanced efficiency. This ensures clients pay in proportion to the value they receive, which fosters a performance-driven relationship between provider and customer.

    What are the pros and cons of outcome-based pricing for XaaS companies?

    Outcome-based pricing helps XaaS companies align revenue with customer success, which strengthens customer relationships and is a huge differentiator. However, it complicates outcome measurement and can create unpredictable revenue, making forecasting and management challenging.

    What is the difference between outcome-based pricing and success-based pricing?

    Outcome-based pricing and success-based pricing are often used interchangeably. They both link compensation to the achievement of specific results or value delivered to the customer. However, success-based pricing tends to be more contingent on generalized achievements, like project completion.