What is Success-Based Pricing?
Success-based pricing is an outcome-based pricing model used by IT and SaaS vendors to charge a price based on the customer’s success in using the product or service. The model aims to maximize the value the solution provides while minimizing the client’s risk in utilizing the solution to optimize revenue.
In a success-based pricing model, the vendor helps their customer achieve a higher TAM (total addressable market) through the product or service. This pricing model helps vendors uncover additional revenue opportunities for the customer and address how the vendor can help them optimize those opportunities.
This pricing model has been particularly popular in the software industry, where it is often referred to as “value-based pricing.” As the value of B2B tech solutions shifts toward delivering business outcomes, many businesses are now using success-based pricing models as it provides them with a way to increase their revenue while also aligning their products or services with their customers’ goals.
Businesses can structure their success-based pricing models in a few different ways. The most common is to charge a percentage of the customer’s savings or increased revenue from using the product or service. For example, if a customer saves $1,000 per month using a software platform, the company may charge 10% of that savings or $100 per month.
- outcome-based pricing
- value-based pricing
Advantages of Success-Based Pricing
There are many advantages to using a success-based pricing model. First, it allows businesses to increase their revenue without raising the prices of their products or services. Second, it aligns the interests of the business and the customer, creating a true partnership since the vendor is incentivized to ensure the solution delivers value and provides the highest quality customer experience. It also guarantees that the vendor and customer are equally invested in the success of the technology.
The primary advantage for IT and SaaS solution vendors in using success-based pricing is how it helps to build long-term relationships with their customers. SaaS customers care about top-line growth. The technology vendor must have conversations about this with their customers throughout the year, not only when it comes time to renew their subscription.
Vendors must think about value from a long-term perspective and look for ways to expand the customers’ use of the platform to achieve their goals. Only charging for success means the vendor must work closely with the customer to determine their needs and how to expand the solution’s use to help them achieve success. This fuels product-led growth; it helps the vendor make enhancements to their product and ensures the customer doesn’t outgrow the solution and move on to other providers.
Success-Based Pricing Challenges
There are a few challenges that businesses need to be aware of when using outcome-based or success-based pricing models. First, it can be difficult to accurately predict how successful a customer will be in using the product or service. This means there is potential for disagreement between the business and the customer over whether or not the desired outcome was achieved. Second, attribution can be challenging as showing that the service or solution led directly to customer success is difficult.
An additional consideration is that it is difficult to determine how the price will be calculated and invoiced and then create clear contracts to enforce the pricing agreement. A success outcome metric must be agreed upon by both parties and then tracked and integrated with billing. The vendor must also be able to track and charge for its services based on mutually agreed metrics. Another aspect of success-based monetization is periodic billing in arrears as opposed to up-front payments, which can present cash flow issues for vendors.
Despite these challenges, success-based pricing models can be a great way for businesses to increase their revenue while aligning their interests with their customers. When used correctly, they can incentivize customers to use the product or service and help businesses better predict and manage their costs.
Success-Based Pricing Best Practices
Here are a few best practices for vendors to implement success-based pricing:
- Make it easy for customers to adopt new features in terms of price and implementation.
- Focus on helping customers create a competitive advantage – be in the mindset of making customers successful, measured in revenue growth.
- Help customers develop efficient business operations while relying on the solution.
- Become so necessary to their success that losing the solution would devastate their business.
- Tailor pricing to different geographical areas, markets, and segments.
Companies that use a success-based pricing strategy must put customer relationships first. They must have a value mindset and evolve their pricing and packaging to align with customer needs and changing market conditions.
Selling Success-Based Pricing
Selling products or services in the success-based business model is consultative and requires sales reps to intimately understand their customers’ business, offer solutions that align directly with customer goals, and write customized contracts that reflect a win for both parties.
Regarding delivery, the service or solution provider must work closely with customers to improve their business processes, track operations, and perform other activities necessary for successful outcomes. Therefore, the suppliers need to develop new skills and knowledge.
People Also Ask
What is an outcome-based pricing model?
An outcome-based pricing model is a pricing structure in which businesses charge their customers based on the results or outcomes they achieve. This type of pricing can be used in various industries and business models and can effectively align customer and business goals.
As organizations implement digital pricing solutions, outcome-based pricing models are increasingly used to add value to the vendor-customer relationship.
What is value-based pricing in B2B?
Value-based pricing is a pricing strategy in which the price of a product or service is based on the perceived value to the customer rather than on the cost of production or other factors.
This type of pricing can be used in B2B and B2C markets, although it is more common in business-to-business markets. In B2B markets, value-based pricing is often used to differentiate products and services from competitors.