Using pricing to create meaningful competitive product differentiation separates you from competitors and allows you to command price premiums by eliminating bad discounts.
Discounts should never lead to a loss of margin. Instead, discounts should reward customers for activities that improve their value—either by reducing costs or improving customer behavior. As a first step, evaluate and build systems and processes that reward customers based on desired behaviors. For example…
- Not getting paid on time? Match prompt payment with a discount that reduces aging.
- Have customers that are time-consuming? Provide a discount for ordering online.
- Have customers that are not properly utilizing their software? Allow discounts that kick in once certain adoption milestones are achieved.
With win-win discounts in hand, your sales team is equipped to suggest discounts that are in your customer’s best interest. Not only does this improve lead conversion, but awareness of pricing and discounts on the “whole product” marketing programs can also impact lead generation and awareness. It is important to properly understand how discounts incentivize certain behaviors and how those discounts are enforced. For example, should volume discounts be granted before certain sales volumes are achieved or are they paid back as credits once the customer hits the appropriate milestones? Unfortunately for marketers, enforcing performance milestones can be a technical challenge without the proper billing system.
The challenges of win-win pricing
Win/win pricing requires a complex array of interrelated processes that must be managed—everything whole product awareness building, the outbound initial contact with a customer, to the placement of an order, to the provisioning and activation of a service, to the billing and payment, and then beyond to the customer care that keeps them engaged with new activities.
Managing the recurring customer relationship includes two critical subscription processes not normally available in off-the-shelf ERP, CRM or GL applications:
- the Order-To-Cash process where the relationship with the customer is established; and
- the Activity-To-Cash process where the relationship is expanded according to the consumer’s behaviors and preferences over time.
Nurturing the relationship requires that multiple pre-billing processes and complex functions, such as event handling and rating, be in place for controlling usage and activities. This is controlled through the assignment and enforcement of entitlements which help to authorize and authenticate whether a person is who he says, and if he should have access to the services he’s requesting.
That means the billing platform must know what a customer has purchased and where he is in the consumption of his subscribed services. The billing platform must also know what actions should be taken, such as advice-of-charge, balance checks, updates of allowances, reversal of events, suspension of accounts, and application of late payment fees and penalties.
For organizations that want to capitalize on the natural evolution of consumption, win-win pricing should include a mechanism for accommodating and evolving the subscription relationship.
Activity-based subscriptions can create sustainable relationships and prevent the loss of customers that might otherwise not be able to, or want to, make one-time purchases. The goal of activity-based pricing is to stimulate more consumption with price levers that accommodate changes in circumstances, usage, and preferences.
The ability to add and manage consumption or activity-based price levers to a product mix gives a company a powerful tool to grow its customer base (recurring revenue) and maximize the lifetime value of the customer (reducing churn).
Competitive product differentiation and the win-win
When you adopt win-win pricing and whole-product thinking, you map your prices to what the customer is willing to pay. At the same time, your customer benefits from discounts that are aligned with their needs which improves win-win behavior. When you discount and reduce costs and improve customer behavior, everyone wins.