Outcome-Based Pricing in the B2B Space: A New Approach to Value Creation
As businesses adapt to changing market landscapes, pricing innovation has become an increasingly prevalent tool for B2B companies looking to carve out a competitive advantage. A common example of this is the greater linking of price to end-result, known as ‘outcome-based’, ‘value-based’, or ‘performance-based’ pricing.
This approach has seen its popularity soar over recent years, often at the expense of traditional cost-plus or competition-based pricing structures. Hitachi Rail has embraced an outcome-based pricing model, where their compensation is linked to the performance and efficiency improvements their rail solutions provide to customers. In the health and wellness sector, Noom offers corporate wellness programs with a pricing model that is contingent on the health outcomes of participating employees. The company’s approach ensures that charges are only incurred for employees who achieve significant health improvements, thus aligning Noom’s financial success with the genuine health progress of its users.
But what is it that makes outcome-based pricing so interesting? And how can you most effectively unlock its potential?
Hitachi Rail uses an outcomes-based pricing model when it sells time on its trains – Hitachi owns and operates the trains, and gets paid for ‘train-as-a-service’ based on on-time performance
Why Outcome-Based Pricing?
Outcome-based pricing offers several advantages:
- Incentivising high-quality business performance:
Connecting the fee you can levy to the quality of your end-product forces you to take direct responsibility for the results you deliver, ensuring customer needs are prioritised and met at all times. This is crucial in industries such as healthcare, where meeting customer needs can have life-changing impact. For this reason, pharmaceutical companies such as Novartis are increasingly pricing their medication to payers according to associated patient health outcomes, driving accountability for end-customer welfare.
- Differentiating business in a competitive market:
Outcome-based pricing can serve as a unique selling proposition, guaranteeing additional value or convenience unavailable to customers elsewhere. Siemens Energy’s recent foray into ‘opex-only’ machinery is a perfect example of this; by switching to an outcome-based service model, they were able to scrap high upfront fees, providing an attractive offer to companies otherwise hesitant to invest significantly in their production lines.
- Reducing customer churn rates:
By pinning your own success against a customer’s ability to achieve their own goals, you actively demonstrates their desire to deliver real, measurable value, a guarantee impossible through more cost-focused price models. Using this approach has contributed to companies like Salesforce reducing attrition rates by up to 45%; the more faith a customer has that you will provide them with what really matters to them, the less likely they will be to seek options elsewhere.
Novartis ties reimbursement rates for drugs to specific health outcomes
The Role of Market Insight
Implementing this pricing model is not without its challenges, it requires a deep understanding of your customers’ needs and the value they derive from your product or service. Being attuned to the KPIs or businesses objectives your product or service supports is also critical. Possessing data analysis capabilities sufficient to measure outcomes and determine pricing accurately is essential to creating and implementing effective outcome-based pricing strategies.
The best pricing approaches start not with internal analysis but with understanding competitor approaches and the needs of your customers and the wider market – outcome-based pricing will only work if your measure of success aligns with what your target audience really values.
Traditional pricing consultancy often focuses on black-box algorithms or custom-built in-house models, but these solutions often remain untested against wider market dynamics. By combining granular and specific market insight with internal & external data analysis, businesses can develop a much more powerful and actionable outcome-based model capable of catering to customer’s core needs.
The Path Forward
To fully leverage the benefits that outcome-based pricing can bring, you will need to identify the quick wins and longer-term plays necessary to sustain this pricing model. This may involve investing in data analysis capabilities, refining customer segmentation strategies, or rethinking product or service offerings.
At White Space Strategy, we have the expertise and tools to help you navigate these challenges. We understand the challenges that B2B organisations face when looking at pricing and we can help align your pricing strategy with your customers’ values and business outcomes, helping to drive growth and profitability.
If you’re considering implementing an outcome-based pricing model and would like expert guidance on your strategy, get in touch with us at White Space Strategy.