A value-based pricing model: Microsoft & partners look at where to begin

Pricing your services based on your costs creates a peril; any bargaining eats your margin. Yes, you may charge a fixed fee or tiered-level prices for low-risk services or discrete products. But those pricing models do not work once you introduce your expert services, unique experience, and any open-ended project risk.

As Microsoft’s Cloud Profitability Lead, Melissa Mulholland advises partners on pricing models, and observed in an August 2017 Microsoft Partner Network blog post that no one model is a silver bullet, but “value-based pricing is quickly gaining traction in the market and worth a closer look for its promise of persistent, long-term revenue growth.”

In this model, the rationale for pricing is tied not to a partner’s costs, but to the customer’s perception of value the partner offers. This is a subjective assessment, which tasks partners to prove to customers the value they receive, both up front and over time.

“This is important, as with the proliferation of cloud providers in the market today, you need to stay relevant and focused to your customers and build value into the services,” Mulholland told MSDW in an interview. “Customers today are smarter than ever before, and building value into your offerings and services is key to success.”

How value-based pricing differs from “commodity pricing.”

A broadly-accepted progression of economic value to a customer – and thus, economic return to the partner – is this one:

A commodity is something undifferentiated – plentiful, and available from multiple sources. Commodity pricing typically sparks a race-to-the-bottom price war.

The differentiators climb as you progress through products, services, and experiences, for which customers will pay premiums. Mulholland makes the analogy of tap water versus premium-priced bottled water, which is filtered and packaged beautifully.

“To carry that analogy to cloud services, you’re not selling a one-size-fits-all ‘commodity service,'” she says. “Your long-term value includes your relationship with the customer, your deep knowledge of the customer organization and the return on your services from the customer perspective.”

She describes how a commodity service might be an Office 365 subscription with no additional functionality built around it; but by offering O365 with Skype for Business, bundling in a voice/conferencing service with your own intellectual property, perhaps even products (e.g., Skype-ready headsets and preconfigured dashboards and self-service portals), you can build tiered services.

So, commodities and products may have fixed or tiered prices; but services and experience introduce value pricing opportunities.

Mulholland also advises: do not lead with a price in a value-based model.

“Customers need to see that the service in question can offer incremental value over time, and that they’ll pay for value received, not a fixed price up front,” she says. This enables partners to focus on long-term customer value. “Yes, the price might be higher than a service with a fixed model, but the perception of the value should also be higher, and hopefully grow over time. Ideally, this adds up to customer retention and recurring revenue.”

This model necessitates careful up-front work by the partner. Jeff Tench, CEO of New Signature, a managed services provider (MSP) and solution integrator based in Washington, DC, told MSDW how a value price reveals itself after carefully researching the project.

“[Believing in a value priced model leads you] to say, ‘This is what the future could look like. This is what good looks like,'” says Tench. That is the point at which to write a proposal, and if the customer agrees to it, a more detailed statement of work. In essence, the customer must be convinced that “the value that they enjoy on the back of whatever work you’re doing for them is greater than the price they’re paying you,” he says.

The up-front work is much like the classic ERP sales cycle (identifying the client’s business objectives; individual objectives and success criteria of stakeholders; agreement as to the roles of IT, the partner, and Microsoft; offering a “future state” solution to achieve those objectives).

The difference, Mulholland advises us, is that value-based pricing flips the model from your requirements as the IT service provider (and your costs) to the customer’s requirements. You still need to establish your baseline costs, but the rationale for pricing is tied to service configurations that maximize a customer’s business outcomes.

BitTitan CEO Geeman Yip does not advertise a fixed price for the company’s MSPComplete platform and services, and does not fix a price until the very end of a sales cycle.

“Value-based pricing is only applicable when you’re doing a solution-based sale,” he says, versus a discreet product or tool; also, “once [the client] agrees that ‘Yes, we have problems, and you can solve it,’ it comes down to, do you want to solve the problem or not?”

Profit from the entire services spectrum

A company may have offerings along that spectrum of value, and different pricing models for each.

Frequently, New Signature is tasked with moving an on-prem, Exchange-based email platform to a Microsoft Office 365 environment. “You need to know what you’re doing, but there’s a lot of people that know what they’re doing,” Tench says.

Still, given the company’s experience, “we can do them more quickly [and] efficiently than our peer group,” allowing the company to safely attach a fixed fee versus time-and-materials.

But often, Tench finds, “We can very immediately move what looks on its face to be a commoditized transaction and turn it into something that creates much more value.”

Returning to that email migration example, if the customer has a complex international environment, “we’re able to bring to bear foundational work [like] an examination and rearchitecture of their identity environment,” to simplify access but tighten role-based governance, he says. That in turn becomes a foundational step to moving other line-of-business applications into the public cloud environment, for example, an IaaS deployment or a reengineering or rebuilding of applications in a Microsoft Azure paths environment.

Understand the customer lifetime value

Mulholland also makes the case for guiding customers through a customized experience – the highest stage in that value/price continuum – for which they are willing to pay a premium price. She pointed to SharePoint and web design and branding firm BindTuning as an example.

“We try to provide value in numerous moments,” says BindTuning CEO and founder Beatriz Oliveira, speaking to MSDW. “They are not paying for a subscription just because they committed a year ago, but because in six months, one year, eighteen months or later, they will still get value.”

But such a customer needs to see value up front. Oliveira says of BindTuning’s Web Parts product that the customer should require fewer resources to build an intranet, and reduce project cost between 50 to 75 percent. Also, “The moment that the customer implements the product, is user adoption of SharePoint [rising] internally?”

Finally, the customer receives value via new products and features. “Every month we launch new things, so it’s valuable for them to continue paying that subscription,” says Oliveira.

BitTitan’s Yip observes that it is easy for Dynamics partners and ISVs to overlook customer lifetime value in a price discussion. Of course, no partner wants to give away products or services, “But if your customer lifetime value is 10 or 100 times the current opportunity, and you have competition, you might want to be more price sensitive to win that deal.”

He likens the cross-sell and upsell opportunities to retail, with its aisle end-cap items, or discounted items in a Sunday circular. “The store’s betting that you’ll walk out with three other items in addition to that discount item, which they’re breaking even or losing money on.”

But value goes both ways. Yip says he’s willing to be creative in deals if, for example, the prospect is a large one willing to be a reference or case study. Still, “We’re not a not-for-profit. It comes down to, what is also the value to me? If I’m going to lose money and I’m not going to get another deal, that’s just absurd, right?”

In the interest of proving its value, continuously, New Signature developed its Cloud Management Portal to deliver a 360-degree view of its engagement across both project services work and managed services work. Between access to project schedules, risks, critical-path items and invoicing, “The client has a single view of how much they spend and what they get in return.”

When the customer forces a price discussion

If a price-conscious prospect simply will not hear a value discussion, then the partner is compelled to make a go/no-go decision – likely no-go.

Yip recalls of BitTitan’s early days that a major car manufacturer balked at the price of the company’s email migration solution. “Their CTO told me, ‘We’re ABC company, we don’t pay list price.’ I said ‘This is the value that our product offers; we’re good at it, and the uptime of your organization and the accuracy that you need is something that we will provide.'”

The prospect countered that it could achieve the same results with an IT staffer and a dedicated server; but within two days, returned to BitTitan when it realized it had underestimated the complexities of the project, and could not risk having no service-level agreement in place.

“That is a true story of someone who wanted price sensitivity when I’m selling them value,” says Yip. “Forget direct costs, because everyone understands hard costs: is this a need for which you are willing to pay a premium for peace of mind?

This article originally posted on MSDynamicsWorld.com.

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