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Risk-Sharing and Customer-Perceived Value
Whenever customers buy your product or service, there’s a leap of faith that they will get value from you. An alternative is to offer your solution in return for some of the savings — and to measure this in the customer’s own business units. Even if you fall back on traditional pricing, it will help the customer assign real value to what you deliver.
An example: my company creates knowledge bases (KB) that store the collected wisdom and policies of technical support teams. We claim to speed up problem resolution time by 20%, saving our customers lots of money. Typical pricing strategies are to price this “by the seat” or “by the month” or “depending on the size of your knowledge base.” None of these reflect why your customer is buying this solution.
Consider turning this around, and taking a portion of the actual value you deliver. “We think we will save you 20% of your support costs, or $600,000 per year based on what you spend today. We will give you our product for free, but want 10% of the savings. If we’re right, you pay us 1/10th of the cost reductions, or $60,000. Pay us less if it saves you less — and don’t pay us at all if there are no savings.”
Notice how this turns you into a partner, instead of a vendor:
- You understand the customer’s business. This proposal addresses your buyer’s actual need: to reduce support costs, and in language she uses with her own management. Normally, the customer has to hope that purchases will lead to results.
- The short-term risk is gone. It’s hard to reject a vendor who is willing to work for nothing. The fear that products will be useless ("dead on arrival") is removed. Collectively, corporate technology buyers have been burned many times.
- Your business interests are aligned. You have every incentive to make the customer successful, not just collect an up-front commission. This separates you from the many drop-and-run vendors with poor post-sales training and follow-through.
Sounds Great, I Think...?
On the flip side, these arrangements create a different set of risks for both parties. You are now tightly linked, jointly committed to delivering the savings that you promised. Dangers and concerns:
- You didn’t get paid yet. If your company needs hard cash for payroll and electricity, this isn’t it. CFOs and auditors will be unhappy with risk-sharing or revenue-sharing deals, and will insist on deferring sales commissions until the actual money arrives. Revenue may trickle in over several quarters or years.
- Customer implementations matter. Even the best products are worthless when not implemented, and some customers will never get things right. You now have to motivate and instigate a good outcome, even if it takes more resources than you planned.
- Measurement is hard. Defining precise and fair metrics for cost savings or incremental revenue is tough. You may be wrestling about what costs are “included” in relevant savings, or how much additional revenue would have come in without your brilliant marketing program.
- You may ultimately be overpaid. Customers should do some mental math about upsides, not just downsides. If your new web commerce application brings in $100M in new business instead of $8M, are they still willing to pay you 10%?
In a famously apocryphal story, one big computer company ‘gave’ a mainframe computer to Sabre early in the development of airline reservation systems. The system was delivered at no charge, but with a cents-per-transaction agreement that would continue paying for the life of the application. Over the years, this was dramatically more than the initial value of the gear.
So Who Would Agree To This?
In reality, not many customers will sign up for this kind of split-incentive model. It is hard to define, hard to approve through Accounts Payable, and generally doesn’t fit corporate purchasing models. It can still help you close a traditionally priced sale for services or products—by forcing customers to calculate your value for themselves. We’ve turned their ROI into your own ROI and shown how much you can contribute.
Imagine that you are a world-famous designer of automotive plants, offering to help a client reconfigure his truck line. You think you can squeeze out 5% more SUVs per day by re-arranging various steps in the assembly process, and have asked for a portion of the incremental profits. Your client’s internal musings go like this:
In fact, he will probably have this precise discussion with his boss before asking to sign you up. If you can help a client think through your value to him, then justifying a small portion of it shouldn’t be so difficult for either of you.
Not a New Thing
Historically, we’ve seen incentive pay for commissioned sales people, Hollywood talent agents, and lawyers taking contingency cases. It’s emerging in the web search market ("pay per click"). Pushing this to the extreme, there might be lots of pay-for-performance schemes:
- Direct mail agencies getting higher fees for response rates over 1%
- Academic coaches rewarded for their pupils’ SAT scores
- Cable TV companies paid for the number of channels watched, rather than delivered
- Home security patrols with rebates for break-ins
- Product managers who want a small portion of eventual revenues for their MRDs and pricing strategies...
Most of these are fraught with difficulties and moral hazards, but considering them may present some novel opportunities.
Offering to share results and risks with your client enables some exciting discussions. Even if you fall back on more traditional pricing, you’ve demonstrated your appreciation for the customer’s own issues.