(Authored by Jagannadh Kanumuri, President & CEO, ACI Infotech)
In the dynamic world of IT services, a new and innovative pricing paradigm has emerged – the outcome based model. This approach is transforming the traditional subscription and per-user models, focusing instead on delivering tangible, remarkable results. Technology providers are embracing this change with enthusiasm, breaking free from conventional constraints.
The outcome-based pricing model has captivated businesses with its promise of delivering awe-inspiring outcomes. Technology vendors now offer flexible, customized solutions to cater to the budget-conscious clientele, like modern-day magicians turning dreams into reality. Fixed prices are no longer the norm, as the focus shifts to value-driven arrangements.
This enchanting transformation has infused excitement and creativity into business interactions. The providers stand tall as architects of success, forming alliances that promote mutual growth.
Indeed, the outcome-based pricing era has arrived, illuminating the path to a future where dreams and innovation harmoniously intertwine.
Shifting the Focus to Outcomes
Customers have always desired solutions to their problems rather than mere products or services, even if they may not have initially realized it was attainable. Their ultimate preference lies in achieving specific outcomes. This sentiment was eloquently expressed by Harvard Business School Professor Theodore Levitt when he wrote, “People don’t want a quarter-inch drill. They want a quarter-inch hole.” To effectively cater to customers’ needs, companies must focus on their goals, objectives, and overall success. While it may be more convenient, habitual, and less risky to sell products, services, or processes, providers of outcomes must go the extra mile and deliver tangible and measurable customer results that generate and capture more value. This need for measurability is particularly crucial for software firms. For example, if a customer aims to improve inventory turnover, the vendor must demonstrate that their application is the primary driver behind that desired outcome.
Digital Technologies and Data Enable Outcome-Based Pricing
Companies can leverage sensors to capture data, utilize the Internet of Things (IoT) and 5G technologies for wireless transmission, and leverage cloud storage and processing capabilities for Big Data. This enables the creation of applications and platforms that can effectively process data, derive data-driven insights, develop digital twins, and drive hardware through ML (Machine Learning) and AI (Artificial Intelligence) algorithms to deliver desired customer outcomes.
The necessity to create OBM (Outcome-Based Models) is one of the driving factors behind the widespread adoption of digital transformation initiatives by almost every company in recent times. However, analog and digital companies face distinct challenges in this regard. Born-analog companies often encounter hurdles in developing digital capabilities due to the requirement of substantial time and investment. On the other hand, digital start-ups may lack comprehensive knowledge about physical machinery, processes, and patents, as well as an established equipment base that they can leverage for their operations.
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Market Segments Embracing Outcome Based Pricing Model
Smaller firms and startups are increasingly adopting outcome-based pricing strategies to attract customers away from larger competitors. This approach is particularly appealing as larger providers continue to raise prices and enforce aggressive contract renewal terms. Over the past few years, chief information officers have become more skilled at utilizing data and artificial intelligence (AI) to monitor their IT expenditures and link them to business results. In various industries, outcome-based pricing is also presented as a means for customers to mitigate their financial risk when engaging with a specific vendor or testing a new product.
Bayer, for instance, has developed a model that leverages its data on crop performance in specific environments. With the help of AI, the company provides personalized recommendations for farmers regarding optimal cultivation practices using Bayer’s seeds and pesticides. Additionally, the model determines the expected financial benefits that farmers can derive from using Bayer’s products. Jeremy Williams, the head of digital farming and commercial ecosystems at Bayer, explained that this approach is novel in the agriculture sector, where farmers are typically accustomed to paying fixed prices for seeds.
However, implementing outcome-based models poses challenges when it comes to attributing revenue increases or cost savings to a particular vendor. Ron Burns, a senior research director at Gartner, emphasized that accurately assigning such outcomes to a single vendor could be a significant obstacle. He also expressed concerns about potential legal conflicts that may arise in these situations.
Embracing Change: The Power of Flexibility and Adaptability
The B2B IT services industry is characterized by rapid changes in requirements and technologies, necessitating a flexible approach. To address this, the outcome-based pricing model has gained popularity. This pricing structure allows for adaptability and accommodates evolving needs. For instance, a cybersecurity service provider may offer outcome-based pricing based on successfully reducing security vulnerabilities and preventing data breaches. In this model, if new threats or regulations emerge during the project, the service provider can adjust their strategies and security measures without additional charges. This flexibility empowers service providers to effectively respond to emerging challenges, ensuring the client’s IT infrastructure remains secure and compliant.
How Mid-size enterprises are adopting Outcome Based pricing model?
Mid-size companies are making a significant impact by combining servitization and digitalization strategies. In B2C markets, they use digital technologies to deliver personalized outcomes in real-time, gaining a competitive edge. In B2B manufacturing, they capture data from physical assets, enabling predictive maintenance for optimal performance. This shift from selling products to delivering outcomes allows mid-size companies to compete with larger players. The integration of analog and digital technologies is crucial for success, leading them to explore partnerships with software firms. By focusing on delivering and measuring outcomes, mid-size companies build strong customer relationships, breaking free from traditional buying centers. This customer-centric approach fosters partnerships with various business functions, enhancing their reputation and loyalty. Embracing Outcome-Based Models (OBMs) offers lucrative opportunities for growth and success in the future market landscape.
Overall, ACI Infotech stands at the forefront of outcome-based pricing, leveraging innovative strategies, clear communication, and meticulous contract drafting to create mutually beneficial partnerships with our clients. We are committed to driving results and ensuring that our clients’ business objectives are not only met but surpassed.
In the dynamic world of IT services, the introduction of the outcome-based pricing model has sparked a remarkable transformation. This innovative approach has revolutionized the way service providers and clients collaborate, placing a strong emphasis on measurable results and creating value. By aligning pricing with achieved outcomes, this model incentivizes providers to deliver high-quality solutions that generate tangible benefits for their clients. The result? Enduring partnerships are built on trust and mutual accountability. With its flexibility and adaptability, the outcome-based pricing model empowers both providers and clients to successfully achieve their business goals in an ever-evolving landscape. It’s a win-win framework that propels the IT services industry into a future of limitless possibilities.
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