Just a couple of years ago, very few firms could afford to network their machines because that was still an extremely expensive undertaking. But now networked manufacturing has grown more popular as solutions have become more standardized.
They can be used immediately at a cost per connected machine. But not every customer benefits from this type of pricing structure. If a technology does not prove to be as useful as expected, it has to be written off as a bad investment.
Value-based pricing uses the true value that a product creates for the customer to determine the price. The product has to prove that it has achieved the desired positive effect on a manufacturing or service process.
To determine the added value that a product creates for a company, both the firm and supplier have to identify key factors before the product is deployed and then monitor these factors constantly. They could, for example, be the firm’s turnover or cost reductions in specific areas. A major advantage of this pricing model is stronger customer loyalty and shared risk. On the downside, the data used to determine the value of a product is often difficult to obtain. Deploying it can also end up adding extra costs compared to other pricing models, so it is essential to calculate carefully before determining which pricing model to use.
What does this mean for setting prices in regard to solutions for networked machinery and the Internet of Things? Customers currently paying per machine would instead determine their costs according to the M2M solution’s success. This would require defining a so-called zero point indicator that measures the value to the customer based, for example, on higher sales or cost savings. The solution provider would receive a predefined percentage as its remuneration.
The benefit for the user is clear: If the solution doesn’t work, a customer has no expense. This means both sides share the risk of an innovative technology but also have an alignment of interest. Should it prove profitable, both sides gain. Companies only just beginning to deploy IoT solutions can derive special benefit from VBP. They take on no risk with a pricing model based on the success of the solution and benefit from the variability of the cost, which changes proportionally to their gain. And since this concept marries their success to Telekom’s own financial interests, they have a partner at their side doing everything it can to ensure that a project achieves results.
Absolute trust is necessary for value-based pricing because determining the added value of a solution requires sensitive information, such as business models, profits, and more to be disclosed. Customers open to providing this data are rewarded with increased productivity and greater service satisfaction.
And what does a provider of IoT solutions gain by carrying the risk that its products might fail to add value for a customer and therefore earn no profit? The answer is simple: It can use these experiences to improve solutions and make them more effective in the future.
So VBP is part of a long-term strategic approach. It can help make increasingly competitive IoT and M2M segments more profitable. Since customers pay not once but continuously, their trust in the longevity of a product’s quality grows. VBP is a very customer-oriented approach to business, increasing client understanding, service, and loyalty.
Alexander Lautz is senior vice president of M2M at Deutsche Telekom (http://m2m.telekom.com).
Edited by Ken Briodagh