Value-Based Pricing: The Exception & How to Get Creative
Yesterday’s post covered how software companies improve their marketing and pricing structures by framing value in revenue growth, as opposed to savings. For the industrial and unregulated energy markets, this framework works about 90% of the time. But, like all good rules, there are a few exceptions. Topline alignment does not work when the product’s value is allocated to any of the following:
Regulatory / compliance
Environmental impact
Cybersecurity
The value-based exception occurs here because the return on investment for each of these product types is either
- government defined or
- addressing a long-tail, difficult to price risk
Most energy & industrial firms look at spend in these areas like insurance policies. With this uncertainty, firms hire consultants to recommend resource allocation and ensure that the corporation is investing sufficient resources (not more, not less) versus their peer set.
This causes two unique dynamics:
- Incredible purchasing influence by channel partners in these areas
- Underinvestment in long-term risks… until the risk shows up on the front door. (Think: a cybersecurity hack, long-term emissions impact, etc.)
If you are a startup serving these markets, it is especially important to retain policy advisors, immediately double down on channel partnerships, and most importantly: find a supplemental way to quantify your product’s impact beyond the initial, seemingly arbitrary cost line item. By creating a new form of value, a start-up in these verticals has the potential to control their pricing. I call this “supplemental value” the “Rule of AND”. Here are a few examples:
- The best companies in cybersecurity will offer their cybersecruity solution and also create an additional narrative around operational visibility. (positively impacting operational uptime = higher revenue!)
- Similarly, the best companies in environmental impact reporting report impact and will attempt to make product and supply chain recommendations to lower materials costs. (positively addressing materials= lower costs)