By Mike Bacidore, Control Design chief editor
As digital connectivity alters channel strategies and as product development lead times continue to shrink, pricing becomes even more important in the quest to not only survive, but increase profitability.
Sometimes, challenges become opportunities, and veteran marketers tap their experience to capitalize.
“We’ve priced everything from diapers to caskets,” said Adam Echter, senior director at Simon-Kucher & Partners, an international consulting company. Echter presented at Smart Industry 2018 and offered four takeaways.
1. Product complexity is expanding. “Firms today have new product and channel categories to consider,” he explained.
2. Orient yourself. “A problem can only be solved once it’s defined,” said Echter.
3. Borrow from others. “Look outside of your four walls for monetization solutions. Look at what’s been done before,” suggested Echter. “The pace of change doesn’t allow companies to get things wrong.”
4. Take the time to do it right. “This is a permanent shift,” he warned.
Digitalization remains a megatrend, explained Echter. “Some of the most important thinking indicates software and data streams are becoming more and more important.”
Echter added that in industrial business-to-business relationships there are five things that can be monetized—original equipment, parts, service, software and data.
“This new landscape means that industrial companies have two new things that can be monetized,” said Echter, “software and data. You have spare parts and service divisions, and we know how to do that. Now, we have software. In the 1980s and 1990s, you could change a chip and modify the horsepower of your car. Now data streaming allows you to reach into a car and modify it without even being there.”
Pricing, channel alternatives
Echter cited three pricing models—cost-plus pricing, cost-avoidance pricing and value-based pricing. “Maintenance is an example of cost-avoidance, he said. “And value-based pricing is when the incremental cost to distribute another copy of a software package or make an additional pharmaceutical pill is almost nothing.”
On top of new pricing alternatives, there’s also the channel problem. “In the past, you had direct and then partners and inside sales,” said Echter. “Now you have web-assisted, and finally you have the digital capability to have an account, and you can download and buy stuff. It’s consumption through a fully digital relationship.”
Buyers are changing their behaviors,” explained Echter. “They’re bypassing partners and dealers and going direct to the manufacturer,” he said.
While industry is doing a great job of using IoT inside of plants, when it comes to using the data streams, there’s room for improvement. “E-commerce platforms add transparency and can create price wars,” he explained.
Echter cited John Deere as a company that’s done pretty well in managing new channels. “I like what they’ve done with their channel relationship and their spare parts business,” he said. “Very few companies have the audacity and courage to do it.”
Channel conflict had been decimating the spareparts business, Echter explained. “The farmer in Florida would get a different price than the farmer in Iowa.” John Deere proactively disrupted established relationships and launched a direct-to-customer channel. “They took their catalog, normalized pricing and gave access through their website.”
The strategy has been effective. “The stock price has risen,” said Echter. “They’ve also created digital parts that mean the tractors don’t run with other companies’ parts, or inform the user the warranty is voided if they do.”
Subscription models
Zuora, a subscription-based enterprise software company, is another example. “We’re moving to a culture where you have subscribers who access you through different channels, which means annual spend increase and churn decrease,” explained Echter. It’s subscriber-based, similar to the Apple and Amazon models.
“Engineers love to reinvent the wheel sometimes,” explained Echter. “Software and data have been around a long time. Monetizing software and media starts with the packaging. Package decisions drive price metrics,” said Echter. “Different packages dictate what features you can use. Price metrics enable price structures.”
It’s also important to realize that there is no “right” business model, Echter stressed. Think about Apple and Amazon, the two most valuable companies in the world, he said. Apple charges premium prices for their phones, while Amazon is all about delivering products at the lowest costs as quickly as possible. But both companies have grown by hooking customers into subscribing to their ecosystems. “If you’ve had more than one iPhone, you’re an Apple subscriber,” he said.
