I was having lunch with a long-time friend from a major US automotive OEM. We discussed automotive Subscriptions. Not surprisingly, this OEM (like most) is unsatisfied with its Subscription program’s revenue results.
One area we started to discuss was pricing. The discussion around optimizing pricing for Subscriptions was not that interesting. While there is value at a lower cost, bringing in more customers based on supply-demand principles evades the real value alignment problem. It is the incorrect pricing discussion.
Transformation Pricing is a term used frequently, with many models to choose from. However, a missing component is generally at the heart of underperforming Subscription programs for manufacturing.
Nearly every product company I have worked with is unwilling to transform existing revenue models into new ones. Conversely, almost every software company has done precisely that and achieved huge benefits in market capitalization & customer retention metrics. Why are manufacturing companies unwilling to move existing pricing to new “transformation pricing”?
I am not confident that there is a strategic alignment issue here. My sense is that it is more about having a model to believe in and the ability to break down traditional revenue-generating methods. That is a big challenge for any executive. However, let’s consider a few practical ideas.
Variable Leasing is a great way to use data to derive a customer-specific consumption-based price. The problem may be that the indicative cost for some customers is lower than the current pricing model. Huh? Let’s say you have a customer with excellent credit who lives and drives with low service risk & willing to pay per mile for the car, service, insurance, & connected apps. Due to their great credit, the cost would be lower than if they pay the lease, dealer service costs, extended warranty, & the app they need. The assumption that they will buy all of this is a big one.. The key point is which is better for the OEM & the customer. Strategically, total revenue and customer loyalty are the winners every time. Transformational pricing can get you there.
By the way, this is not only for individual customers. While in Singapore, I talked to every Grab Driver about their vehicle rental expense. The model is cost per vehicle per day in every case. This model encourages bad behavior, like driving too fast or for too many hours. How many fleets are missing out on better customer options?
Service as a Product – Similar to a variable lease (or part of it), data-driven service pricing can be a customer or fleet “win-win” scenario. Today, it is still the norm in most industries to have a fixed price for an extended warranty. In many cases, the connectivity Apps are included. Mainly because no customer sees value in paying for a connectivity app, which is expected as part of the product. At a recent field service conference, I was shocked that many field service managers prefer moving customers off service plans to T&M because they reduce their risk and increase margins. Ten years ago, the data may not have been available to provide variable pricing for Service as a Product, but today it is—another opportunity for Transofmraiton Pricing.
Embedded & Added Services – is generically a tricky area. In many cases, ALL of the new offerings were priced at an added cost. The business model and ROI were contained to cost & revenue. Perhaps if this is roadside assistance, it is valid. However, if “heated seats” (generically speaking), the market will rebel. There is much more to say about the “additive” pricing scenarios and the underlying problem with the selling process and market expectations. In nearly all cases, the initial product sale includes the expectation of embedded services, and added services are the upsell misaligned with value. However, in some cases, expectations are properly set to align future applications with future needs.
How do we think about transformational pricing vs. subscription pricing?
As noted in related articles, the solution is understanding the complete ecosystem and building a monetization model that aligns with your company’s strategic objectives. The key to this is to start with “transformational pricing” in mind and break down the current barriers preventing this.
Please continue to follow Value Threading as we further develop the data-driven transformation pricing methodology through technology and predictive modeling.
