Creating and Capturing More Value
With greater focus on product innovation today, business-to-business (B2B) executives are creating more value for their customer. However, as more opportunities to create value are generated, the ability to capture more value becomes challenging. As such, how to design revenue models that allow business suppliers to capture more value has become a fundamental question widely discussed in the B2B arena. The key is to understand the different monetization models and how they can effectively be deployed.
Traditional Monetization Models
In traditional monetization models, suppliers typically set price levels and charge upfront based on an understanding of how much customers are willing to pay. The supplier later adopts new pricing levels as new features/benefits are added. We refer to this monetization approach as Myopic Pricing. As companies have moved towards value-based selling, they have begun to recognize the longer-term value of the product to the buyer and have generally made upward adjustments to the initial price to capture some of the incremental value at the time of the transaction. We refer to this approach as Pricing Plus.
These traditional monetization models are limiting for two reasons:
- They fail to fully realize the customer value creation
- Over time, they often become overly complex with add-ons, exceptions, and varying risks embedded in the supplier-customer terms and conditions
Strong, sustainable, alternative monetization models are those that acknowledge that the value created in supplier-customer relationships is dynamic, uncertain, and changing.
Alternative Monetization Models
As companies continue to innovate, build more robust offerings/solutions around the Internet of Things, and find new ways to incorporate big data into their products, new monetization models have come into play. These alternative monetization models connect the interplay between the supplier-customer financial flows and the drivers of time, usage, and production. We define each as follows:
Time: Revenue flow to the supplier is delivered over the same time frame during which the customer is receiving value for the offering. For instance, rather than paying an upfront annual license fee for use of a software product, the supplier agrees to structure the price as a monthly subscription fee.
Usage: Revenue flow to the supplier is based on the amount the customer uses the product (e.g., pay-as-you-go).
Production: Connects revenue flows to the customer’s level of production. For example, rather than selling a system or product on an upfront, fixed price, the customer and supplier agree to match revenue flows based on the customer’s production level.
How Do You Know You Have The Right Monetization Model?
It’s not enough for an opportunity to exist to capture additional revenue with an alternative monetization model, a need must also exist for the customer. Essentially, the customer must be uncertain about the acquisition of a new product or service from the supplier, either in the form of unknown or new technology or value delivery and timeframe. Ultimately, two interlinked questions must be asked?
- Is there value that you are currently offering to your customer that could be facilitated by a new monetization model?
- Would your customer prefer a new monetization model to mitigate risk and/or gain more liquidity?