Using marketing to create meaningful product differentiation separates you from competitors and allows you to command price premiums. One differentiation strategy should be the elimination of bad discounts.
Discounts should never lead to a loss of margin. Instead, discounts should reward customers for activities that improve their value as a customer - either by reducing your costs or improving demand.
As a first step, evaluate and build systems that reward customers based on desired behaviors.
- Not getting paid on time? Equate prompt payment with a discount that reduces your aging.
- Have customers that are time consuming? Provide a discount for ordering online.
- Have customers that are not properly utilizing their software? What about discounts that kick in once certain adoption milestones are achieved?
With win win discounts in hand, sales is then equipped to suggest discounts from a menu. The customer can then select the discounts that are in their best interest. It is important to properly understand how discounts incentivize certain behaviors and how those discounts are enforced. For example, should volume discounts be granted before certain sales volumes are achieved or are they paid back as credits once the customer hits the appropriate milestones? Enforcing performance milestones can be a technical challenge without the proper billing system.
The challenges of win win pricing
Any activity that is measureable is also monetizeable. Win win pricing requires a complex array of interrelated processes that must be managed: everything from the initial contact with a customer, to the placement of an order, to the provisioning and activation of a service, to the billing and payment, and then beyond to the capabilities that keep the customers hooked over time with new activities.
Managing the recurring customer relationship includes two critical subscription processes not normally available in off-the-shelf ERP, CRM or GL applications: the Order-To-Cash process where the relationship with the customer is established; and the Activity-To-Cash™ process where the relationship is expanded according to the consumer’s behaviors and preferences over time.
Nurturing the relationship requires that multiple pre-billing processes and complex functions such as Event Handling and Rating be in place for controlling usage and activities. That control comes through the assignment and enforcement of entitlements, which help to authorize and authenticate whether a person is who he says, and whether he should have access to the services he’s requesting.
That means the billing platform must know what a customer has purchased and where he is in the consumption of his subscribed services, and whether actions should be taken, such as advice-of-charge, balance checks, updates of allowances or reversal of events, suspension of accounts, and application of late payment fees and penalties.
For organizations that want to capitalize on the natural evolution of consumption, win-win pricing should include a mechanism for accommodating, and even evolving the subscription relationship.
Activity-based subscriptions can create sustainable relationships and prevent the loss of customers that might otherwise not be able to, or want to, make one-time purchases. The goal of activity-based pricing is to stimulate more consumption with price levers that accommodate changes in circumstances, usage and preferences.
The ability to add and manage consumption – or activity-based price levers to a product mix – gives a company a powerful tool for growing its customer base (recurring revenue) and maximizing lifetime value of the customer (reducing churn).
The win win
When you adopt win-win pricing, you map your prices to what the customer is willing to pay. At the same time, your customer benefit from discounts that are aligned with their needs - which improves win-win behavior. Last, you only pay out discounts that reduce your cost or improve customer performance.
Ben Bradley writes about the intersection of
technology and business. His primary interests include the impact of
sales and marketing on end-user technology adoption, billing and
business models, social innovation, entrepreneurship, collaboration,
networks and groupware. He is also the founder of Macon Raine, Inc. He
can be reached at