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Rethinking Value: The Impact of Outcome-Based Pricing

By Palladium,

Pricing innovation is an increasingly prevalent tool for B2B companies looking to carve out a competitive advantage. A common example is linking price to end result, also known as ‘outcome-based’, ‘value-based’, or ‘performance-based’ pricing models.

This approach has gained popularity in recent years, often at the expense of traditional cost-plus or competition-based pricing structures. For example, Hitachi Rail has embraced an outcome-based pricing model, where their compensation is linked to the performance and efficiency improvements their rail solutions provide to customers.

In the health and wellness sector, Noom offers corporate wellness programs with a pricing model that depends on participating employees' health outcomes. The company’s approach ensures that charges are only incurred for employees who achieve significant health improvements, aligning the company’s financial success with the genuine health progress of its users.

But what makes outcome-based pricing so appealing? And how can you unlock its potential?

Outcome-Based Pricing: The Benefits

Outcome-based pricing offers several advantages for companies:

1. Incentivising Business Performance

Connecting the fee you can charge to the quality of your end product forces you to take direct responsibility for the results, ensuring customer needs are prioritized and met at all times. This is crucial in industries such as healthcare, where meeting customer needs can have a life-changing impact. Consequently, pharmaceutical companies such as Novartis are increasingly pricing their medication to payers according to associated patient health outcomes, driving accountability for end-customer welfare.

2. Differentiating In A Competitive Market

Outcome-based pricing is a unique selling proposition, guaranteeing additional value or convenience unavailable to customers elsewhere. A perfect example is Siemens Energy’s recent foray into ‘opex-only’ machinery. By switching to an outcome-based service model, they could scrap high upfront fees, providing an attractive offer to companies otherwise hesitant to invest significantly in their production lines.

3. Reducing Churn

By linking your success against a customer’s ability to achieve their goals, you actively demonstrate their desire to deliver real, measurable value—a guarantee impossible through more cost-focused price models. Using this approach has contributed to companies like Salesforce reducing attrition rates by up to 45%. The more faith a customer has that you will provide them with what matters to them, the less likely they will be to seek options elsewhere

4. Encouraging Innovation

By using the outcome-based pricing model, companies are driven to innovate and enhance their products and services to ensure they can deliver the promised outcomes to customers. In recent years, companies have harnessed emerging technologies such as artificial intelligence (AI) and machine learning (ML) to accurately measure and control outcomes, forming the basis of outcome-based monetization models. The constant innovation push also leads to more effective products and services and fosters an organizational culture of continuous improvement. 

Harnessing Market Insight

Implementing an outcome-based pricing model is not without its challenges. It requires a deep understanding of your customer’s needs and the value they derive from your product or service. Being attuned to the business objectives or KPIs your product or service supports is also essential. Having data analysis capabilities sufficient to measure outcomes and determine pricing accurately is vital to creating and implementing effective outcome-based pricing strategies.

The best pricing approaches do not start with internal analysis but with an in-depth understanding of competitor approaches, your customers' needs, and the wider market. Outcome-based pricing will only work if your measure of ‘success’ aligns with what your target audience truly values. By combining granular and specific market insight with internal and external data analysis, businesses can develop an actionable outcome-based model capable of catering to customers’ core needs.

AI and Outcome-Based Pricing

Using market insights as a foundation, AI becomes a powerful tool in developing outcome-based pricing strategies. By harnessing the ability to process vast datasets, AI makes it possible to predict and analyze outcomes accurately—this is especially true when AI is integrated with proprietary company data.

As Rich Klee, Product and Technology Director at Palladium, highlights, equipping a private AI solution with your company’s data can lead to breakthrough applications: “The biggest step change is when people integrate their own data, giving AI access to a private corporate knowledge store. When this happens, really interesting use cases open up.” This data-driven approach is vital for creating informed pricing adjustments that align with the value your customers ultimately receive.

A global survey conducted by MIT and the BCG Henderson Institute revealed that AI pricing transformations generate greater financial impact than other AI transformations. The survey found that large companies with over $10 billion in annual revenues that adopted AI-driven pricing transformations saw more than $100 million in revenue improvement. This is 70% more than those that didn’t use AI for pricing strategies. 

Ultimately, implementing AI in outcome-based pricing strategies is about combining it with deep market insights and human judgment to create a pricing model that truly aligns with customer needs.

Outcome-Based Pricing: The Way Ahead

To fully leverage the benefits that outcome-based pricing can bring, you must identify the quick wins and longer-term strategies necessary to sustain this up-and-coming pricing model. This may involve investing in AI and data analysis capabilities, refining customer segmentation strategies, or rethinking product or service offerings.

Are you considering using AI to help implement outcome-based pricing in one or more of your portfolio companies? Before jumping headfirst into AI implementation, it’s important to understand the opportunities AI presents for your company, including pricing. We launched the AI Impact Assessment to help private equity firms and portfolio companies assess AI's potential value and impact on their investments.

Please don’t hesitate to contact us to learn more about our AI Impact Assessment.

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