Over a series of four posts, we’ll explore companies that are embracing the emerging performance economy. Aligned incentives and transparency of metrics are key to performance-based pricing that fuels this new trend. Technology and software are allowing business leaders to share both upside and downside risk with their partners, customers, and vendors.
Background on the two-decade evolution of SaaS pricing
Software-as-a-Service (SaaS) pricing has come a long way since Salesforce first put SaaS on the map last century. From user-based pricing, which served largely as a legacy holdover from per license models, to value-based pricing, you will find many opinions on the best way to maximize revenue. Companies are often limited by resources and tools when deciding how best to price their services. Depending on the underlying business, leaders will choose between flat-rate, pay-as-you-go, or feature-based pricing.
“Software as a service pricing schemes are getting more complicated and raising questions about lock-in, whether long-term deals are true to the spirit of cloud computing and what kind of deals IT buyers are really getting.” - ZDNet
The challenge of balancing the seller’s need for revenue predictability with the buyer’s expectations for flexibility and value is the issue all companies are looking to optimize.
Enter performance-based pricing. Simply put, performance-based pricing “means explicitly pricing of product in terms of the customers’ revenue gained or cost reduced from its use.” The concept of performance-based pricing appeals to many because, on the surface, it appears the most favorable for both the buyer and the seller. Incentives are aligned and if the seller is not delivering the promised value, the buyer is not locked into costly zombie contracts.
Meet 7.ai - They’re redefining the way companies interact with consumers
7.ai was founded in 2000, and with thousands of employees, the company now describes itself as “a customer experience software and services company that is redefining the way companies interact with consumers,” that helps, “...businesses attract and retain customers, and make it possible to create a personalized, predictive, and effortless customer experience.”
7.ai leverages artificial intelligence and machine learning to deliver customer acquisition products and customer engagement products, spanning nine target industries (Agencies, Education, Financial Services, Healthcare, Insurance, Retail & Ecommerce, Telecom, Travel & Hospitality, Utilities). Through these solutions, 7.ai seeks to redefine customer acquisition and engagement.
Measuring what matters makes performance-based pricing possible
Two core areas provide hints as to why performance-based pricing works for 7.ai:
- Existence of KPIs and industry benchmarks
- Inputs/metrics that are being measured and data that is retained
One of the most common themes for companies who successfully implement performance-based pricing are the existence of commonly understood industry metrics and customer KPIs.
7.ai pricing page
The customer experience space, which has its roots in call centers and contact centers, benefits from an established list of shared metrics and measures. Using what the company calls “Outcome-Based Pricing,” 7.ai works with customers to define their “pay for performance” ROI model aligned to their business objectives and centered around:
- Incremental revenue
- Direct and indirect cost reduction
- CSAT measurements
7.ai further defines specific inputs that might go into customer experience ROI models, including:
- Annual Chat Volume
- Cost Per Chat
- Annual Voice Call Volume
- Percentage Contained in the IVR
- Costs Per Call
- Agent to Agent Transfer Rate
- First Contact Resolution Rate
- Average Handle Time (AHT)
- API & integrations
- Customer Journey Flows/Call Flows
- Business Rules
The second key theme found in companies with successful performance-based pricing models is taking advantage of inputs that are already being measured.
Performance-based pricing requires that tracking, metering, and billing systems have a clear line of sight into the data that defines performance. Even if buyers and sellers agree on the performance metrics that determine pricing, if those metrics are difficult to obtain, the relationship will be unsuccessful.
Leverage your data to power smart pricing
Fortunately for teams scaling businesses now, the reliance on paper checks needing to be cashed, Excel spreadsheets littered on hard drives around the office, and on-prem software siloing data are more memories than real-time constraints on today’s process. As webhooks and APIs permit near-real time transfer of billing-related data, measuring the underlying data is no longer the issue. The only constraint on your business model is the creativity of your team.
Learn about some of the businesses who transformed their business models with the Ordway billing and revenue automation platform.