This series of blog posts is exploring companies in the emerging performance economy. Performance based pricing—also known as outcome-based pricing or results-based pricing—refers to a pricing model where the product is priced based on the customers’ expense reduction or revenue gained as a result of the adoption that product.
In the first two posts of this series, we covered performance-based pricing models that use revenue gained as the lever for shifts in pricing.
- [24/7].ai leverages artificial intelligence and machine learning, combined with human intelligence, to create a personalized, predictive, and effortless customer experience.
- Clerk.io helps companies drive sales by using artificial intelligence to power a personalized shopping experience, for every customer in their online store.
In performance economy spotlight #3, we’ll look at the other side of the performance-based pricing coin—using expense/cost reduction, rather than revenue gained, as a mechanism for setting customers’ price. What better industry to examine cost reduction than sourcing and procurement? LevaData stood out as an interesting company planting a flag deep into the performance economy.
LevaData is a Software-as-a-Service (SaaS) sourcing and procurement platform that aims to turn this important process into a competitive advantage for its customers. LevaData touts itself as a cognitive procurement platform that leverages artificial intelligence (AI) and data-driven tools to optimize your negotiations.
Historical expenses shared with a partner—a solid foundation for performance-based pricing
Two critical elements for successful performance-based pricing model are the existence of shared KPIs and industry benchmarks. Another facilitator of this type of business model is the ability to measure data in a clear and consistent fashion.
LevaData prices its software based on the anticipated amount of incremental cost savings for a customer. This is a strong starting point, as year-over-year cost reductions are “the most important KPI for most procurement groups.”
LevaData creates a baseline for their customers using three years of what was sourced and the prices paid. From this baseline, they can calculate the additional savings a customer would have reaped, had the customer used the LevaData platform. Looking at a customer’s goals for the year, alongside historical data, LevaData predicts how using their platform will enhance and improve cost-reduction goals.
Formula for mutual benefit
Gainsharing requires a company to possess a tremendous amount of confidence in their ability to deliver, and it proves an excellent recipe for joint accountability.
“LevaData goes further and puts their money where their mouth is. They are willing to put 100% of their revenue at risk if they don’t meet the goals. They create a baseline cost reduction from the mutually verified historical 3-year average cost savings. The gainsharing formula is: for each incremental hard dollar cost savings realized above and beyond that historical baseline, LevaData earns 33%.”
LevaData so fully embraces outcome-based pricing that their website leads with a claim of “10 to 30% Incremental Cost Savings. Guaranteed.” At first blush, this seems dangerous. That said, LevaData is insulated from the dangers of ambiguous promises because of their “hard ROI” approach. Using shared data and metrics and the value associated with changes in those metrics becomes the basis of both LevaData and its customers' success.
In the end, partnerships flourish when there is an alignment of incentives and an agreement on how the parties will share in the upside.