There has been a lot of talk in the services industry around new pricing vehicles: non-linear pricing, outcome-based pricing, pricing for results and gainsharing, for example. All these new pricing models whipped up by providers have something in common: they’re complex. I’ve been in this industry since 1983. Here’s one of the important things I’ve learned over the years: complicated pricing breaks down.
I’ve looked at function-point pricing and all kinds of algorithms. The complexities don’t stand up well.
That’s why cloud pricing is so compelling— it deals with pricing complexities by bundling components and customers pay for the service based on consumption and a few key metrics. It’s simple. It’s this simplicity that gives the cloud model so much power.
Simplicity is also what made labor arbitrage pricing so powerful. It’s based on a body and an increment of time in India versus the United States. You can have an FTE on an hourly or daily basis. It eliminates a lot of moving parts. The service pricing is easy to understand.
The acid test for pricing models
Here is my acid test for whether a pricing model is simple enough: You must be able to tell it to your mother, and your mother has to be able to tell it to her friends, and when you hear it from her friends, you must recognize what you’re hearing.
This acid test for simplicity is important. In a customer organization people have to explain the pricing model to other people, and it has to survive multiple layers of people telling and retelling it clear down to the users. Nothing complicated will survive that. The pricing must make sense to the people who use the service based on that pricing model. Otherwise, there will be misunderstandings and misalignment and eventually the structure will break down.
Bottom line: New pricing models are often too complex, very painful to break down. My advice is to remember the well-known KISS Principle — Keep it simple, Stupid.