Pricing Options While Purchasing of Procurement Professional Services: Innovative Pricing Strategies
"The price point defines the sales model. It has to be simple, and you have to know how to make money with it."
Don't all purchasers want to buy products and services which help them save cash while spending? The answer to this would definitely be an emphatic "yes". The main challenge comes into play in the form of a "how". The good news is that suppliers have themselves evolved several pricing models which buyers can choose from to their advantage. This series of blogs will be specifically mentioning a few of the models in favor with suppliers of professional procurement services like BPO services, staff augmentation and project based consulting work.
As it is often said "innovation is the name of the game". Lending credence to this much apt business lingo, clients today demand for a more competitive pricing strategy. Standard pricing models drawing parallels from product pricing have waned away. This has infused the business process outsourcing sector with an additional impetus to derive and sustain the business models, on a more mutually beneficial pricing model linked to process efficiency and gains. Clients have been focusing lately on models designed around volume of transactions, sharing of savings and service provider fees linked to service delivery. A brief concept outlining of these processes will set the context on where the current pricing strategy in the professional procurement services sector is heading towards.
• Volume based pricing: This model is commonly referred to as the transaction or pay per use model in the business process outsourcing sector. This pricing model is relatively simple as the price is based per transaction count, each transaction having a fixed price and the client is charged for count of transactions. In essence client pays for the volume for which service delivery is done. This gives the client the flexibility to cater to his business demand scenario. Client is safeguarded against paying up a fixed service fee even when the service delivery utilization is low due to cyclical nature of his business. This type of pricing strategy is best suited for clients where business volumes are variable.
• Gain share model: While outsourcing a business process, clients are on the lookout to incentivize the service provider as well as share the risk of service delivery. Such a strategy has been augmented by the advent of the gain share model. The gain share model is based on the fundamentals of sharing the realized gains from delivering the client's outsourced business with the service provider. Gains realized are in terms of savings realized to the client due to cost reduction and increased process efficiency. At time of pricing the service, service provider states the savings that are going to be realized to the client. The shares of the savings that will be given to service provider are pre decided with the client and specific percentages of the gain are shared. This pricing strategy has come into favor off late with clients in various business sectors, majorly due to the shifting nature of outsourced work to being strategic from pure transactional.
• Fee at risk model: This model is being preferred in combination with the Gain share model by more and more clients, as along with the incentive factor outlined in the earlier model the risk factor is getting addressed aptly as well here. The service provider bases the fee on the input cost of enablers like people, process and technology. If the service provider realized the committed gains to the client he is entitled to the full fee, whereas if he misses the target he is charged a penalty i.e. a percentage of the fees to be given by client for services to be rendered.
Both the fee at risk and the gain share model promote a 'mutually beneficial relationship' between the client and the service provider, as both have equal stakes involved herein. Promoting this relationship and realizing business benefits and values is the driving force which steers this ship to the shore.
This concludes the outlining of basics of innovative pricing strategies in the professional procurement services sector; laying in turn a foundation for the upcoming blog in this series which will emphasize on the pros and cons of these models. Not to forget; a glimpse into sector specific preferences for these models will be given for a better understanding of market preferences.
Invite all of you to comment on some additional points to elaborate on these in-vogue pricing models from your own experiences.