Outcome-based vs. Usage-based Pricing
In the subscription world, I see these two phrases and concepts used a lot, but the difference isn’t always clear. Let’s explore this together and then I’d love to hear your opinion over on the Champions of Value community posts or post a comment on LinkedIn.
Theodore Levitt famously said, “people don’t want to buy a quarter inch drill, they want a quarter inch hole.”
Let’s use that as the starting point for this discussion.
Let’s think: Is the hole an outcome or usage or both?
If we could connect the drill to an app and monitor it in action we could create different pricing mechanisms. These are what you refer to as pricing metrics.
What are you going to charge for?
Considering Different Pricing Metrics
- One pricing metric could be a monthly charge for the drill. The customer can drill as many holes as she’d like. This is neither usage nor outcome based pricing, this just becomes a subscription.
- Let’s say instead we charged by the amount of time the drill was spinning. This is obviously usage based and not outcome based. After all, the drill could just be spinning on the table, or the user could be trying to drill something that’s impenetrable.
- Assuming we could monitor it, what if our pricing metric is the number of holes drilled? This is usage based, but is it outcome based? The answer depends on how we define outcomes.
Thinking About the Outcome
A hole is an outcome.
But nobody really wants a hole so you have to ask, why did the user need the hole?
Here’s one possible scenario.
Let’s call it the “husband scenario”:
The user wanted to hang a picture but why did he want to hang a picture? To make his spouse happy. Why did he want to make his spouse happy? So he could go golfing on Saturday. So, the user drilled a hole, hung a picture, pleased his wife, and went golfing. What was the outcome?
In B2B, you could argue that every outcome is measured in dollars. It is either increased revenue or decreased costs.
Here’s a B2B scenario:
Why did the company want to drill the hole? To be able to assemble their product efficiently. Why assemble the product efficiently? To save time on the assembly line. Why save time? To reduce the cost per assembled product.
What was the outcome?
Was it the hole or the reduced cost?
Defining the Outcome
Now that I’ve got your mind spinning, let me take a shot at defining the difference.
Outcomes are what the buyer cares about.
What reason did the buyer articulate or think regarding why they’re buying the product? That’s the desired outcome they’ve defined?
In the husband scenario:
I doubt the husband was really thinking, “If I drill this hole I can go golfing.” But he might have been thinking, “If I drill this hole my wife will be happier with me.”
Holes don’t ultimately feel like outcomes in this scenario.
In the B2B scenario:
It seems reasonable that the plant manager is thinking, “We need to make production more efficient. How can we reduce some time?” In this case, the reduced time to assemble is probably the exact outcome the buyer was looking for. Still not the hole.
Is the hole an outcome? Sure.
Is it really the outcome the buyer wanted? Probably not.
Conclusions in Comparing Outcome-based with Usage-based Pricing
After going through all of this analysis, what should we conclude?
The closer we can get to articulating and pricing for the true outcome, the more value our buyers will perceive. However, it seems we can rarely if ever truly get to that point. Instead, let’s think of outcome-based pricing as pricing the product or service based on the amount it does the job it was intended to do.
What do you think?
Join the Conversation!
Have a question or comment about this blog? Share your opinion in our Champions of Value Community.
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.