Until last year, the importance of digital products and services has been growing steadily, offering manufacturers a competitive advantage and enabling them to generate new revenue streams. Today, however, digital offerings are no longer a practice reserved only for forward-thinking companies.
As the landscape has changed and forced the entire business spectrum to move online, digital offerings have become the primary way to do business in a world that is still struggling with the pandemic.
Therefore, developing a digital sales strategy is extremely important. Most businesses already learned that in 2020. However, the forced transition into the online world has been so rushed that not many have had the time to develop a solid strategy and are still working on it. And one of the most common hurdles in rolling out an effective strategy is digital pricing.
So, what are the pricing mechanisms in a digital ecosystem? And what pricing strategies will work for your digital services? We’ll tackle these questions below.
The digital approach to pricing
Rushed and forced digitization is undoubtedly a cumbersome thing to go through. But for all its hurdles, there are some exciting benefits it creates. For example, companies can now transform traditional products into digital ones and use this opportunity to revamp their offerings. In fact, by digitizing their products and services, manufacturers can complement their core business and maximize the use of cutting-edge technologies.
Although the manufacturing industry has been considered as one of the slower business sectors in terms of digitalization, there is huge potential for manufacturing companies in the digital age. And to realize their potential, companies must know how to position their digital offerings in the market.
When taking a digital approach to pricing, it’s important to understand that digital products and services differ fundamentally from their traditional counterparts in terms of cost structure and customer value. Additionally, you must consider new factors in your pricing decisions, such as digital platforms.
Because digital products and services are expensive to produce but cheap to reproduce, the best way to price them is according to their value and the customer’s willingness to pay for them. Also, it’s important to understand the benefit variables that customers are willing to pay for and identify a pricing method that allows consumers to experience the product as an incentive for the purchase. Another key consideration that should go into pricing is the transition from traditional supply chains to a digital platform or network.
Pricing strategies and payment models
Keeping in mind the changes in cost structure and customer value, the best pricing approach for digital offerings is value-based pricing. Because it’s a customer-centric model, it allows companies to first understand the needs and perceptions of different customer segments, align the perceived value to price, calculate the maximum allowable production cost to secure a sufficient return on investment, and, lastly, design products that prioritize the value perceived by customers.
By digitalizing products and taking a value-based approach to pricing, companies become more customer-centric more likely to capture the maximum value of their digital offering which results in higher profits.
Generally, the perceived value of products and services varies, sometimes significantly. So, how can you determine which pricing strategy can make your value-based approach effective? There’s actually more than one strategy that can work for you and for your diverse customer groups:
- Differential pricing: Depending on the customer’s willingness to pay, you can charge a different price for the same product or a similar one. To develop a differential pricing strategy, companies need access to detailed data about customers’ individual benefit variables and exogenous variables.
- Versioning: This strategy allows customers to sort themselves into segments. With versioning, a company can sell different versions of a product at different prices, which enables sellers to see the different degrees of a customer’s willingness to pay based on the version of the product sold, its price, and the features it provides.
- Bundling: With bundling, a company sells multiple items at a package price. In manufacturing, it can be applied to the selling of multiple industrial goods or components, traditional industrial goods combined with services that can also include digital solutions, and sets of digital services such as monitoring and maintenance. Although it sounds attractive, many customers in manufacturing industries prefer targeted purchases, so with this strategy, a very thorough approach may be necessary.
- Dynamic pricing: While in differential pricing prices vary between different customer segments, in dynamic pricing the prices differ based on market demands. In manufacturing, for example, dynamic pricing can help companies extract a surplus for products in high demand.
In addition to a solid pricing strategy, selecting the right payment model can help you maximize the benefits of your digital offerings. Transitioning from traditional models such as price lists to more flexible, scalable, and convenient models is the key to a value-based pricing approach that actually works for your digital offerings. So, consider innovative models that focus on customer value rather than costs:
- Pay-per-use/pay-per-outcome: This model allows the customer to pay for the actual usage or outcome of your product or service. The greatest benefit of this model is that it enables companies to turn fixed costs into flexible ones, which results in reduced financial risks and increased scalability.
- Subscription: A subscription allows customers to use your product or service for a fixed recurring price, usually every week, month, or year. This model is quite common for digital services.
- Freemium/tiered pricing: With this model, the customer can try a free version of a product as well as a premium one for a fee. This is more commonly used when selling software or other digital solutions such as monitoring for industrial equipment.
To get the pricing right for your digital offerings, you must create a healthy balance between your pricing strategy and payment model.
Once you achieve this, you should work on refining your strategy on an ongoing basis so that your business stays flexible and responsive to changing market dynamics.