Create Value by Focusing on What Your Customer Values
My colleagues and I conducted a workshop with WaterTap to enable water technology companies to better approach their pricing strategies. Prior to the workshop, I had the opportunity to interview the CFO of one of Canada’s leading clean tech software companies that is focused on the water sector, James Griffiths of Aquatic Informatics. James was able to share with me his thoughts regarding pricing for one the their software brands, WaterTrax.
Using technology-driven data collection, WaterTrax helps agencies and utilities monitor and manage their water and wastewater system data. With WaterTrax, these organizations are able to streamline regulatory compliance and reporting. WaterTrax’s clients benefit from real-time data analysis that allows them to meet water quality standards. WaterTrax was founded in 2001 as a application service provider – you could say that they were in the SaaS business before it was called SaaS. WaterTrax joined forces with Aquatic Informatics in July 2017.
When establishing pricing for WaterTrax, the team identified key attributes for their pricing:
- Reflects value – Value takes into account budget capacity
- Subscription-based – Ability to scale according to population
- Viewed as affordable – Fairness is a lens for affordability
For pricing to reflect value, customers need to receive economic and emotional value from the offering. Strong pricing power requires elements of both. Values are role specific, so consider which of your roles will be driven primarily by economics versus emotion, and vice versa.
Here is a table outlining the six main economic value drivers with examples of each.
Some of the key economic drivers that WaterTrax customers receive include:
- Decreased Operating Expense: Time saved by technicians leads to improved efficiency of operations. WaterTrax provided customers with ROI based on the amount of time saved by technicians through task automation, which frees up resources to concentrate on other tasks. Saving time is the key economic driver for their customers.
- Decreased Operating Expenses and Decreased Capital Investment through better planning and allocation of expenditures. With improved data and analysis, customers are able to better predict and take action more quickly to avoid potential water quality issues. This enables the municipalities to determine budgets and how they should apply their capital expenditures, and potentially reduce their overall operational expenditures. In WaterTrax’s experience, their buyers’ budget typically comes out of operating expenses (OPEX).
- Decreased Risk by mitigating against costly outcomes of poor water quality. “It is hard to put a figure on the value of reducing risk.” Insufficient water quality can impact the health of the entire ecosystem, not just human health. There can be dramatic environmental and social impact costs. For example, the Walkerton crisis that resulted in 2,300 people falling ill and 6 fatalities had an economic impact assessed at over $64.5M.
A great framework for emotional value drivers is Maslow’s Hierarchy of Needs. The higher up the hierarchy that you are able to satisfy with your offering, the greater pricing power you can achieve. Emotional value tends to be role specific, so consider mapping the emotional driver that your offer creates for each role within your stakeholder map.
For WaterTrax, the key emotional drivers are:
- Basic Functionality, Security, and Community. Improved water quality to avoid tragedies like Walkerton. People expect to have clean water. Public service provides this vital service and plays an important role in the community.
- Security by establishing peace of mind. “I will sleep at night knowing that the data is not impacted as a result of human error.”
- Self Realization. Municipalities and water technicians in particular take pride and ownership in knowing that they are keeping their communities safe. With better transparency and data being better managed and structured, information can be used to better inform the public.
Subscriptions Pave the Way to Predictability
For WaterTrax, pricing is closely associated with the size of the municipality. The company developed a tiered pricing model based on the US EPA public drinking water classification system, which is based on the population served by the water system. The US EPA population bands reflect the budget and purchasing power of a water system and is therefore an appropriate metric to scale software subscription.
At Ibbaka, we promote the need for pricing to be fair, transparent, and consistent. Utilizing an existing pricing metric that the customer is familiar with adds to increased transparency for WaterTrax. Furthermore, the tiered model based on this metric gives a degree of predictability on pricing that the municipality can model its investment on should its population fluctuate over time.
Affordability and Willingness to Pay
As we consider attributes, we should always remember that it is the view of the customer and not our own views that matter. Affordability relates to both fairness and willingness to pay. Bear in mind that affordability is perceived differently depending on the specific segment you are targeting. Affordability factors into how you structure and fence both your offering and pricing tiers.
Key Questions on Pricing
- Are we charging too little or too much? Is our pricing fair?
- Are we being too sensitive to budgets such that we are leaving money on the table?
We are not alone when we ponder pricing. These are very common questions all companies ask themselves.
- You have to continue to test pricing. Pricing is not a once and done exercise.
- More often than not, pricing is not the objection to the sale. Pricing objections are typically a symptom of something else. For WaterTrax, the main criteria for securing the customer is to make them feel comfortable around the path to getting the WaterTrax system operationalized within the customer’s environment.
I would be pleased to hear your comments on the key questions you ponder when it comes to setting your pricing strategy.
Insights on Pricing Innovation Survey
In the meantime, I invite you to participate in our survey on pricing innovation where we explore how companies create and price their innovations.