Monday, August 27, 2012

Cash Flow -Friendly Pricing Models

Early in August I had the pleasure of being a panelist at the NAB Small Business Summit in Melbourne. Along with a taxation specialist and a management accountant, our topic was “How to Best Manage Cash Flow”.

My contribution to the topic was that pricing is preventative medicine for cash flow. Get your pricing right, and you have the type of cash flow situation you want (a healthy one), but getting it wrong can be a contributor to cash flow problems.

There are a number of pricing models that are more cash-flow friendly than others:

Subscriptions: The world is moving towards a subscription economy, in both business (B2B) and consumer (B2C) markets, particularly for services. Look at companies like Flexicar and Quickflix (in Australia), and Zipcar and Netflix, the overseas equivalents. Spotify, and many Software-as-a-Service (SaaS) companies also fall into the same category.

The beauty of selling subscriptions are numerous, including the ability to “sell once and renew many”, lower perceived price points, greater segmentation opportunities and revenue that forms an annuity, rather than a lump sum payment.

Rentals: Companies selling tangible goods can achieve the same result as service providers offing subscriptions by renting out their products. Most companies don’t buy photocopiers any more: they rent them.

In addition to the advantages associated with subscriptions, further advantages of this pricing model is the ease with customers can be upgraded to new and improved models when they are released, as well as retention of ownership.

Goods Sold as a Service: A hybrid model, between subscriptions and rentals is to sell a good as a service. Those engines on the wings of airplanes have not been purchased by the airline you’re flying with. They are operating on “power-by-the-hour” contracts, with the airline paying for their use when the aircraft is in the air and earning the airline revenue. Likewise, Orica not longer sells explosives: it sells a ‘rock removal service’.

Link Pricing to a Value Metric: Often, the above-mentioned cash flow –friendly pricing models are non-linear, or have two or more parts. Subscriptions can be accompanies by usage charges. Photocopy rental agreements often comprise a rental fee as well as a cost-per-page price.

Ideally, these linkages should be to a value or usage metric that is going to grow within your customers business, thereby growing your revenue. If airlines fly more hours, then Rolls Royce earns more revenue. Just be aware that the converse may also apply.

There is one other benefit associated with these pricing models that illustrates why pricing is a holistic, business-wide initiative. Such pricing models can be easier for your sales force to sell, as they often become OpEx, rather than CapEx spending for clients.

Can you afford not to have a cash flow –friendly pricing model?

No comments: