A new pricing model: Client Business Model Pricing - CBMP

In the new economy, the one driven by bits not atoms, new opportunities arise every day. New competitors arrive every day as well, because there is one specific downside to products based on bits. They are easily copied. Of course, they are quite easily created as well. Whereas physical products usually have a higher barrier to entry. Uniqueness for knowledge based products must therefore come from other traits around the product or solution you provide. One distinction is the pricing model you apply.

Over time companies have moved from a strict product based or hourly rate based pricing model to a model that incorporates some form of success. Examples are models like no cure no pay and pay for performance. Although these models include some sort of success metric, they limit themselves to the relationship between you as provider and your client. The client however, has totally different success criteria. Their criteria revolve around their relationship between them and their clients.

The drawback all these pricing models have, is that they do not focus on your client's success. Even worse, they can leave your clients utterly dissatisfied, even if you have delivered something of value to them. With the no cure no pay model, your client might have asked for a solution you could not deliver. The client has invested a lot of time and ends up empty handed. To a limited extend this is also true for the pay for performance model.

Enter Client Business Model Pricing

Client Business Model Pricing, or CBMP in short, takes your client’s success as the starting point for payment. It bases the price they pay for your product or service on the success criteria from the client’s business model.

How can you apply it

A big difference between CBMP and the earlier pricing models is the fact that you are asked to invest in the client's solution upfront. You first create the solution you are supposed to deliver. Only then, when it is applied to your client's business, will you get paid. With knowledge based products, specifically the ones that do not require an immense investment upfront to create, this is a viable scheme.

An example

Let's assume your client wants to create web site portal for their clients and they want to attract as many potential clients as possible. Their clients will pay a yearly fee of 47 dollars to access the portal. You have knowledge and know-how about setting up such a web site. This means that you need to invest time to create the site. In the CBMP model, your investment in time is not invoiced to your customer. You negotiate a different model: for every registered and paying user, you get 4.70 dollars per year. It is now your task to make sure the portal functions properly and fully supports your client's business model. What you now have is a payment scheme that is fully aligned with the income scheme of your client. The upside for your client is that the costs become highly predictable and easy to incorporate into their business model.

Criteria

Customer Business Model Pricing is not something you easily apply to all products and solutions. There are certain criteria that you should consider before you use this pricing model:

• The solution does not require huge investments to create
• You have time available to create a working solution
• Your client's business model is open to scalability
• The potential size of your client's business is substantial
• The solution you create can be copied to other clients easily

Positives

The upside to the CBMP model is:

• It does not require an investment from your client
• You have created a high barrier to entry for any competitor who uses traditional models
• Depending on the size of your client's market, the payout can be enormous
• Because you can copy your solution easily to other clients, you can spread your risk

Downsides

Of course there are downsides as well:

• If your client is not capable of growing his/her business, you end up with an investment that has gone sour
• If your client does not allow you to create a generic product from your solution or disallows you to sell a similar solution to other clients, you are at risk

I am about to offer this pricing model to one of my potential clients and will see what happens. If you have experience with the CBMP model or want to discuss this model, please leave a comment.