An Old Recurring Revenue Model Gains New Converts

An Old Recurring Revenue Model

Due to a range of market forces, a recurring revenue model that’s been used for decades in industries such as airplane manufacturing is undergoing a resurgence. Widely referred to as outcome-based pricing, output-based pricing, and performance pay, it offers companies a compelling way to stand out in a crowded field. Here’s a quick look at what it involves and what it takes to make it work.

With outcome-based pricing, people don’t buy products and services. Instead, they purchase the results those products and services make possible.

It’s not a new idea. For example, the concept of “Power by the Hour” for jet engines first arose in the 1960s. Customers no longer had to buy engines. Instead, they bought the outcome of owning an engine: guaranteed hours of operational performance. As part of the agreement, the engine makers took care of all maintenance and repairs.

Rolls Royce uses the same pricing method today with its TotalCare program, as do other engine manufacturers such as GE and Pratt & Whitney.

Why outcome-based pricing works

In today’s age of soaring customer expectations and increasing product commoditization, the idea of paying only for results is taking off. For companies, it provides more than ongoing, predictable revenues. Because they’re directly responsible for positive outcomes, it also deepens their relationships with customers in ways other pricing models don’t. It makes them collaborators in their customers’ success.

Here are a few examples of how various industries are using this strategy in new ways:

  • IT outsourcing and managed technical services. Traditionally, customers of services such as outsourced network management pay for labor and resources (aka “time and materials”). But increasingly, through the use of performance-based contracts (PBCs), they now have the option to pay for quantifiable results, such as the number of security Vulnerabilities patched or mobile devices supported or the average network uptime achieved.
  • Printing services. With Managed Print Services from Xerox, customers no longer have to pay for printers, toner, and maintenance. Instead they buy only what they really want—successfully printed copies. Xerox takes care of everything else. This same output-based pricing model is found in many “as-a-service” industries today.
  • Heating and air conditioning (HVAC). For years, Trane has offered customers an alternative to up-front capital expenditures for HVAC equipment and services. Through its PACT™ contract (Performance Agreement for Comfort from Trane), customers pay instead for guaranteed annual energy savings. Trane handles all project management, maintenance, and performance monitoring.
  • Truck fleets. With MAN, a German truck and bus manufacturer, fleet operators don’t have to purchase vehicles or deal with maintenance. Instead, for a small fee per kilometer, they get the outcome of truck ownership—access to trucks that are always available, in top condition, hassle-free, and fuel-efficient.

Key considerations

For all of its benefits, outcome-based pricing works well in only certain circumstances. For example, outcomes should be quantifiable and not subjective (e.g., cost savings, specific tasks performed, or benchmarks reached). Here are a few more criteria to consider if you want to know if this strategy is worth pursuing:

  • Direct connections. A direct line of connection needs to exist between a service and the business results it delivers. Determining precise cause and effect can be murky with complex services involving multiple suppliers and vendors.
  • Detailed agreements. Agreements must cover such granular details as what constitutes a successful outcome, who makes that determination, and what happens when outcomes fall short.

If your business can take advantage of outcome-based pricing, it’s well worth exploring. It gives you unique leverage in creating long-term repeat revenues. After all, when you offer customers positive outcomes, chances are they’ll want to buy them over and over again.

By Tom Dibble

Gary Bernstein
Test Data Management How do you test your data management systems? With Delphix, you can automate your tests by running your data against a virtual copy of your production environment. Today, the amount of data ...
Episode 16: Bigger is not always better: the benefits of working with smaller cloud providers
The benefits of working with smaller cloud providers A conversation with Ryan Pollock, VP Product Marketing and Developer Relationships for Vultr.com - Everyone knows who the big players are in the cloud business. But sometimes, ...
Alex Tkatch
Best Practices for Designing and Executing a Product Launch Nothing in entrepreneurial life is more exciting, frustrating, time-consuming and uncertain than launching a new product. Creating something new and different can be exhilarating, assuming everything ...
Crozdesk Business Software
B2B SaaS Comparison Platforms B2B SaaS Comparison Platforms are designed for buyers looking for additional information on a particular vendor and service. These sites help ease the complexities for buyers by providing a detailed breakdown ...
Brian Rue
What’s Holding DevOps Back And How Developers and Businesses Can Vault Forward to Improve and Succeed Developers spend a lot of valuable time – sometimes after being woken up in the middle of the night ...

SECURITY TRAINING

  • Isc2

    ISC2

    (ISC)² provides IT training, certifications, and exams that run online, on your premises, or in classrooms. Self-study resources are available. You can also train groups of 10 or more of your employees. If you want a job in cybersecurity, this is the route to take.

  • App Academy

    App Academy

    Immersive software engineering programs. No experience required. Pay $0 until you're hired. Join an online info session to learn more

  • Cybrary

    Cybrary

    CYBRARY Open source Cyber Security learning. Free for everyone, forever. The world's largest cyber security community. Cybrary provides free IT training and paid IT certificates. Courses for beginners, intermediates, and advanced users are available.

  • Plural Site

    Pluralsite

    Pluralsight provides online courses on popular programming languages and developer tools. Other courses cover fields such as IT security best practices, server infrastructure, and virtualization.