Description
The goal of this research is to study the two managerially and academically important issues of 1) the level of value based pricing used in SMEs and 2) pricing strategy as a tool for partnerships.
Pricing Strategy and Revenue Models: A Multiple Case
Study from the IT Service Sector in Finland
Management Science
Master's thesis
Joonas Wuollet
2013
Department of Information and Service Economy
Aalto University
School of Business
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Pricing Strategy and Revenue Models
A Multiple Case Study from the IT Service
Sector in Finland
Master’s Thesis
Joonas Wuollet
15.11.2013
Information and Service
Management
Approved in the Department of Information and Service Economy 01.01.2012
and awarded the grade _______________
ii
AALTO UNIVERSITY SCHOOL OF BUSINESS ABSTRACT
Department of Information and Service Economy 15.11.2013
Master’s Thesis
J oonas Wuollet
ABSTRACT
Objectives of the Study
The goal of this research is to study the two managerially and academically important issues of 1)
the level of value based pricing used in SMEs and 2) pricing strategy as a tool for partnerships.
Academic background and methodology
In one of the staple articles on the issue of value-based pricing, Hinterhuber explains that
although the effect of pricing on profitability is quite clear, managers often see pricing as a zero
sum game, where the company’s gain comes only at the customer’s expense. (2004) Managers
often do not pursue value pricing because they perceive customers as quite price sensitive.
However, in their research, Avila and Dodds found that purchasing managers ranked price as the
least important criteria in the decision making process (1993).
Although the literature has attempted to describe pricing as a tool for partnerships (Voeth &
Herbst, 2006; J ohnston & Lawrence, 1988; Porrini, 2006), there has been no attempt to explain
what aspects of pricing and revenue strategies make the most significant contribution to the
success of partnerships. Sainio and Marjakoski describe value based pricing and revenue logic as
key determinants of business models, but do not make the connection between these inputs and
the goal of building partnerships (2009). We addressed this gap in the literature by proposing a
framework to assess pricing as a tool for partnerships based on these two dimensions: 1) value
versus market pricing and 2) on-going versus one-time revenue models.
The multiple case study method employed in this study helped to overcome the knowledge gap
of novel pricing concepts by providing clarification of concepts to the interviewees. The
interviews were structured which encouraged comparability between the cases. The integrity of
the interview data was ensured by conducting all interviews within a short time frame, producing
full transcripts of interviewee comments, and translating the complete texts.
Findings and conclusions
The proposed framework was tested and can be used as a strategic tool to build deeper
partnerships with clients. The dimensions used in the framework were supported by the stated
goals of the interviewees, who each hoped to build and maintain partnerships with their clients.
Keywords
value-based pricing, revenue models, partnerships, pricing strategy framework
iii
ACKNOWLEDGEMENTS
I would like to express the deepest appreciation to Professor Matti Rossi, who provided support
and instilled mental stimulation in regards to my research. I would also like to thank Assistant
Professor Risto Rajala, who gave direction when I needed it most. His selfless advice and
assistance at the outset of this process kept me focused on this topic and I greatly appreciate his
input in helping to build the structure of the interviews. Without his guidance, this study would
not have been possible. I would also like to thank my friend and mentor J aakko Tikkanen, who
inspired me to follow through with my studies. Finally, I express my deepest appreciation to my
lovely wife, Emma who supports me every day and inspires me by employing the highest
standards with her own research, albeit in the dental field. Her encouragement is what brought
this project to a satisfying close.
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TABLE OF CONTENTS
ABSTRACT .............................................................................................................................. ii
ACKNOWLEDGEMENTS....................................................................................................... iii
TABLE OF CONTENTS .......................................................................................................... iv
LIST OF FIGURES .................................................................................................................. xi
LIST OF TABLES ................................................................................................................... xii
1. INTRODUCTION ....................................................................................................1
1.1. Background Information ...........................................................................................1
1.2. Value based pricing...................................................................................................1
1.3. Rationale for the study ..............................................................................................1
1.4. Pricing as a tool for partnerships ...............................................................................2
1.5. Research Questions ...................................................................................................3
2. Literature Review .....................................................................................................4
2.1. Focus of the literature review ....................................................................................4
2.2. Pricing as a phenomenon...........................................................................................4
2.3. Pricing as a tool for partnerships ...............................................................................5
2.4. Pricing strategies .......................................................................................................6
2.4.1. Market based pricing .................................................................................................6
2.4.2. Competitive pricing ..................................................................................................6
2.4.3. Cost based pricing .....................................................................................................6
2.4.4. Value-based pricing ..................................................................................................7
v
2.4.5. Price Skimming ........................................................................................................8
2.4.6. Customized prices .....................................................................................................8
2.4.7. Hourly based billing ..................................................................................................8
2.4.8. Lifecycle pricing .......................................................................................................8
2.4.9. Experience curve pricing ...........................................................................................9
2.4.10.Target return pricing .................................................................................................9
2.4.11.Group/ Segment based pricing ..................................................................................9
2.4.12.Versioning /Predetermined choices ...........................................................................9
2.4.13.Bundled pricing ...................................................................................................... 10
2.4.14.Profit and Revenue sharing ..................................................................................... 10
2.4.15.Licensing ................................................................................................................ 10
2.4.16.Pricing as a cue ....................................................................................................... 10
2.4.17.Discounting............................................................................................................. 11
3. Methodology ........................................................................................................... 12
3.1. Research method ..................................................................................................... 12
3.2. Case Selection......................................................................................................... 12
3.3. Data Collection (Interviews) ................................................................................... 13
3.4. Data Analysis .......................................................................................................... 14
3.5. Validation Strategies ............................................................................................... 15
4. Case summaries ...................................................................................................... 17
4.1. Aaron Aho, CEO, Auto-Site .................................................................................... 17
4.1.1. Website building automation ................................................................................... 17
4.1.2. The business model ................................................................................................. 17
vi
4.1.3. A strategy for growth .............................................................................................. 18
4.2. Hans Hänninen, CEO, Heatsaving Co ..................................................................... 19
4.2.1. Driving a process patent to market leadership ......................................................... 19
4.2.2. Invest or Deal.......................................................................................................... 20
4.2.3. Customer retention and service development........................................................... 21
4.3. Markus Määttä, CEO, Multi-Software ..................................................................... 21
4.3.1. From products to a service business ........................................................................ 21
4.3.2. A customer oriented service offering ....................................................................... 22
4.3.3. A relationship business ........................................................................................... 22
4.4. Niklas Nenonen, Chairman of the Board, NAV Consulting ..................................... 23
4.4.1. From legacy ERP software to Microsoft Dynamics NAV ........................................ 23
4.4.2. Transitions in offerings ........................................................................................... 23
4.4.3. Business direction ................................................................................................... 24
4.5. Steffan Salmela, Sales Director, Survey Blend ........................................................ 25
4.5.1. Collecting feedback and completing the communication loop ................................. 25
4.5.2. Directions for growth .............................................................................................. 25
4.5.3. Retaining the customer base .................................................................................... 26
5. Exploring the research questions ............................................................................. 28
5.1. Auto-Site’s pricing strategy ..................................................................................... 28
5.1.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 28
5.1.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 29
5.1.3. Which customer perceptions effect pricing and revenue models? ............................ 30
5.1.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 31
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5.2. Heatsaving Co’s pricing strategy ............................................................................. 31
5.2.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 31
5.2.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 32
5.2.3. Which customer perceptions effect pricing and revenue models? ............................ 33
5.2.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 33
5.3. Multi-Software’s pricing strategy ............................................................................ 34
5.3.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 34
5.3.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 35
5.3.3. Which customer perceptions effect pricing and revenue models? ............................ 36
5.3.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 36
5.4. NAV Consulting’s pricing strategy ......................................................................... 37
5.4.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 37
5.4.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 38
5.4.3. Which customer perceptions effect pricing and revenue models? ............................ 38
5.4.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 39
5.5. Survey Blend’s pricing strategy............................................................................... 39
5.5.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 39
5.5.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 40
5.5.3. Which customer perceptions effect pricing and revenue models? ............................ 41
5.5.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 42
6. Usage of pricing strategies ...................................................................................... 44
6.1. Pricing strategies ..................................................................................................... 44
6.1.1. Market based pricing ............................................................................................... 44
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6.1.2. Competitive pricing ................................................................................................ 44
6.1.3. Cost-based pricing .................................................................................................. 45
6.1.4. Value based pricing................................................................................................. 45
6.2. Pricing methods ...................................................................................................... 46
6.2.1. Price Skimming ...................................................................................................... 46
6.2.2. Customized prices ................................................................................................... 46
6.2.3. Hourly based billing ................................................................................................ 46
6.2.4. Lifecycle pricing ..................................................................................................... 47
6.2.5. Experience curve pricing ......................................................................................... 47
6.2.6. Target-return pricing ............................................................................................... 47
6.2.7. Group/ Segment based pricing ................................................................................ 47
6.2.8. Versioning /Predetermined choices ......................................................................... 48
6.2.9. Bundled pricing ...................................................................................................... 48
6.2.10.Profit and Revenue sharing ..................................................................................... 49
6.2.11.Licensing ................................................................................................................ 49
6.2.12.Pricing as a cue ....................................................................................................... 49
6.2.13.Discounting............................................................................................................. 50
7. A framework for pricing strategies .......................................................................... 51
7.1. Goals of the framework ........................................................................................... 51
7.2. The scale of one-time versus on-going revenue models ........................................... 51
7.3. The scale of value versus market based pricing ....................................................... 52
7.4. Preliminary groupings ............................................................................................. 52
7.5. Building the dimension weights .............................................................................. 53
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7.5.1. Separation of distinctive offerings ........................................................................... 54
7.5.2. Firm and offering level values for scaling ............................................................... 55
7.5.3. Arriving at final dimension values from scaled factor scores ................................... 55
7.6. Stated strategic goals within the framework ............................................................ 56
8. Discussion .............................................................................................................. 58
8.1. Revenue models’ relation to differentiation strategies ............................................. 58
8.2. The effect of economies of scale or economies of scope on pricing strategy ............ 59
8.3. The effect of customer perceptions on revenue models and pricing ......................... 60
8.4. The relationship between pricing principles and sales strategies .............................. 60
9. Conclusions ............................................................................................................ 62
9.1. Empirical findings of pricing method usage ............................................................ 62
9.2. Findings from the four descriptive research questions ............................................. 62
9.2.1. How does a firm’s revenue model relate to differentiation strategy? ........................ 62
9.2.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 63
9.2.3. Which customer perceptions effect pricing and revenue model use? ........................ 63
9.2.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 63
9.3. Implications for theory development and future research ......................................... 64
9.4. Managerial Implications .......................................................................................... 65
9.5. Strengths and limitations ......................................................................................... 66
9.6. Lessons learned ....................................................................................................... 66
10. REFERENCES ....................................................................................................... 68
11. APPENDICES ........................................................................................................ 74
11.1. OUTLINE OF THE STRUCTURED INTERVIEWS .............................................. 74
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11.2. Value pricing factor weights and scores .................................................................. 76
11.3. Revenue model factor weights and scores ............................................................... 77
xi
LIST OF FIGURES
Figure 1: Pricing strategy for partnership, preliminary framework ............................................. 52
Figure 2: Pricing strategy for partnership, populated framework ................................................ 56
Figure 3: Stated Strategic goals of the case companies .............................................................. 57
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LIST OF TABLES
Table 1: Preliminary groupings ................................................................................................. 53
Table 2: Pricing methods by value pricing weights .................................................................... 54
Table 3: Value pricing factor weights and scores ....................................................................... 76
Table 4: Revenue model factor weights and scores .................................................................... 77
1
1. INTRODUCTION
1.1. Background Informati on
IT services come in many forms and functions, from time-intensive hourly work to Software as a
Service (SaaS), where the variable cost to serve an additional customer is close to nil. Although
some services are provided free to end-users, the unifying theme in the services industry is that in
order for a business to be successful, someone must be charged a price. For this reason it is
perplexing that pricing is one of the least mastered and researched aspects of marketing (Hoffman,
Turley, & Kelley, 2002).
Not only is pricing often a black box in practice; academics have largely avoided the topic as well.
There are three major issues in service pricing research to date: the challenges unique to service
pricing are not understood, there is no well-defined research direction for service pricing research,
and the pricing of goods and services are being studied in isolation (Hoffman et al, 2002)
1.2. Value based pri cing
Nagle and Holden define value pricing as the price of a customer’s next best alternative plus the
value of differentiating features (2002). In one of the staple articles on the issue of value-based
pricing, Hinterhuber explains that although the effect of pricing on profitability is quite clear,
managers often see pricing as a zero sum game, where the company’s gain comes only at the
customer’s expense. (2004) Other researchers view prices as dictated by the market, and therefore
choose to focus their attention on operational functions. However, according to a study on 200
manufacturing firms completed by Avila and Dodds, when the product in question is critically
important to the customer, salespeople give price far too much weight in the sales process, while
customers actually consider product attributes and service first (1993). It follows that pricing should
be considered a strategic choice, rather than a precedent given by the market.
1.3. Rati onal e for the study
Having opened the realm of pricing to a strategic discussion, the theoretical gaps, which the current
study addresses, can be specified. The larger gap in the literature is the small number of studies that
2
focus on pricing. Malhotra found that pricing was the subject of less than 2 percent of studies
published in major marketing journals (1996). Even a more recent empirical study still found that
less than 5% of articles in the Journal of Business-to-Business Marketing cover the topic of pricing.
(Dant & Lapuka, 2008) Nagle and Holden go as far as saying few professional managers consider
pricing in a strategic sense (2002).
While the general lack of focus on pricing in the literature is quite easily demonstrated, the lack of
qualitative studies on the topic is more difficult to evaluate. Most research in the area of pricing has
made use of questionnaires or metadata analyses (Hogan, 2001; Lancioni, Schau, & Smith, 2005;
Sainio & Marjakoski, 2009). While these methods have shown some light on macro effects of
pricing, their ability to link real-life phenomenon to theory is somewhat lacking (Benbasat,
Goldstein, & Mead, 1987). Therefore the current study uses a multiple case study approach in order
to more precisely define the decision making processes which take place within case firms as part of
their pricing processes. If we have a more robust understanding of the pricing decision making
process, future research can find contextual differences which encourage use of different methods
of strategic pricing. With case research, value-based pricing as a process within a firm can be more
clearly described (Ulaga, 2003). In this study, a current cross-section of pricing as a strategic tool is
assessed based on data from structured interviews with leaders of five SMEs in the IT service sector
in Finland. This study also demonstrates pricing as a tool for building partnerships, which is
supported by an emergent framework of pricing strategies.
1.4. Pricing as a tool for partnerships
Most studies to date on partnerships focus on sharing of information and expertise or building
cooperation between operational functions. (Lombardo, 2005; Merhout and Havelka, 2008)
However, some studies have brought the discussion of pricing as a tool for partnership to the next
level. In a study on supply chain pricing, Voeth and Herbst look for opportunities for suppliers and
customer to use pricing as a tool for building mutually beneficial relationships. In order to reach this
goal, they state that pricing must be viewed as a tool for outcome optimization rather than a
distributive parameter (2006). In a review of value added partnerships, J ohnston and Lawrence find
that even in commoditized fields such as construction, contractors make contracts with partners
offering reasonable prices, and not always the lowest bid (1988). Although the literature has
attempted to describe pricing as a tool for partnerships (Voeth & Herbst, 2006; Johnston &
3
Lawrence, 1988; Porrini, 2006), there has been no attempt to explain what aspects of pricing and
revenue strategies have the make the most significant contribution to the success of partnerships
(Shipley & Jobber, 2001). Sainio and Marjakoski describe value based pricing and revenue logic as
key determinants of business models, but do not make the connection between these inputs and the
goal of building partnerships (2009). We attempt to address this gap in the literature by proposing a
framework to assess pricing as a tool for partnerships based on these two dimensions: 1) value-
based versus market-based pricing and 2) on-going versus one-time revenue models.
1.5. Research Questi ons
The goal of this research is to study the two managerially and academically important issues of 1)
the level of value based pricing in SMEs and 2) pricing strategy as a tool for partnerships. To reach
that goal, this study will focus on the following research questions:
1. How does a firm’s revenue model relate to differentiation strategy?
2. Do economies of scale or economies of scope dictate pricing strategy?
3. Which customer perceptions effect pricing and revenue model use?
4. Do pricing principles currently guide sales strategies or vice versa?
5. How can pricing strategies be categorized in a useful manner?
4
2. LITERATURE REVIEW
2.1. Focus of the li terature revi ew
This literature review will follow the guidelines laid out by Hart, who states a literature review
should contain serve the following 11 purposes in research:
1) distinguishing what has been done from what needs to be done;
2) discovering important variables relevant to the topic;
3) synthesizing and gaining a new perspective;
4) identifying relationships between ideas and practice;
5) establishing the context of the topic or problem;
6) rationalizing the significance of the problem;
7) enhancing and acquiring the subject vocabulary;
8) understanding the structure of the subject;
9) relating ideas and theory to applications;
10) identifying the main methodologies and research techniques that have been used;
11) placing the research in a historical context to show familiarity with state-of-the-
art developments (Hart, 1998).
While quite a long list of requirements, a comprehensive literature review will provide a solid basis
for the subject of the research.
2.2. Pricing as a phenomenon
Everything is worth what its purchaser will pay for it.
-Maxim 847 of Publius Syrus, first century AD (Lyman, 1856)
5
As seen from the timeless ponderings of a first century philosopher, pricing has claimed the interest
of generations, and for good reason. Of E. Jerome McCarthy’s four P’s of marketing, price has the
most direct effect on a firm’s bottom line. In his research, Andreas Hinterhuber finds that on
average, a five percent increase in price leads to a 22 percent improvement in operating profits
(2004). According to the basic economic laws of supply and demand, an increased price can
decrease demand. However, depending on the elasticity of demand, this can in turn increase or
decrease revenues. Marn and Rosiello make the importance of pricing quite clear in finding that
holding other factors steady, a single percent increase in price can mean an 11.1 percent increase in
operating profitability, while a single percent increase in volume will only raise profits by 3.3
percent (1992). It follows that poor pricing often leads to poor financial performance, while proper
pricing often increases operating profit. For this reason it is perplexing that pricing is one of the
least mastered and researched aspects of marketing (Hoffman et al, 2002). Nagle and Holden define
pricing strategy as “coordination of interrelated marketing, competitive, and financial decisions to
maximize the ability to set prices profitably”. They also go as far as saying few professional
managers consider pricing in a strategic sense (2002). While research in the area of pricing has
picked up since the early 1990s, much of the research has focused on pricing methods more relevant
to products than services (Avlonitis & Indounas, 2007; Bonnemeier, Burianek, & Reichwald, 2010;
Demirkan, Kauffman, Vayghan, Fill, Karagiannis, & Maglio, 2008; Hultén, Viström, & Mejtoft,
2009).
Arriving at the correct price in the cost-based pricing realm can be an important exercise. However,
as a strategic tool, prices can reflect the value the customer perceives rather than the cost ensued to
produce the good or service (Anderson & Narus, 2004). Although other researchers have explored
the theoretical advantages of value pricing (Narayandas, 2005; Avila& Dodds, 1993; Hinterhuber,
2004), and perhaps due to the novelty of some pricing concepts, little research has been undertaken
to explore the current level of usage of value pricing methods in practice at SMEs or otherwise.
With this research, we attempt to address this gap in the literature.
2.3. Pricing as a tool for partnerships
Most studies to date on partnerships focus on sharing of information and expertise or building
cooperation between operational functions (Lombardo, 2005; Merhout & Havelka, 2008). Other
studies have proven the concept a step further by measuring value creation resulting from alliance
6
announcements (Anand & Khanna, 2000; Neill, Pfeiffer, & Young-Ybarra, 2001). Porrini considers
whether alliance value creation is a zero sum game, hypothesizing that alliances allow firms risk
management by offering incremental commitments to new strategies (2006). All of these studies
attempt to describe the inter-organizational cooperation phenomenon, either what makes it work, or
what could be done to improve these partnerships. However, a review of the literature found no
attempt to explain what aspects of pricing and revenue strategies most affect the success of
partnerships. We attempt to address this gap in the literature as well.
2.4. Pricing strategies
2.4.1. Market based pricing
The default method of pricing for many firms is using market prices. Many managers feel prices are
dictated by the market and they have little or no control over them (Dolan, 1995). However, there
are two very different perspectives from which a market-based price can be derived. The reference
price may be from the product or service, which is viewed as most similar to the firm’s own
offering. In their paradigm-shifting book, Nagle and Holden claim that the reference point should
rather reflect the customer’s perceived alternative to a particular offering (2002).
2.4.2. Competitive pricing
The distinction between competitive pricing and competition based on pricing should be made clear.
Competitive pricing, or the pricing of an offering based on what the competition is charging is most
common in markets where many substitutes are available. Anderson and Narus define competitive
pricing as simply setting prices relative to what competitors are charging (2004). Competition based
on price is the practice of undercutting prices offered by competitors, and is not a sustainable
growth strategy, particularly if it sparks a price war (Nagle & Holden, 2002).
2.4.3. Cost based pricing
Cost pricing or cost-plus pricing is the practice of adding some percentage to known costs to arrive
at the offering price (Anderson & Narus, 2004). Nagle and Holden state that while cost must be
taken into account in pricing decisions, the cost-plus pricer often uses an inefficient chronology of
steps in the pricing process. The method involves setting a volume first, and constructing a cost
based price from that. A more efficient method is to begin by determining a value that customers
can accept and building the market and quantity numbers from there (2002).
7
2.4.4. Value-based pricing
Value based pricing can be defined as setting a price in relation to an offering’s value (Anderson &
Narus, 2004). The reason many managers do not pursue value pricing is that they perceive
customers as quite price sensitive. However, in their research, Avila and Dodds found that
purchasing managers ranked price as the least important criteria in the decision making process.
Sales managers, on the other hand, perceived price much higher on the list of criteria. This
demonstrates their lack of understanding of what is critical in the purchasing process (1993).
A price increase can bring either an increase or decrease in revenue depending on the elasticity of
demand (Hoffman et al, 2002). Nagle and Holden suggest 10 factors which influence customer
price sensitivity in the context of services (2002). They proposed that price sensitivity decreases as
the customer’s ability to build an inventory decreases. Lee and Ng continue this line of thought and
find that more capacity should be saved for the time of consumption as price sensitivity decreases
(2001). The factor which perhaps most directly lends itself to value-based pricing is that price
sensitivity decreases the less price-sensitive customers are to the end benefit (Nagle & Holden,
2002). If the value of the end benefit is central to price sensitivity, the next question is how end
benefits can be quantified. In his research, Hinterhuber stresses that by gaining a clear
understanding of the value sources from the customer’s perspective, under-pricing products,
particularly innovative products, can be avoided. He goes on to describe the process of
implementing value pricing. (2004) While his article describes the value analysis process in depth,
the methods of implementation are only briefly listed. Little research has been undertaken to
understand to what extent firms, particularly service firms, pursue value based pricing. In a more
recent article written together with Stephan M. Liozu, Hinterhuber studied the extent to which CEO
advocation of pricing impacts both pricing capabilities and firm performance (Liozu & Hinterhuber,
2013). While that article takes the discussion to the end benefits of pricing, the intermediate step in
the value pricing process remains largely open. The aim of the current study is therefore to fill that
gap in the literature. The IT industry has been chosen for this study due to the apparent difference
between the cost to produce and the value provided by the various technologies, and the resulting
opportunity to use value based pricing strategies. The current study aims to investigate the extent to
which SMEs in the IT service sector employ different pricing strategies, to describe the internal and
external factors which affect pricing methods, and to build a theoretical framework to describe the
8
relationship between the various pricing strategies. Next we will review the literature on pricing
methods.
2.4.5. Price Skimming
If the objective of pricing strategy is to build market share, low penetration pricing is often
recommended (Nagle & Holden, 2002). However, if the goal is to capture as much of the customer
perceived value as possible, “price skimming” might be the method of choice. Price skimming
relies on the assumption that different customers value an offering at different prices. The technique
involves introducing a new offering at a high price and lowering the price over time, so that as
much as possible of each consecutive level of valuation is captured (Gebhardt, 2006). Price
skimming can be a brief process, but sometimes premium prices are drawn out over years.
2.4.6. Customized prices
While customized pricing in consumer markets is at best slow, and at worst, illegal, it is common
practice in B2B markets (Simon & Butscher, 2001). Clients may have such large differences in
needs that a firm must provide a different solution to every customer. Due to this reality, the use of
customized prices is also widely accepted, even expected, of firms. When the usage of the offering
is what provides the value, a customized price can be built which reflects this unique value
(Narayandas, 2005).
2.4.7. Hourly based billing
Although billing by the hour is one of the most used methods of pricing labor, as workers in
developed economies becomes more skilled and specialized the usefulness of this method is
diminishing. Baker finds that hourly fees are the wrong way to measure value firms provide for
clients (2009). Often, the hourly fee is used due to the perception that it most directly correlates to
cost, but this is not always the case (Scott, 2006).
2.4.8. Lifecycle pricing
Nagle and Holden encourage contemplation of a product’s price through four phases: development,
growth, maturity, and decline (2002). As a long-term concept, its implementation may take years to
complete. The realization of lifecycle pricing procedures may take even longer. For this reason it
can be difficult to observe or comment on its use in newer companies.
9
2.4.9. Experience curve pricing
Experience curve cost cutting goes back to beyond Henry Ford and the Model T, although the first
article on the subject was not published until 1936 (Hirschmann, 1964). In his classic article in the
Harvard Business Review, Hirschmann refers to the experience curve phenomenon and the
resulting price decrease that Ford achieved (1964). In more recent research, the slope of price
decreases in competitive markets is more accurately measured and these tools are suggested for use
in predicting future price decreases as well (Gottfredson, Schaubert, & Saenz., 2008).
2.4.10. Target return pricing
Target return pricing is often used interchangeably with cost-plus pricing. The method’s ease of use,
an assumption of good sales estimates by managers, and close-enough attitudes are factors which
have encouraged its adoption. Brooks claims that the additional time and effort to produce a better
price point may not be offset by the rise in precision (Brooks, 1975). However, already during the
same period, target return pricing had its adversaries. The method is labeled naïve, and less than
precise, although at that time few superior pricing techniques had become mainstream (Kamerschen,
1975).
2.4.11. Group/ Segment based pricing
Buyer grouping or segmentation allows a company to offer an appropriate price to groups of
customers with differing willingness to pay. Each level is carefully separated using a number of
different tactics (Chesbrough, 2010). If taken to an extreme segmentation can be illegal, but many
legal methods are available. Segments do not separate themselves, but require careful consideration
by the firm to distinguish differences in what customers value and how much (Nagle & Holden,
2002).
2.4.12. Versioning /Predetermined choices
In their now classic article on versioning, Shapiro and Varian took the marketing theory of
information goods to a new level. They assert that versioning is not a new way of doing business,
but rather a method used to apply the tested concepts of segmentation, differentiation and
positioning to a new type of offering; namely information goods (1998).
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2.4.13. Bundled pricing
It is important to note that price bundling of two or more products which are not inseparable from
the customers’ perspective also requires discounting. However, this type of discounting is not in
conflict with value pricing per se, as there is no additional value perceived by the customer which
would demand a premium (Sharma & Iyer, 2011).
2.4.14. Profit and Revenue sharing
Profit and revenue sharing schemes can essentially turn a traditional supply chain into a value chain.
Cachon and Lariviere name the practice “turning the supply chain into a revenue chain” and
describe the practice used by blockbuster in its heyday, which gave studios producing content a
share of rental fees while requiring a lower purchase price for the tapes (2001). They argued already
then, that the practice would be applicable to high technology in particular, due to the high up-front
costs of equipment and the price sensitivity of customers to a relatively new technology. Nagle and
Holden also come to the same conclusion, observing that price sensitivity decreases as shared-costs
for the expenditure increase (2002).
2.4.15. Licensing
Licensing as a business practice began long before software. However, from the success of
Microsoft, among others, it seems that the business model was made for these offerings. Besides
allowing scaling of software products, licensing can also be used to launch a national brand,
penetrate new markets, share investment risk, build brand awareness, increase profitability of
existing products, revive mature product lines, control subsidiaries, or to build a franchise (Quelch,
1985).
2.4.16. Pricing as a cue
Assuming that buyers find a reference price and compare an offering based on the perceived value
differential, price can be used as a signal of the value of an offering. The signal can be either “this is
a deal” or “this must really offer something special”, depending on whether the price is lower or
higher relative to reference points in the market. In any case, pricing is not used as a cue for the
sake of making a point. Rather, the goal is to benefit from the client perception, for example
through cross selling to clients who feel a firm provides a great value on a single product (Dolan,
1995).
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2.4.17. Discounting
Many researchers including Teng (2009), Tsao (2009), and Choi and Coulter (2012) have studied
the phenomenon of discounting in retailing and other B2C settings. Despite the prevalence of
discounting in B2B situations (Frenzen, Hansen, Krafft, Mantrala, & Schmidt, 2010), far less
research has been conducted on the phenomenon of discounting in these contexts. In their study on
the delegation of pricing authority to the salesforce, Frenzen et. al. find that rigid sales pricing
policies are not the answer, but rather, salespeople should be given sufficient autonomy to price
according to context, especially in the face of uncertain markets (2010). In a single-vendor multi-
buyer context, however, Sinha and Sarmah find that specifically under a level of uncertainty,
coordinated discounting is not an efficient method of building channel profitability (2010).
In his paper on value-based pricing, Hinterhuber offers the use of discounts as a method of
introducing higher prices by first offering a “discount” on a higher price. After this period of
enjoying a discount, the buyer is then much more receptive of the higher price, as it is simply the
end of a temporary discount (2004). While their research focused on the angle of sales force
productivity, Siguaw, Kimes, & Gassenheimer found that the use of discounting to land “national”
customers often led to lower profitability (2003). On the other hand, Siguaw et. al. also found that
discounting off-peak capacity which would have otherwise not been sold was seen as fair pricing
(2003).
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3. METHODOLOGY
3.1. Research method
The status of pricing strategies in IT sector SMEs is quite diverse. Some use the same hourly
pricing they have since their founding, while others use licensing or value based pricing.
Unfortunately, the single common factor most firms share in the area of pricing is a lack of
understanding of the options available (Hoffman et al, 2002). While it would offer a higher level of
statistical validity, a survey on the topic would fall short of creating accurate information due to this
pervalent lack of familiarity with not only the pricing options available, but the relevant
terminology as well (Roethlisberger, 1977). Because the goal of this research is to more precisely
describe the pricing strategy and decision making processes which take place within SME firms, it
is critical that the descriptions given are not only accurate, but also provide more depth than
provided by a Likert scale (Miles & Huberman, 1994). While a single case study research design
could alleviate this issue of depth, focusing on a single company would fail to populate the
theoretical framework at a meaningful level and critically restrict the universality of any findings.
Interviews of hundreds of company leaders would provide the background for universal
applicability of findings, but this is not possible due to the lack of resources in a Master’s thesis
(Benbasat et. al., 1987). For these reasons this study is based a multiple case study design. Case
studies and other such idiographic research strategies are particularly suited for describing
deepening understanding an observable phenomenon in its context (Davis, Frankz, & Robey, 1984).
The case study strategy of research suits the goal of capturing knowledge from professionals and
using this knowledge to develop theories particularly well (Benbasat et. al., 1987). Studying
multiple cases will help to balance the competing priorities of populating the proposed framework,
the universality of findings, and managing the lack of familiarity with current pricing concepts
among the SME leaders interviewed.
3.2. Case Sel ecti on
In order to achieve a meaningful sample of perspectives, while allowing a substantial depth of study
for each one, five case companies were chosen. The companies were chosen based on several
criteria. Their revenues, apparent stress on one-time or on-going revenue sources, and the apparent
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level of traditional cost or market based versus value-based pricing were considered in order to
provide a diverse set of perspectives for the framework. According to the prescribed criteria, one
case company had revenues of less than 500,000€, one had revenues of over 10MEUR, and the
remaining had revenue levels between these two extremes. Two of the case companies had clearly
communicated on-going revenue models while the other three communicated a mix of on-going and
one-time revenue streams on their websites. Based on the interviews, the actual levels of ongoing
versus one-time revenue models were found to quite closely follow the expected methods. The level
of value pricing used in the case companies was difficult to identify prior to the structured
interviews. However, the level of value based pricing methods used was diverse enough to populate
the framework at a meaningful level. Although diverse offerings were not a set priority of case
selection, the case companies had somewhat different offerings. Key product and service offerings
included website building software, integrated thermostats, ERP implementation services, custom
software services, and evaluation tools. Software plays a role in the offering of each of the case
companies, which was preferred due to the potential for high discrepancies between cost and value
provided, and the consequent opportunities it provides for value pricing. Once target companies
were listed, I simply called the prospective leaders (CEO, Sales Director, or Chairman of the board)
and asked them for a structured interview requesting that it take place in the next two calendar
weeks. After contacting six potential leaders, I had five interviews set up and did not call through
the rest of the list of prospective interviewees. (The sixth one called me back later, to which I
explained that the allotted slots had been filled.) Thus, each of the participants opted in at their own
discretion.
3.3. Data Collecti on (Intervi ews)
Interviews were conducted with the CEO, Sales Director, or Chairman of the Board of the
respective case companies. Interviews lasted 30 to 90 minutes depending mostly on the preparation
level of the interviewees and took place in the company’s premise or another location chosen by the
interviewee. Approximately one week before each interview, I emailed the interviewee with an
outline of the questions and topics I planned to ask. The interview outline was based on the
literature review and included 1) background information about the company, 2) their business and
revenue models, 3) questions about the extent to which they employed the pricing methods and
revenue models uncovered in the literature review, and 4) future expectations for each of the
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previous areas. Risto Rajala, an assistant professor of Operations Management at the Aalto
University School of Science, was consulted on the interview outline due to his familiarity with the
case methodology and experience with software companies particularly from his doctoral
dissertation work (Rajala, 2009). Interviews were conducted according to the structured outline in
order to promote comparability of the case companies during the data analysis phase (Miles &
Huberman, 1994). I took notes during the interviews, but I also made audio recordings, which were
used to produce a full transcript of each interviewee’s comments. One interview was conducted in
English due to the participant’s proficiency in English and his request to do so. The other four were
conducted in Finnish according to the preference of the interviewees. According to the guidelines
set out by Benbasat et. al., at the beginning of all interviews I reviewed confidentiality issues and
received permission for an auditory recording of our discussion. I ensured all participants that
pseudonyms would be used for names, and any figures mentioned could be disguised to protect
confidential information. Lastly, the interviewees were ensured that the publishing of any text
concerning them, the company, or others mentioned would be done only with their approval of the
final draft (1987). Interviews were completed in the space of two weeks in order to minimize
variance in protocol (Benbasat et. al., 1987). The interview questions can be found in the
appendices.
3.4. Data Anal ysi s
Once all of the interviews had been completed, interviewee statements were transliterated word for
word from the audio recording and translated into English. The single interview completed in
English was simply transliterated. Each interview text was then edited for grammatical errors and
sentence structure with the goal of making it more usable in an academic context (Miles &
Huberman, 1994). At the same time, great care was taken to preserve the style and spirit of the
interviewees’ statements despite many cultural and contextual differences between the Finnish and
English languages. I have worked as a translation consultant for four years, and concluded that my
skills suffice to preserve the style and spirit of the interviewees’ message, so a third party translator
was not used. The separation of the steps in arriving at a useable text, namely, transliteration first
and then translation minimized the chance for error in interpretations. According to Eisenhardt’s
recommendations on theory building case study research, the cases were then each studied
separately to “become intimately familiar with each case as a stand-alone entity” (1989). Next, the
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texts were coded for references to the first four research questions and the named research questions
were analyzed and discussed case by case. This approach was recommended by Miles and
Huberman, who argue that studying content through continued readings alone can lead only to a
practical understanding, but not empirical findings (1994). Finally, a cross-case analysis was used to
search for patterns in the relationship between different pricing strategies (Eisenhardt, 1989). A key
element of case study research is maintaining a chain of evidence. The attainment of this goal is
measured by the ability of an independent researcher to come to the same conclusions given the
information contained in the study report (Yin, 2003). In addition to the case summaries, coding,
and cross-case analysis, the full transcripts of all interviewee comments are available from the
author at request.
The second phase of data analysis involved replicating the hypothesized framework for using
pricing as a tool for partnership. This involved naming the factors pertaining to the two axial
concepts: value versus market pricing and ongoing versus one-time revenue models. Each factor
was assigned a weight reflecting its impact on the overall level on the concept. Once these factors
had been identified from the case data, each case company was assigned a value reflecting the level
at which it applied each factor. Some of the case companies had another major offering, which
differed from the firm’s main offering in the two dimensions studied, and these were thus scaled
separately. Replicating the axes of the framework with case data showed evidence for the suggested
partnership through pricing framework.
3.5. Validation Strategies
In order to provide triangulation of analysis, and to take advantage of this particular strength
available to case study research, two sources of evidence were collected of each of the case
companies (Yin, 2003). The initial process of selecting case companies began with a company
search on finder.fi in order to find suitable SME candidates for the structured interviews (Fonecta
Oy, 2013). Candidates were selected on the previously mentioned criteria based on information
available from their respective websites. Information about the product and service offerings of the
different companies were inferred from these websites in order to make final changes to the
interview structure prior to contacting the case companies. According to Yin, interviews can be the
sole source of evidence for case studies, but the use of their websites was necessary to fill the
selection criteria for case companies (2003). The final method of triangulation was to contact each
16
of the case company leaders originally interviewed a second time. Each interviewee was given a
copy of this report, asked to verify that the findings were correct, and given the chance to correct
any miscommunication or other error.
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4. CASE SUMMARIES
Although the focus of this research is the pricing strategies and revenue models of the case
companies, it is necessary to begin by becoming familiar with each of the separate entities
(Eisenhardt, 1989). Each of the companies had a distinct offering, and in some ways it appeared that
a use of software in their offerings was the only common factor.
4.1. Aaron Aho, CEO, Auto-Site
4.1.1. Website building automation
Auto-Site was established in 2008 as a technical website service for marketing and advertising
agencies. Theirs is a specialized niche, which is built upon economies of scale within the technical
side of building websites. They realized that not only could the technical aspects of a website be
repeated with minimal manual work, but that this method would also minimize uncertainties for the
end customer.
At that time we thought about how similar it is to provide the technical side across
projects, despite the differences in projects on the content and layout side. So that is
where we started. We thought we should try to build a common platform where we
could find advantages for advertising agencies to build websites more easily, more
quickly, and with exact pricing and delivery times.
Their core end customer base is anyone who needs a website short of a portal. A typical scenario
goes as follows: The client contacts a marketing or advertising agency who takes full responsibility
for the client and the project. The agency chooses a technical partner to do the actual coding. At
Auto-Site, the agency opens an account for the client and immediately has a full slate of technical
tools at their disposal. This allows a predictable price and delivery date for the project; a rarity in
the website business.
4.1.2. The business model
How we do business is we have a mass product. We don’t focus on big projects; it’s
more about getting a lot of customers. The way to get there is to get a lot of
advertising agencies to sign up and use our product, and to educate them on how to
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use the product. We remind them to use our product, because they do not have to sell
our product, it is just an option for them. We are confident that if they try it out with a
few sites and a few projects, they will bring all of their customers and all of their
projects in. And that is where we will make money, because we do not have to allocate
any resource or programmers’ time, or hire new people whenever we open a new
account. We just open a licensed account for them and they can start providing all
kinds of sites for their customers.
The business model has come a long way from a beginning of direct marketing. However, through
trial and error, they have found that sales people did not have enough knowledge of the complete
website building process and thus preferred that agencies be the ones bringing in new accounts. At
the same time, this allows growth without the overhead of a large sales force. However, Auto-Site
also offers a white label product to larger entities.
That is a model for big operators who already provide their clients with email
addresses and file storage and other services. They have a problem: their clients are
changing providers to cloud services because many of these cloud services bring in
the software and they have included the service side as well. They could not provide
those extra services. For those operators, we give the option to start selling our
product as a white label product, so it is actually branded as if it was their own
product. We take care of the technical side and we take care of as many aspects as
they like. We price the model based on those demands.
4.1.3. A strategy for growth
The growth strategy at Auto-Site is to create one very solid good product around which to create a
following. Once they have reached broad market acceptance, there are many avenues for creating
and introducing new products and revenue models. While the few competitors they have seem to
cater to the upper echelons of the market, Auto-Site is aimed at the mass market with the whole
package of options available to all customers and at an inexpensive price level. They have invested
heavily in ease of use and pricing is also straight-forward with a setup fee and an annual license fee.
Clients can switch marketing or advertising agencies and continue using the same software with
their next partner.
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Let’s say you change and update your website annually. You always have to find a
new operator to upload your files with a website files tool. Every year, you have to
learn a new way to update the site. This becomes very complicated for the customer
and it is annoying because if you look at it from the client’s perspective, they just want
to update the layout. The advertising agency or partner who makes the website always
uses some software. So we keep telling our end customers that whenever you want to
create a new layout and update your site you don’t have to switch away from our
platform. You can just find a new partner to do the job and stick with this platform so
you will still retain your user statistics of who is looking at your site. You can use the
updater possibilities and always use the same user interface to accomplish this goal.
You will not have to go through the annoying processes each time you have to update
the website. Most importantly, you do not have to pay the technical fees each time,
which run from 1000-5000€ for one project.
4.2. Hans Hänninen, CEO, Heatsaving Co
4.2.1. Driving a process patent to market leadership
Heatsaving Co was established in 2002, and was acquired by its current management in 2011. At
the time of acquisition, the company owned a valuable patent and historical data of installations
showing significant savings in heating costs. With district heating costs on the rise, every unit of
energy saved is becoming more and more valuable. Hans sums up how they have transformed the
market:
Previously, the market was made up of manufacturers and contractors. They were
separate companies, and neither of these were responsible for the whole picture. We
have our own equipment, i.e. the method of creating savings. Then we have our own
installation, or service, and we have a warranty securing the investment In other
words, we have a savings guarantee and a satisfaction guarantee. That is, we take
overall responsibility for heating related issues. We are the fastest growing operator
in the energy savings sector in Finland.
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Heatsaving Co‘s process patent is on a method which, on average, reduces heating costs by 17
percent. This turnkey solution provides appraisal, installation, and maintenance packaged together.
There are other operators in the market, but Hans does not see them as a major threat.
End customers may compare us to some automation suppliers, or other alternative
suppliers, but we are superior in comparison, so that is not a problem for us. There is
remote monitoring and heating control based on the weather forecast but they have
not really taken off in Finland, or the rest of the world… In terms of volume, we had
our first good year of sales last year, with over 700 installations, while our main
competitor with a forecasting model has completed 400 installations in the last 5-
years. This illustrates the situation quite well.
4.2.2. Invest or Deal
The Heatsaving Co solution can be purchased using one of two schemes. The Invest option is a one-
off payment, which includes the unit and maintenance costs within a single price. Upon purchase,
all energy savings go directly to the housing cooperative. The price is affected only by the size of
the building and the typical payment period is less than two years. Hans describes the other option:
Then we have a “deal model” which is aimed at "poor" housing cooperatives, which
do not have the cash immediately available, even though the savings are obvious. The
annual fee for that is about 500 euros, and the resulting savings are divided over the
five-year period. That is, for the first two years, the resulting savings are divided
evenly, and then our share of the savings declines consistently. That is, in the last year,
we claim only five percent of the savings, while 95 percent goes to the housing
company. In the 6th year, the equipment and all the resulting savings are received
directly by the housing company.
In addition to the new business model and service packages, Heatsaving Co has made it standard
practice to review district heating charges with their energy company partners and these savings
also directly benefit the customer. However, despite the multiple perspectives employed, what is
most critical for the customer is a good payback time.
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4.2.3. Customer retention and service development
Heatsaving Co differentiates from the competition most clearly in being active with customers.
They meet with over 1000 housing cooperatives on an annual basis. However, it is not only the
volume, but also the content, which counts in customer contacts.
We retain our existing customers because we offer them such a significant savings, we
report on the savings results, and we serve the end users (the residents) well. We
monitor consumption on a monthly basis and report the results every three months to
the property manager and, consequently, the Board of Directors. In this way, we keep
them in our control… Our sales representative will call and tell them, “Hey, I have
reports for the last three months; can I come for a visit?” So they say, of course, come
here and let’s look at it together. It is a good opportunity for further sales. Being the
“bearer of good news” means that it is easy to make more sales.
Heatsaving Co plans to offer energy maintenance services and other additional on-going services to
their existing and future customer base.
4.3. Markus Määttä, CEO, Multi-Software
4.3.1. From products to a service business
Multi-Software was established in 2000 as a software products company. They began to sell
services in the form of projects in order to finance product development and grew both business
models side by side. In 2008, they made the decision to focus purely on services. Markus describes
the market situation:
Our service business is a market, which from the top down, can be divided into two
categories. We have the big giants including Tieto, Accenture, Logica, CGI and so on.
Then there are our kinds; young and different types of small but rapidly growing
companies. This dichotomy is pretty clearly noticeable. We operate here in our own
category, and challenge the big guns, but maybe using a little different means. Our
position in the market is perhaps within the so-called new school, newer, younger, and
more flexible companies, and I see our position as the cutting edge... It depends on
22
how you define the market, but in any case, size-wise, we are quite small. If you
include everyone, we have about one and a half percent of the market share.
4.3.2. A customer oriented service offering
When Multi-Software made the strategic move to services, their portfolio of offerings became more
diverse. The simplification of the business opened opportunity to cater more directly to client needs.
In 2008, we clearly left technology and we have little by little introduced
implementation design, service design and, most recently consulting, which allowed
us to move into maintenance services and more. In this way, we have differentiated the
various stages and have brought added value to customers.
As Markus sees it, they rarely write blocks of code for one customer, which easily fill the needs of a
different customer. When they do come across a common need, there is usually a block of open
source code they can use which fits the bill more readily than in-house recycled code. They have
also avoided reselling third-party software, although sometimes they will discuss a customer’s
capability of building some software themselves. This is part of their philosophy on how they
manage customer relations.
4.3.3. A relationship business
We try to keep our existing customers by doing damn good work. That is, we do not
have any strategy with which we tie down customers, or commit them to us in a
negative way. Of course it is natural that the more we do for them, the more they
become tied to us… If the customer is forced to work with us, it creates a relationship
of confrontation. With everything we do, we aim to do such good work, and handle
things so well, that the client wants to work with us. We do not use built-in logins or
build such difficult-to-maintain software that they have to buy our maintenance
service because no one else is able to do it. We seek to retain clients through positivity,
and not by using hooks, or other such tactics. From us it requires constant
communication, a consistently good attitude, and continually doing good work. It
begins with culture, it begins with attitude, and it begins with how we care about what
we do, and our attitude of commitment.
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Pricing at the top of the market presents a challenge even for a customer oriented company. On the
other hand, Markus explains that whether the customer is willing to pay a higher price is a good
indicator of how well they are delivering the promised value. The comparison to competitors’ prices
is what pushes the team to work at the highest level. While some potential clients may be shopping
around to avoid spending too much on a project, at Multi-Software they have made a clear strategic
decision to focus on value.
Our customers compare our prices to our competitors, and what we want the
customer to say is that, man, you are expensive, but worth it. Yes, it works like this. If
the client sees us as cheap and good, then it is the wrong message.
4.4. Niklas Nenonen, Chairman of the Board, NAV Consul ting
4.4.1. From legacy ERP software to Microsoft Dynamics NAV
NAV Consulting was established in 1992 and it all started when the company where I
and a few other owners were employed folded do to the recession. We took up a
specific part of the previous company's business, mainly the rights to their industrial
and wholesale financial management software and business. At the time, we worked
with IBM and microcomputers, and we had developed software for IBM server
hardware called Navis. Our customers were a few subsidiaries of a large oil company,
mainly in the industrial and wholesale sectors.
NAV Consulting sold and maintained their own software for over 10 years before strategically
replacing it with Microsoft Dynamics NAV. As a reseller of Microsoft ERP systems, they have
delivered complete projects for about 100 clients. Their core client base is medium sized businesses
with 3-50 MEUR in revenues, primarily in the industrial and wholesale sectors. The software is
supplied by fewer than 10 resellers in Finland and is constantly gaining market share as a platform.
4.4.2. Transitions in offerings
Although NAV Consulting’ core offering of an all-encompassing ERP system has remained, the
peripheral offering and delivery has changed.
Our earnings include personnel work, which consists of design, consulting, training,
and application development work. Part of our revenue comes from license sales,
24
which is based on the software licensing… When we had our own software it was
much simpler, but personnel hours, application development, and customization had a
larger share and licensing sales were smaller. At the moment, leasing licenses is
emerging as a new concept. Today we are also able to provide [hardware] capacity
as a service whereas in previous years we also sold servers and system software. At
the moment, together with a partner, we provide data center services. Previously, we
sold IBM servers as a reseller, and with Microsoft Dynamics NAV we had server sales
directly. Today we offer server capacity and data center leasing as new offerings.
NAV Consulting offers the complete ERP solution not only to the initial client, but vertically as
well. By offering the solution to specific industries, they differentiate with a supply chain solution.
If a customer group or segment is an industry, take for example the food industry...
the basic package includes food processing extensions.
The user experience is based on the interoperability with the full suite of Microsoft products. Use of
the Microsoft Office, operating system, and databases provide an existing level of familiarity to the
user base.
4.4.3. Business direction
We try to retain existing customers with competent and good service. Now, we
constantly face competition because the software has several suppliers in Finland.
Customers really have the possibility of changing suppliers while continuing to use
the same ERP software. This is quite exceptional overall in the ERP market, which in
many cases in constructed so that one software product has only one supplier.
Customers in such cases have very high opportunity costs if they want to change
partners, because they would have to change the software completely and all
customizations made. We have to consistently be the best supplier, and we use this in
our sales pitch.
With a naturally competitive environment as a Microsoft Dynamics NAV reseller, NAV Consulting
must both serve the customer better than their competitors and charge a competitive rate. Niklas
does not see their pricing as a barrier to growth. With new versions coming out regularly, and a
roadmap of future development already laid out, Niklas sees that the software is consistently on the
25
cutting edge from a technological perspective. They do not price at the highest level in the market,
but they retain a reasonable margin.
We aim to be in the upper-middle class of the market. That is, we feel that we have
experienced consultants, which means we cannot be the very cheapest. On the other
hand, we are not a large company with a heavy cost structure and we do not price in
the upper segment. We aim to communicate through our pricing that we are an
effective and knowledgeable supplier.
4.5. Steffan Salmela, Sal es Director, Survey Bl end
4.5.1. Collecting feedback and completing the communication loop
Survey Blend was founded in 1997 and their first product was an evaluation machine. It was
designed to collect feedback related to employee well-being, customer satisfaction, and other
various studies. Since 2005 they have built Finland’s most popular election machines with a major
media network, and have built their name as a large contender in many other surveying realms as
well. A study, which found that election machines actually affected voting individuals’ choices in
elections, gave rise to their second product, the electronic salesman. Since then, they have added
integrated chat tools to their portfolio.
If we go product-by-product, the election machine is not used almost anywhere, we
have the best solution available, and it has been developed for so long. The evaluation
machine is quite exceptional in its method and we are scaling it up worldwide… The
user describes their needs and the service representative can watch the customer
adjust the preference controls and is able to start a chat session… Chat is one that is
already quite common around the world. However, when chat is connected to our
other tools, it creates additional value… We are really turning an online store into a
brick-and-mortar business.
4.5.2. Directions for growth
Growth at Survey Blend currently stems from extensions to their product offering. Often, a
customer purchases a single solution and once they have seen the benefits, they are offered another
26
tool. According to customer demands, they have offered consulting for a fee, but this is not their
strategic direction.
We use free webinars, which can have up to 100 companies tuning in at once, as well
as bigger workshops. We try to avoid individual training and using many working
hours. Rather we try to be scalable, enabling customers around the world to purchase
this tool via the internet. It does not necessarily even require a salesman.
Using a scalable model, Survey Blend plans to ramp up operations worldwide. With the number of
competing products and therefore, quite low user levels outside of Finland, there is reason to
believe these ambitions may be realized.
4.5.3. Retaining the customer base
While some of Survey Blend’s products do not face stiff competition, evaluation tools and
especially chat are contested markets. Customer retention requires a two-fold approach: customer
contact and discounts. Customer contact happens over the phone and in person.
We call and contact all of our customers every 10 weeks and ask how it’s going,
monitor their results, see what benefits they have gained, look for new ideas, and so
on. Also, we currently have one person who is physically meeting with these
customers. Although they do not specifically need any help, we physically go on-site
and talk about how great it is to work together. At the moment, we are investing a lot
in that.
Discounts are available for both economies of scale:
With our evaluation machine, we have a big campaign type of deal in which we
provide all the basic art schools [in Finland] with an assessment tool. The price is
quite different when it involves several hundred different schools, versus a situation
where every school would buy the service independently. Without this project, the
purchase price would be quite different. However, with so many schools participating,
those who want to buy the product will pay less than others will because they are part
of this big project.
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…and economies of scope:
If a customer uses one of our products, the price is one thing. Then, if they want to
fulfill a second need with another separate tool… it is a bit cheaper as a bundle.
Steffan says that marketing at Survey Blend has mostly happened through their sales force. Visiting
clients and implementing projects has been their retention strategy.
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5. EXPLORING THE RESEARCH QUESTIONS
This study of pricing strategy consists of two parts. The first concerns the pricing and revenue
models used by the case companies. The goal is to describe these from the perspective of each
company, taking into consideration the market and competitive situations of each case. In order to
reach a critical depth of analysis with each company, the first four research questions are explored
for one case at a time.
5.1. Auto-Si te’ s prici ng strategy
5.1.1. How does the firm’s revenue model relate to differentiation strategy?
In the website building market in general, the costs of technical implementations can vary greatly
from project to project. Auto-Site’s differentiation strategy is based on a clear price, which is
known from the beginning. Advertising agencies provide most of the revenues at Auto-Site through
on-going payments, and become their partners when they find that costs are truly what they are said
to be from the beginning:
We always focus on what would be the best way for our partners, the advertising
agencies, to profit from these kinds of projects. The advertising agencies have all
kinds of employees. However, for the person who makes the decisions, it is all about
the money and how they can save money, rely on, and profit more from us. As long as
their projects are going ok or better, they do not have any reason to change.
Larger clients represent the minority of their revenues, but they are significant one-time projects,
which can also provide on-going income. With these clients, the revenue strategy follows demands
more than costs.
The white label products [are] based on the expected value to the partner we sign
with. In most cases, they pay some setup fee, from say 20 000-100 000 euros for us to
set up the project for them, and set up and modify it in a way that it fits into their
existing systems and their brand. We always include some monthly fee for the main
service to be there.
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5.1.2. Do economies of scale or economies of scope dictate pricing strategy?
Aaron describes a strategy of achieving economies of scale, after which they plan to use economies
of scope. He sees their pricing as very closely tied to these broader strategies.
Our idea is to create a simple product, find our place in the market, and then scale to
a market leader position. When we achieve that, we would like to implement new kinds
of products within the same account. We would like to try and sell and attach products
for the clients. We see a lot of potential there.
For the time being, however, they hope to focus on bringing in more advertising agencies and thus
more induction channels for new users. The scalability of their SaaS model is what makes this
possible.
[Advertising agencies] have all of the client responsibility so that we do not have to
hire new people and be the first-hand contact to the client… The best type of
advertising agency from our perspective, which bring most of the licensing contracts,
are small companies of 1-5 employees. They sell a lot. They create and work on small
projects and they have many projects ongoing all the time.
An economies of scale approach also entails serving as much of the market as possible. The lower
echelons are also served with their own product, and their own price:
We have created a branch out of these small companies who need a website but don’t
want to spend a lot of money or a lot of time creating such sites. It is basically the
same product. It is a bit easier to use for the end customer.
At the same time they still offer a white label product, which upon first inspection appears not to
drive an economies of scale approach. However, what a white label project brings them is not just a
single large customer, but a large number of end users as well:
Let’s say we see a potential of 1000 or 5000 license agreements. We look at the whole
picture on how much revenue that white label product would bring in and we always
calculate the price at the same level or lower than the existing partner or the ones
they already have and try to compete that way as well. So we price below market
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prices on a general level and even on a strategic level. It is about getting the masses.
Whatever we can do to try to reach that goal, we tend to do it.
5.1.3. Which customer perceptions effect pricing and revenue models?
One of the key aspects of our marketing strategy [is] to be very clear and precise on
how much the product costs and how long it takes for us to deliver such a project.
From the above comment, we see that customer perceptions are clearly linked to differentiation
strategy. However, perceptions take into account even the softer sides of the business, and the
effects go both ways, with pricing affecting customer perceptions and perceptions driving pricing
strategy. Aaron illustrates this phenomenon with an observation of perceptions driving their pricing
strategy:
It is business as usual for the tech companies to rob the advertising companies
because it is so complicated to change tech partners with an ongoing project. It is
almost impossible to do that. For example, let’s say that you buy a website from me
and we agree that you will pay me about 1000€ for the tech side. When I have done
my part you come back and say, “Hey I want to make a few minor changes here.” I
could rob you and tell you it is going to cost another 1000 dollars or years to do that
even though it only took an hour or two. However, it is complicated for you to change
and nobody is going to do it for any cheaper. That is the basic idea behind why
somebody would buy our product instead.
However, particularly with their premium white label products, their pricing strategy has been built
to drive perceptions:
Of course, the reason we do that is that we want to send the signal that if you want to
set up a white label product with Auto-Site it is not a Saturday evening job. It is a big
process and you have to stick to that and take it seriously. You also have to put some
money on the table before we are even going to negotiate with you. It is always easier
to come lower from the pricing when the product is good, but it is more complicated
to give a discounted price before the first meeting.
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5.1.4. Do pricing principles currently guide sales strategies or vice versa?
The sales strategies used at Auto-Site have changed from a direct sales model to an agent model due
to experiences from the former:
We hired 10-15 sales personnel for that purpose but it got very complicated in the first
six months because the sales personnel did not exactly know what it’s like to sell this
type of product and they knew nothing about what it really means to build a website
from the technical side. They let the customer call all the shots too easily and
promised the customer things that we could not provide because they were focused on
their provisioning models and the money they were personally making from the deals.
However, as their business model developed, they saw the need to return to direct sales with the
lower priced segments of the market. The following excerpt illustrates the sales strategy guiding the
pricing model:
We do not have discounts in the main product or the white label product, but when
our partner sells through telemarketing, we do. You always have to have something
extra to get the decision of subscribing to our service so we always have some sort of
offering going on. Sometimes it is about maybe lowering the prices in ways in which it
is hard for the end customer to say no and it does not create any profit within the first
year, but it gets us many sites, a lot of user experience, and many deals. In the
upcoming years, it brings in the profit, once the sales’ costs have been paid for.
In the case of Auto-Site, it appears that the sales strategy drives pricing more than the other way
around.
5.2. Heatsavi ng Co’ s prici ng strategy
5.2.1. How does the firm’s revenue model relate to differentiation strategy?
Of particular significance at Heatsaving Co is the difference between how the business operated
previously, in comparison to today.
Our earnings model has changed in that the former entrepreneur sold a mere device,
not the benefits. We, on the other hand, sell the resulting savings and payback period.
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Heatsaving Co differentiates its technical method from the other offerings in the market by
positioning it as a cost savings plan. The energy saved is on average a percentage of the energy
consumed, which in turn, is a derivative of the size of the space in which it is implemented. Hans
describes their two choices for purchasing the technology and the revenue that they provide:
We have two ways to buy this. We have Heatsaving Co invest, which has a single price.
It is free of leasing and maintenance costs. All the savings go directly to the housing
cooperative. It is priced in such a way that the price is the same for everyone. The
only variable is the volume of the building, meaning the property is priced according
to size. A typical housing cooperative pays about 5000 euros and the payback period
for the investment is less than two years… The deal model is a continuous service. We
share the resulting savings, which means the price is based on benefits.
The revenue model for the invest option is thus a one-time payment, while the deal option provides
the service with an on-going payment. Just as important as where they have taken their offering
from the past, is the future direction of their differentiation and the resulting changes in pricing
strategy:
Our future expectations of the company's revenue model are that we can likely
increase our prices at some point in the near future because the price of the saved
energy rises all the time. In other words, what we do becomes more valuable every
day.
5.2.2. Do economies of scale or economies of scope dictate pricing strategy?
At Heatsaving Co, economies of scale are pursued in that they have developed a technical product
and they provide the same product to all clients. While they benefit from economies of scale on the
costs side, their pricing does not follow the same strategy.
The price is the same for everyone. Whether you have 1200 apartment buildings or 1
apartment building, the price is the same. Therefore, we sell to customers at the same
price.
It is noteworthy that the larger the client’s building, the smaller is the cost of the installation to
Heatsaving Co relative to revenues. In order to accentuate the economies of scale on the cost side,
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Heatsaving Co has also licensed their technique to YIT, for example. Using economies of scope, on
the other hand, is a direction which they are planning to take the model in the future by offering on-
going contracts to their existing customer base:
We consider account value from the perspective of what the value of one account is to
our business. For example, if we sell the Invest model, we need to sell a continuous
service to allow an ongoing cash flow for us, and good continuous service for the
customer.
5.2.3. Which customer perceptions effect pricing and revenue models?
In general, our pricing principle has been value-based, that is, what kind of value we
can create for customers. That is how we justify the pricing of our service.
The above excerpt demonstrates the focus at Heatsaving Co on customer perceptions. It is at the
core of their sales case as well as their revenue model. Attention is diverted from a cost based
discussion entirely, which allows them to push value added with potential customers. There was
little discussion of how customer perceptions may be pressuring for lower pricing, although it is
unclear whether this was simply left out, or whether it is indeed a nonfactor. However, they have
left out the expected increase in energy costs (and therefore expected savings) from their pricing:
We use discounting, if you consider the potential benefit for many years down the
road versus today. Energy prices increase constantly. No one can say how much they
will increase, but they will increase a lot. In the last ten years, they have doubled, so
they will continue to rise quite a bit, likely at an accelerated pace. This has not been
taken into account because we also have the effect of inflation, and we do not know
the overall effect.
5.2.4. Do pricing principles currently guide sales strategies or vice versa?
At Heatsaving Co, pricing principles guide sales strategies. In fact, the feedback loop has yet to be
completed, as price increases have not yet significantly affected sales. In sales terms, the hit-rate, or
percentage of leads which turn into sales, is very good at the moment.
We currently have a very good hit-rate. If we get as far as the Board of Directors, we
make the deal 8-9 times out of ten. So when we have a good hit-rate, and when we are
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able to sell with this model, we calculate that the profit margin is at a sufficient level.
We would do well to be content with our situation and just close deals. That is, if our
hit-rate dropped significantly, then of course we should rethink our pricing model. But,
for example, last year we raised the price of labor 25 percent and the initial payment
in the deal model was increased to an annual fee. So the fixed share of the fee was
increased fivefold, and it has not affected our sales in any way. These are big changes,
but they improve our business, and it is never a deal breaker. The payback period is in
this case the essential ingredient. It is what the customer buys and what it compares to.
The macroeconomic trend of rising energy prices is clearly doing Heatsaving Co a favor. However,
the important point is that they are capitalizing on the trend through their pricing and through their
sales.
The price of district heat has consistently risen. This means that energy conservation
is more important than ever. Every incremental savings percentage becomes more
valuable.
5.3. Multi-Software’s pri cing strategy
5.3.1. How does the firm’s revenue model relate to differentiation strategy?
Multi-Software is aimed at the upper echelon of the custom software market. The basis for choosing
a software partner, Markus believes, is often the trust developed between the customer and supplier.
It is this trust which drives project demand and due to hourly pricing, one-time project demands
drive their revenues.
This is really a confidence-based business, which means a customer often tries us out
for a bit. When they get to know us and gain mutual experience, we seek to increase
the volume, but also to expand. It usually begins with one part and then expands
through service planning. Our earnings logic is hourly pricing.
Not only does Multi-Software work towards becoming the trusted software supplier, they also want
to achieve partner status with their existing customers. Thus, they are not looking to take on every
potential client they come across. Rather they cater to a certain type of client:
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Some clients like to work with different suppliers, buying something from one and
something else from another, so no one single supplier becomes too important. Others
like to say directly, “You are our partner. Make it happen.” We specifically seek those
clients who see us as partners.
The most succinct explanation of Multi-Software’s differentiation strategy is perhaps this comment
by Markus:
We aim at higher than market prices. If the customer wants the lowest possible price,
we do not offer that.
5.3.2. Do economies of scale or economies of scope dictate pricing strategy?
Where many software companies, particularly those focusing on products, seek economies of scale,
at Multi-Software they distinctly choose not to follow this path. Rather, in building custom software
from the ground up for their clients, they not only customize pricing, but they customize internal
roles as well to fit customer roles:
We use customized prices. If all customers were to see each other’s rates, it would not
be the end of the world, but the cost structures for each one are a little different. We
use role names that our customers want to see. In many cases, the customer has a
certain way of understanding because they want to use the same measure for different
locations. They want to dictate that there are such and such roles here and to
determine prices for their roles. Therefore, we adapt our operations to fit their roles.
Multi-Software does not pursue economies of scope either. Their stress on one-time, hourly billing
prevents both of these strategies. Perhaps the closest they come to economies of scale or scope is
their use of open source code for some of the basic blocks of code. However Markus describes the
limitations of lower pricing, even when harnessing open source:
We can begin by building on some open source code, and the source code is in most
cases the property of the customer who can access it if necessary... If the customer
agrees to pay for only half of the amount, it is very unlikely that we will be able to sell
it to anyone else.
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5.3.3. Which customer perceptions effect pricing and revenue models?
When discussing why they no longer pursue licensing software, Markus explained that the decision
stemmed from a difference in perceptions:
This involves a difference in perception. We always talk about the fact that of course
the customer should pay for the value, but what we see, as we have also sold licensed
software, is that who wants to pay anything at all for a software license? Selling a
5,000€ software license costs more than selling a 100,000 project, so that is it.
However strongly we feel that a license includes more value for customers, they still
do not agree. Therefore, I would answer that hourly billing will remain the staple of
our billing.
From the statement above, we can see that it has been difficult to communicate to customers the
value that Multi-Software creates. At this firm in particular, the strategic decision to stick with
hourly billing for the near future is based on an assumption about perceived fairness, and the
difficulty in changing this reality:
Foremost in my mind is that everyone agrees that value is a great thing, but then
again, everyone says that an hourly-based billing business model is the easiest.
Perhaps it is because everyone sees it as more fair. We are constantly considering
how we could successfully implement this model. Yes, we have a very different
position with our customers compared to other suppliers, but the problem is often that
the client is accustomed to the traditional approach, and it takes a lot of effort to
accept that things can be done a bit differently.
5.3.4. Do pricing principles currently guide sales strategies or vice versa?
For the most part, at Multi-Software, pricing principles guide sales strategies. Although they often
see their offering as much more valuable than the competition, they stick to certain criteria for their
pricing. This is due to both customer perceptions and their own costs:
We have very little strict value pricing. In most cases, when you sell services, the
customer wants to see that the price is related at some level to the time spent and the
amount of work assigned. If the bill is 10,000€ and we have spent a week on the
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project, the customer feels cheated, even if the value to the customer was 100,000€.
These are difficult issues. A second Vendor would spend two months completing it, but
the customer still feels cheated, and this feeling must be avoided.
However, by allowing their team leaders to award discounts, Multi-Software allows pricing to also
be affected by sales and customer service strategies.
We have sometimes used discounts. It is the responsibility of the team leader. It is
essential that anyone who gives a discount is the one who is responsible for them, and
that they must always consider whether it makes sense. Sometimes we give a discount
for one reason or another, sometimes due to competitive situations, and sometimes
due to customer dissatisfaction.
5.4. NAV Consulting’ s pri ci ng strategy
5.4.1. How does the firm’s revenue model relate to differentiation strategy?
Because NAV Consulting implements the Microsoft Dynamics NAV software, they directly
compete against just over 10 other resellers in Finland. They must therefore differentiate with other
factors besides the software. However, the Microsoft ERP software itself is not the natural answer
for many companies either. Thus, the first challenge is to make the case for the software, for which
they have a cost and pricing argument:
It depends a little on the customer's industry and the company operations, but more
and more are looking for a ready-made solution, and there are less and less of these
customer-specific customizations. I mean complete industry-specific packaged
solutions. If it is a packaged solution or product, it will be a license or lease-based
payment, because there is no such customization. Again, the share of personnel work
and customization labor remains small. Implementation time is quicker and the
customer receives the benefits of it more quickly.
With set prices for licensing fees, they may struggle to differentiate with price in on-going fees.
However, they take a clear stance to preserve the value of add-ons to their products:
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In my opinion, we do not use bundling. If we have this basic software, and add some
more modules, they have a clear price. We also do not offer payroll software or any
other module at half price. There is always some give and take, but only a little. We
have tried to get the price right from the beginning.
5.4.2. Do economies of scale or economies of scope dictate pricing strategy?
Revenues at NAV Consulting are centered on one-time, hourly fees, which make it difficult to take
advantage of economies of scale or economies of scope. There are advantages to serving a single
customer for an extended number of hours, which at NAV Consulting translates to discounted fees.
Then, with personnel hours, as has already been said, prices are market-based, but
there are also the levels of costs, which play a part. A small discount may also be
applied to hourly work on a project if a customer has purchased a heavy workload.
That is, it is a quantity discount because our work efficiency is higher. One person
could work for a month with one client if needed instead of half days for 10 different
customers.
This effect on costs is not translated to revenues, however. Although they save on down-time for
employees, the value of more efficient work hours that result is not reflected in prices. Niklas
explains their discounting policy:
In principle, we operate according to our price list. Then, of course, there are some
amount of discounts on labor costs. If someone buys 1000 days of services from us,
the price will be different than it is for a customer who buys one hour now and then.
5.4.3. Which customer perceptions effect pricing and revenue models?
One of a new customer’s first perceptions of NAV Consulting is often a quoted price. They ask for
a daily and hourly rate, which they then may directly compare to a competitor. This places
considerable direct pressure on their prices. These price quotes are the de facto prices on all work
completed for a given customer. This approach is apparent in Niklas’ comments on role-based
pricing:
In practice, different people do not have different prices. All work is just application
work, training, or working with the customer. All of the work is the same price. It is
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because we have experienced enough people that we do not use junior and senior
pricing. We begin with the assumption that if we send a person to the client,
regardless of whether he or she is consulting or training, or whatever he or she is
doing for the customer; it is the same person and it would be absurd to start dividing
it. We do not use results-oriented pricing or economic value pricing.
From the above comments, we can see that at NAV Consulting, particular stress is placed on the
customers’ perceptions of fairness. There is also an underlying view of prices as a particularly
important criterion in clients’ decisions of choosing an ERP implementation partner.
5.4.4. Do pricing principles currently guide sales strategies or vice versa?
At NAV Consulting, pricing principles are quite clearly guided by sales strategies. Niklas answered
the question quite succinctly:
Yes, it seems to be that we find out what our costs are and add our margin
requirements to that. However, in practice, we may use market prices more.
However, they are open to new methods of pricing which could in turn guide their sales in a new
direction. Niklas describes the sentiment:
We have considered at some point that it would be good if, instead of selling days or
software, we could sell the benefit which the client received, and price accordingly.
However, we do not actually use that because it is quite difficult to assess the value of
the advantage to the customer.
The challenges of bringing these value pricing ideals into the day-to-day business are clear across
all of the case companies interviewed.
5.5. Survey Bl end’s pri cing strategy
5.5.1. How does the firm’s revenue model relate to differentiation strategy?
Just as stated about Auto-Site, at Survey Blend they also aim to stand out by offering a clear price
with no surprises. However, some of their customers require more handholding than others.
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If a customer has required additional training, we have charged them directly. Then,
if the customer wants us to continue assisting in creating content, we have charged for
that as well… [However,] clients are able to build on their own using these tools
without our help. That is not where we want to focus. However, sometimes it has been
unavoidable. We also have partners who are able to provide these services.
With at least four different product groups among their offerings, Survey Blend also has a couple of
different pricing strategies. In fact, each differentiation strategy carries its own pricing strategy.
However, most of their services use a revenue model of on-going payments. Steffan explains the
differences succinctly:
For the electronic salesman we have not really considered [competitive pricing] since
we do not have a lot of competition. Our election machine does not really have
competitors either. Those products for which we use market pricing, we basically have
market prices.
5.5.2. Do economies of scale or economies of scope dictate pricing strategy?
In perhaps the clearest example of economies of scale dictating pricing strategy out of the five case
companies, Survey Blend follows an example of SaaS pricing they have seen elsewhere:
We have studied a variety of different SAAS providers around the world, how they
have been able to scale successfully, and which issues they have focused on. It is
always very clear that it they have placed their bets on an annual or monthly license,
and then they have these big training days or workshops, and webinars on the side.
The combination of a scalable model and a push for internationalization has accentuated the link
between economies of scale and their pricing methods.
Especially now when we have globalized, it is based almost entirely on licensing. We
have little to no foreign staff, but we have partners who can then sell it separately.
However, we do offer free online webinars and training courses via the Internet. They
are free of charge and are, in practice, marketing.
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As they have introduced new products, the focus at Survey Blend has somewhat shifted from an
economies of scale to an economies of scope strategy. Steffan describes the process:
If a customer uses one of our products, the price is one thing. Then, if they want to
fulfill a second need with another separate tool… it is a bit cheaper as a bundle.
5.5.3. Which customer perceptions effect pricing and revenue models?
As stated in the discussion on differentiation strategy, Survey Blend aims to offer one clear price
that is easy for the customer to understand. At the same time, they equip their sales force with a lot
of autonomy. Steffan explains the benefits and limitations of this pricing strategy in terms of
customer perceptions:
Economic value pricing is very much in the seller's hands. There are certain broad
guidelines, but it pretty much is in the hands of the salesperson to consider what is
expected case by case, according to the level of usage and benefits. But we try to keep
it on a small scale to avoid a situation where one customer pays half of what another
does, which may hurt our level of trust.
However, the discussion of perceptions in pricing strategy can include those customers who cannot
afford the given price. They would be non-customers with a rigid pricing strategy, but with a
diplomatic salesperson they can create additional on-going revenue streams:
We attempt to keep it as standard as possible, but it may be that someone has a very
small shop, but clearly needs our tool. We can provide our tool with very little effort,
so we drop the price to a level in their budget and they reap the benefits. We always
have the annual license, but it is a somewhat less expensive annual license, and it is
consistently inexpensive. Sometimes we can customize the price so that the first year
charges are cheaper to get things started and then, when they like it, we charge them
normal prices.
The price they choose to sell at drives the return side of the pricing equation, but the goodwill
provided can be just as important from a customer perspective. Survey Blend has an ongoing offer
to art schools all over Finland to provide evaluation tools at a group-based discount:
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We wanted to provide the schools with these tools because they would not otherwise
have access to such uniform assessment models. These tools are expensive enough
that schools have not been able to commit the resources. Then, because it involves
data analysis, we have offered those services as well.
5.5.4. Do pricing principles currently guide sales strategies or vice versa?
In the case of Survey Blend, there are examples of both pricing principles driving sales strategies
and sales strategies driving pricing principles, although the latter is clearly more common. One
example of pricing principles driving sales strategy is the campaigns, which are based on a modified
price aimed at increasing sales:
Take this school deal as an example. Because it involves several hundred schools,
their price is much cheaper than the others. It is a group discount. It was constructed
by producing the content, and because they all use the same content, they can all take
advantage of the same content. They all use the same evaluation tool, which takes
advantage of the same content, so we do not need to train them all separately. We can,
for example, hold one training session which can be shared as a webinar, or hold no
session at all, but offer a training video, with which they can then learn how to use it.
Alternatively, we can provide a brief telephone training.
However, this example is an exception to the rule and there are far more examples of sales strategy
driving pricing. The following are excerpts of two example situations:
For some solutions, our price is market-based. For example, we dropped the price for
chat just because the market had more favorable prices.
In principle, [with] these databases and so on, we do not have any specific charges to
use another database. Rather, we charge for the language version. It has been
simplified so that the language version costs this much and that finances those costs.
We simply do not bring it up.
These situations demonstrate the need to adapt pricing to the pressure salespeople experience. At
the same time, Steffan credits their sales personnel for the opportunity to be flexible with pricing:
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We have such good salespeople that it works. For us, sales people’s autonomy is a
pretty big deal. They get to work independently and define and build it themselves.
The seller gets a commission on it themselves, so that is a lure not to sell for too cheap
either.
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6. USAGE OF PRICING STRATEGIES
In order to establish the level of value pricing employed at the case companies, we will compare use
of the following concepts found in the literature: market based, competitive, cost, and value based
pricing, skimming, customized, hourly, lifecycle, experience curve, target return, and group based
pricing. Then we will compare versioning, bundling, profit and revenue sharing, and licensing
schemes. Lastly, using pricing as a cue and discounting will be considered.
6.1. Pricing strategies
6.1.1. Market based pricing
Although every firm short of a complete monopoly faces pressure to price according to their market,
there are often other options available. By differentiating their offering from competing products,
companies can set their prices considerably higher than other offerings in the market. Of the cases
analyzed, the firm whose prices were most market based was NAV Consulting. Their perception of
their place in the market was clearly in the upper, but not the highest level in the market. They
quote a daily and hourly rate as well as services prices very early in negotiations at the customer’s
request. The Microsoft Dynamics NAV software they implement is a retail product, so they have
little room to maneuver from that standpoint. The other case companies also used market pricing,
but clearly at a different level. Auto-Site and Survey Blend also priced according to market pressure
and considered their prices a key competitive edge. Heatsaving Co and Multi-Software, on the other
hand, paved their own path with pricing.
We do not even want to begin competing with those who seek a competitive advantage
through a lower hourly rate. We would rather compete with expertise or other factors,
and then seek to sell to customers at a high price. Then we deliver at the price we ask.
– Markus Määttä, CEO, Multi-Software
6.1.2. Competitive pricing
While very similar to the concept of market based pricing, competitive pricing involves both
proactively and reactively adjusting prices according to expected or realized price changes by
competing firms (Nagle & Holden, 2002). The case companies used competitive pricing at the same
45
relative levels as market pricing, but Aaron Aho, the CEO at Auto-Site had a particularly concise
way of stating their position:
We price below market prices on a general level and even on a strategic level. It is
about getting the masses, and whatever we can do to try and reach that goal, we tend
to do it.
6.1.3. Cost-based pricing
In service industries, cost-based pricing often means charging an hourly fee. However, the fact that
hourly fees are used does not rule out the possibility for value-based pricing. The distinction of
cost-based pricing is that the fees correlate most directly with costs, rather than customer value or
other measures. Of the group of case companies, NAV Consulting bases its pricing most directly on
costs, while Heatsaving Co clearly chooses not to use cost pricing.
We do not seek price or cost leadership as it is more important to make the value of
the resulting savings as great as possible.
- Hans Hänninen, CEO, Heatsaving Co
6.1.4. Value based pricing
We use a mix of value and the market based prices. That is, we want to be in the
higher price echelons of the market. Of course, we must also be competitive. We must
be able to justify our value. The company has margin and P&L calculations, but
pricing happens, above all, in the market.
– Markus Määttä, CEO, Multi-Software
At Multi-Software, about 90 percent of revenues come from hourly fees. However, among the peer
case companies, they are a relatively strong user of value pricing. They manage this by charging
premium fees, often differing between customers, projects, and even roles for the same employee.
However, the leader of the case group in value-based pricing is clearly Heatsaving Co; as Hans
states:
When the payback period is good, it does not matter what it costs as an investment.
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6.2. Pricing methods
6.2.1. Price Skimming
As a concept, price skimming is nothing new, but today claiming top-tier prices is not just the
business of monopolies. From the base of companies studied, it appears to be an all or nothing
phenomenon, with three of the case companies opting out, and two quite clearly choosing to follow
this strategy.
Our customers compare our prices to our competitors, and what we want the
customer to say is that, man, you are expensive, but worth it... If the client sees us as
cheap and good, then it is the wrong message.
– Markus Määttä, CEO, Multi-Software
6.2.2. Customized prices
By customizing prices, a firm takes the risk of being seen as unfair by customers, who may find
they are paying much more for a service than another client who at least appears to be receiving the
same service. At the same time, they can capture far more of the value they provide to their
customers. There are many ways to go about customizing prices, but it should always be done
carefully.
Economic value pricing is very much in the seller's hands. There are certain broad
guidelines, but it pretty much is in the hands of the salesperson to consider what is
expected case by case, according to the level of usage and benefits. However, we try
to keep it on a small scale to avoid a situation where one customer pays half of what
another does as that may hurt our level of trust.
- Steffan Salmela, Sales Director, Survey Blend
6.2.3. Hourly based billing
Hourly based billing is by far the most common way to sell services, whether it is a bid for a
number of hours to complete a particular task, or open-ended billing of hours as work is completed.
All of the case companies have some form of hourly billing although Heatsaving Co in particular
does not offer it directly.
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6.2.4. Lifecycle pricing
Lifecycle pricing refers to the practice of planning prices for the different stages during the useful
life of an offering. A level of this concept is implied in virtually every sale, as few goods or services
have value for only an instant and even fewer retain their value indefinitely. While some services
have a value lasting longer than others do, some case companies plan future prices on this value
explicitly.
Energy prices increase constantly. No one can say as much they will increase… but people
understand it that if they will increase, it pays to start saving money right now.
- Hans Hänninen, CEO, Heatsaving Co
6.2.5. Experience curve pricing
Experience curve pricing relies on achieving lower costs than the competition and thus reducing
prices in order to eliminate much of the competition. Usually this requires an economies of scale
approach and a critical mass, which can be difficult for the SMEs in the case group to achieve.
However, within a well-defined niche an element of experience curve pricing is possible.
We have tailored industry-specific packages that are ready for use and do not need to
be customized from the beginning, in which case it is also far less expensive for the
customer. On the other hand, it is also more cost-effective for us.
- Niklas Nenonen, Chairman, NAV Consulting
6.2.6. Target-return pricing
Instead of arriving at price points based on cost and revenue forecasts, the practice of target return
pricing turns the process upside-down by beginning with a profit target, and calculating the price
based on the margin required. Most of the case companies used target-return pricing strategies, but
they generally used single account targets rather than aggregate targets when building their pricing
models.
6.2.7. Group/ Segment based pricing
One of the more straightforward ways of customizing pricing is to divide a single market into
segments which have different requirements. However, it is much more difficult to get customers to
48
self-select into a higher priced segment. By splitting their offering into at least three different levels,
Auto-Site offers what each segment requires, while minimizing product level downgrades by
adding customer service or other bonuses to higher tier offerings. At the same time, they try to
maintain a high quality experience by updating technical components at all product levels
simultaneously.
6.2.8. Versioning /Predetermined choices
Versioning as a concept is quite similar to group based pricing in that versions are often aimed at a
particular segment of the market. However, versions can also be built to accommodate choice for a
single customer. All of the case companies besides Multi-Software use versioning as a staple of
their pricing strategies. As part of their standard procedure, a NAV Consulting representative will
offer a client a host of versions to choose from.
As far as versioning, we may consider a hardware service package with fewer options
for smaller customers. Then again the biggest customers have the need for an ERP
system with more functionality and a broader package, so the price is higher as well.
In these cases, the alternatives are known before we visit the customer, that is, we
offer options from which the customer can choose.
- Niklas Nenonen, Chairman, NAV Consulting
6.2.9. Bundled pricing
By bundling products and/or services together, the customer can be helped along in the purchasing
process. At the same time, a discount on the combined products can give a sense of getting a good
deal. From the firm’s perspective, bundling can create pressure to offer a discount, but at the same
time it can ensure a good customer experience and the possibility of extra sales.
We do not charge maintenance or start-up costs. We have made an effort to keep it
simple… There is no need to divide costs into five different sections. Rather they are
all included.
- Steffan Salmela, Sales Director, Survey Blend
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6.2.10. Profit and Revenue sharing
Profit and revenue sharing models are becoming more popular, but among this case group they are
not used extensively. Heatsaving Co shares energy saving with customers of its Deal model, but
there were few other examples. Markus Määttä of Multi-Software had a particularly pessimistic
view on the practicality of revenue sharing models:
In general, if the customer believes in their own business case, they are willing to
purchase it straight out. If they do not believe in their business case, they may prefer
such a revenue sharing deal… It is kind of a lost cause in any case.
6.2.11. Licensing
Licensing as an art or a science is a broad enough topic to warrant a separate study. However, we
will touch on a few of the possible types: user, usage-frequency, and time-based licensing. User-
based licenses are priced according to either the number of users with access to a product or the
number of users with simultaneous access. With its chat product, Survey Blend bases its price
directly on the number of simultaneous users. They also use usage-frequency to price their
evaluation tool, although a strict formula does not exist. Time based licenses are the foundation of
Software as a Service (SaaS) models and are used by both Survey Blend and Auto-Site. The other
case companies do not use this pricing scheme. Aaron Aho of Auto-Site tells of two different
applications of time-based licensing:
We always include some monthly fee for the main service to be there for white label
partners.
[Individual] clients create most of our revenues. They sign up for the account and pay
a price for the time they use it.
6.2.12. Pricing as a cue
Every firm sends a signal with their pricing, whether they are aware of it or not. When asked about
this, the interviewees invariably answered positively. However, in his comments Markus Määttä of
Multi-Software pointed out that the signals can be used internally as well:
50
For us, it is a significant indicator whether our clients see us as competent, and are
willing to pay some of the highest prices in the market.
6.2.13. Discounting
Pressure from the client or management will often drive sales people to offer discounts. However,
many discounts are unplanned, or go “under the radar.” A discount strategy is a set of guidelines for
using discounts as a tool rather than a last resort for closing deals. Heatsaving Co is the only case
company that appears not to give discounts. However, some of the others claimed not to use
discounting, while describing discounts that have been given in the past at a different point during
the interview. It seems that discounts are, at least for the case companies, a mystery item which is
difficult to pinpoint. At least Survey Blend, NAV Consulting, and Multi-Software use volume
discounts, and Auto-Site has offered one-time discounts to long-time customers. Two of the
interviewees mentioned that the employee granting it should have responsibility for the discount.
Although not their standard practice, Markus Määttä of Multi-Software described a situation in
which they may offer a discount:
We sometimes do, although quite rarely, take a customer who is not terribly solvent
and offer them a lower price. However, in those cases we do not stick to a delivery
timetable, but build it on a "when we have nothing better to do" basis.
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7. A FRAMEWORK FOR PRICING STRATEGIES
7.1. Goals of the framework
In this section, we will attempt to answer the final research question of how pricing strategies can
be categorized in a useful manner. In the best-case scenario, pricing strategies are a direct result of
business strategy. Ideally, value provided to customers’ businesses would be apparent, that value
would be assigned a price accordingly, and this value would be successfully communicated to
customers (Terho, Haas, & Eggert, 2011). In the worst case, prices and revenue models would be
simply due to legacy business models, internal working practices, or the whims of sales people. As
discussed in the literature review of this paper, some research has been done which asserts pricing
can be used beyond the traditional role of distributing profits between market participants (Nagle &
Holden, 2002; Narayandas, 2005; Avila & Dodds, 1993; Hinterhuber, 2004). Voeth and Herbst
suggest using pricing as a tool for building mutually beneficial relationships (2006). In their
research, Sainio and Marjakoski describe value based pricing and revenue logic as key determinants
in building business models (2009). Thus, we suggest the level of value based pricing as a
theoretical success factor for partnerships. Revenue models are often dismissed as merely a matter
of financing. However, if the on-going payments for a service continue at the discretion of the
customer, it requires the vendor to provide value on an on-going basis. Therefore, the revenue
model of a firm affects the level of commitment required of a firm towards their client partners. At
the outset of this research, we propose a framework for using pricing strategy as a tool for building
and maintaining partnerships based on these two dimensions: 1) value versus market pricing and 2)
on-going versus one-time revenue models. The case companies were placed in the framework in
relative terms based on information gained from their websites. Sufficient information about
offerings was a criterion in case selection.
7.2. The scal e of one-time versus on-goi ng revenue model s
On-going payments may be only a matter of financing for a one-time contract. However, if future
payments are subject to value received today, (i.e. the client can cancel the service on short notice)
the firm must provide on-going value in order to secure future revenues from the client. This
distinction makes payments a strategic measure, rather than simply a consequence of financing
methods. Thus, the measure of one-time versus on-going payments is an indicator of cooperation.
52
7.3. The scal e of val ue versus market based pri ci ng
The goal of pricing strategy is most commonly to maximize profits, whether in the short or long
term. However, the goal of value based pricing is to encourage the maximization of value, its
communication to customers, and subsequently, to capitalize on some amount of that value. By
employing value based pricing, the agency problem of maximizing the profits of the firm and the
value provided to the client is alleviated. Thus, the measure of value versus market pricing is also
an indicator of cooperation.
Figure 1: Pricing strategy for partnership, preliminary framework
7.4. Preliminary groupi ngs
From the initial coding of case companies interview transcripts it became clear that the case
companies ran very different businesses. From the perspectives of strategic pricing studied, they
seemed to fit into three groups: Auto-Site and Survey Blend, Heatsaving Co and Multi-Software,
and NAV Consulting.
The similarities found in Auto-Site and Survey Blend were the following:
The main offering was a standard toolkit
Economies of scale were used in pricing
Auto-Site
Heatsaving Co
Multi-Software
NAV Consulting
Survey Blend
0
5
10
0 5 10
Value
Pricing
Market
One-time Revenue model On-going
Preliminary Pricing Strategy Model
53
Pricing was largely market-based
Revenue was composed mostly of on-going payments
The similarities found in Heatsaving Co and Multi-Software were:
The main offering was a premium service
Economies of scale were not used in pricing
Pricing was largely value-based
Revenue was composed mostly of one-time payments
The characteristics that were typical of NAV Consulting were:
The main offering was standard software
Economies of scale were used in pricing
Pricing was largely market-based
Revenue was mostly composed of one-time payments
Because it did not follow either of the patterns set by the other companies, NAV Consulting was
given its own category.
Table 1: Preliminary groupings
Pricing Auto-Site Heatsaving Co Multi-Software NAV Consulting Survey Blend
Differentiation Standard Premium Premium Standard Standard
Revenue model On-going One-time One-time One-time On-going
Economies of Scale None None Scale Scale and Scope
Key Driver Sales Price Price Sales Sales
Prices based on Market Value Value Market Market
7.5. Buil di ng the dimension wei ghts
Factors pertaining to the two axial concepts, 1) value versus market pricing and 2) on-going versus
one-time revenue models were identified. Next, each factor was assigned a weight reflecting its
impact on the overall level of the concept. Market-based, competitive, and cost-based pricing, as
54
well as discounting were given a weight of -1 due to their use in traditional, non-valued-based
pricing. Experience curve pricing was given a weight of -0.5 due to a similar relation. Lifecycle and
target return pricing, versioning, bundling, and pricing as a cue were given a positive weight of 0.5
because they can be used in value based pricing, although they do not directly lead to that outcome.
Lastly, but perhaps most importantly, the use of value-based pricing, price skimming, customized
prices, and segment-based pricing were given a positive weight of 1, given their direct relation to
value-based pricing as found in the literature. The weights are summarized in Table 2. Mentions of
these factors were identified from the case data and each case company was assigned a value on a
scale of 1 to 10, reflecting the level at which it applied each factor. Ranking case companies on the
revenue model employed was more straightforward. The same procedure was followed except that
the only pricing factors used were hourly pricing and licensing, which received weights of -1 and 1
respectively. Scores were multiplied by the respective weights of the two pricing elements and
summed. Totals were normalized on a scale of 0-10 for the sake of comparison. Thus a value of 0 or
10 is not necessarily the extreme case, it is only the relative extreme among the group of case
companies.
Table 2: Pricing methods by value pricing weights
Weight Pricing methods
-1 Market-based Competitive Cost-based Discounting
-0,5 Experience curve
0,5 Lifecycle Target return Versioning Bundling Pricing as a cue
1 Value-based Price skimming Customized prices Segment-based
7.5.1. Separation of distinctive offerings
Some of the case companies had another major offering which differed from the firm’s main
offering, and these were therefore scaled separately. The offerings at Auto-Site, Heatsaving Co, and
Survey Blend (Auto-Site white label, Heatsaving Co deal, and Survey Blend election machine
respectively) which diverged by these measures from the respective firms’ other offerings, were
scored separately for two reasons: 1) to allow more accurate scoring of the other offerings and 2) to
more meaningfully populate the theoretical framework. The peripheral offerings at Multi-Software
and NAV Consulting, mostly hardware and maintenance, were considered minor enough not to be
taken into independent consideration.
55
7.5.2. Firm and offering level values for scaling
Firm level values for the scaling factors of each dimension were arrived at based on statement made
by each of the interviewees, or statements made on their websites, if no comments had been made
during the interviews pertaining to the given factor. A score was assigned to each factor for each
firm/offering on a scale of 0-10, with 10 equating to strong demonstration of the factor, and 0
meaning a clear statement of not using a given method was made. Statements made by the
interviewees were given precedence over website material in determining the factor score unless
they were contradicted by other statements made during the interviews. Triangulation of scaling
was achieved by giving each interviewee a copy of this report, asking them to verify that the
findings were correct, and giving them the chance to correct any miscommunication or error in
scaling.
7.5.3. Arriving at final dimension values from scaled factor scores
Final values for the two framework dimensions were arrived at by multiplying each factor score by
the weight given to that factor and finding the sum of these values. Negative values were avoided
by adding the lowest value to all figures, and the resulting values were normalized to a scale of 0-10.
Thus, the final dimension values are relative to the sample of case companies and not comparable to
the IT service sector in general. The goal of this scaling was to describe the phenomenon of pricing
as a tool for partnership among the multiple case companies in order to demonstrate the value of a
scaling system for the value pricing and revenue model dimensions.
56
Figure 2: Pricing strategy for partnership, populated framework
7.6. Stated strategi c goals within the framework
The framework can be used as a measure of the level of cooperation or partnership between a firm
and its clients. In their comments, the leaders of all the case companies expressed an interest in
building deeper cooperation and partnerships with their clients. Some had specific future goals
through which they hoped to attain that end. At Auto-Site they plan to gain broad market
acceptance, after which they will add other value enhancing products to their offering. For an SaaS
company, Survey Blend is investing heavily in client relationships and the plan is to cross-sell their
synergistic offerings to their clients who currently use only a single product. These two case
companies are thus strategically aiming to move towards value based pricing, while showing no
intention of moving towards one-time payments. At Heatsaving Co, they plan to use their client
base to introduce more on-going payments such as maintenance. At Multi-Software, they are
actively searching for new ways to supplement hourly revenue with on-going contracts of software
maintenance and other services. Thus these two case companies are looking to move towards on-
going payments while increasing the level of value based pricing if possible. At NAV Consulting,
the aspirations are to one day sell the benefit the client receives instead of the software. They also
expressed the movement towards leasing software instead of licensing, so this signifies a movement
towards on-going pricing. There was no evidence of goals to shift closer to market based prices or
one-time payments. These stated goals are illustrated in the context of the framework in Figure 3.
Auto-Site
Heatsaving Co
Multi-Software
NAV Consulting
Survey Blend
Auto-Site White
label
Survey Blend
election
machine
Heatsaving Co
deal
0
5
10
0 5 10
Value
Pricing
Market
One-time Revenue model On-going
Revenue model vs Value pricing
57
Figure 3: Stated Strategic goals of the case companies
Auto-Site
Heatsaving Co
Multi-Software
NAV Consulting
Survey Blend
Auto-Site White
label
Survey Blend
election
machine
Heatsaving Co
deal
0
5
10
0 5 10
Value
Pricing
Market
One-time Revenue model On-going
Stated Strategic Goals
Goal
G
o
a
l
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8. DISCUSSION
8.1. Revenue model s’ rel ati on to differentiation strategies
For all five of the case companies the link between differentiation strategy and revenue model are
quite clear. Furthermore, it appears that it is indeed the differentiation strategy, which drives the
revenue model as opposed to the other way around. From a strategic perspective Auto-Site and
Survey Blend seemed to have very similar approaches to differentiation; providing a standard tool
to as broad an audience as possible. This goal lent itself to a pricing strategy of market-based prices.
The revenue model itself was, for both companies, an on-going payment with the principle
difference that Auto-Site uses monthly billing, while at Survey Blend payments are primarily
annual fees. However, both companies had other offerings that were based on customized projects
and customized fees, namely white-label products and election machines. These offerings were
considered significant sources of financing for other product development as well as creating
market presence, but were not the focus of future strategic direction.
Heatsaving Co and Multi-Software, on the other hand, are similar in their differentiation as
premium drivers of value in their respective markets. The focus on building trust through good
work in the software market at Multi-Software is matched with a focus on delivering and proving
energy savings at Heatsaving Co. The premium status of their offerings are both met with a
premium price: The former through some of the highest hourly rates in the market, the later with a
pricing scheme far removed from the cost of the device and installation used by much of the
competition in their pricing. Interestingly, both Multi-Software and NAV Consulting focus on
project based pricing with pay-as-you-go and up-front payments the currently preferred methods of
billing. However, Heatsaving Co offers an alternative payment option combining fixed annual
payments and sharing of energy savings. This option appears to chiefly serve the purpose of
positioning their invest model as a value proposition, as sales through the deal method are far below
those of the invest model. Nevertheless, they have customers who purchase using this method, so it
can be considered a genuine offering as well.
As a reseller of third party software, however strategically chosen it may be, NAV Consulting
competes on a relatively modest possibility for differentiation from direct competitors, which offer
implementation of the same software. By choosing certain sectors to serve, they can offer a larger
59
predetermined solution to their client, which reduces costs of implementation. Their revenue model
is based on the license or lease payment for the software and the chosen add-ons, with virtually all
revenue streams stemming from these initial fees. They have maintenance contracts for virtually all
customers, which provide on-going income. However, new implementations provide the bulk of
revenues.
Thus, we find two groupings of 1) companies pursuing market-based pricing, with on-going
payment methods and 2) companies pursuing value-based pricing, with one-time payments. The
outlier currently has relatively limited opportunity for differentiation, and thus very limited choices
of revenue models. However, in their current form, the standard tool customers have adopted
market-based prices, which may indicate either a strategic decision or a lack of choice in pricing.
However, the existence in both companies of offerings with very different revenue models favors
the former explanation. Although the differentiation of a premium service in the case of Multi-
Software and Heatsaving Co does not seem to restrict their pricing options, we cannot be sure that
this is the source of their freedom use value-based pricing.
8.2. The effect of economies of scale or economies of scope on prici ng
strategy
The traditional effect of economies of scale or scope on prices is downward, where an increase in
scale or scope results in the ability to offer lower prices while retaining a profit margin. Economies
of scale and scope appeared to affect the pricing of the case companies in different ways. At Multi-
Software, there were limited economies of scale or scope of which to take advantage. At Auto-Site
and NAV Consulting, economies of scale allow a lower price level than that of many competitors
and they take advantage of this discrepancy by charging less than market prices, or by offering
volume discounts. Survey Blend, they also take advantage of economies of scale by charging prices
similar to those of their competitors. They also employ an economies of scope approach by cross-
selling additional products to existing customers. Lastly, at Heatsaving Co, economies of scale
provide significant cost advantages but the discrepancy is not turned over to clients. Rather, the
price follows a set fee according to the volume of the building, which is the same for all clients
regardless of cost. It follows that, at least among the case companies, an economies of scale or
scope approach can allow cost savings, but its effect on price differs from company to company.
Thus, there is no direct correlation between economies of scale or scope and pricing strategy.
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8.3. The effect of customer perceptions on revenue model s and pri cing
A common factor of pricing across four of the case companies was a priority on customer
perceptions of fairness. While customer perceptions of fairness in pricing are also important at
Heatsaving Co, seen from the lack of discounts, they stress the value provided about all else. At
Multi-Software, there is some motivation to continue moving towards a value-based model, but the
fairness perception and difficulty in addressing these perceptions are holding them back. Similar
issues were asserted by the other three fairness-based companies. Another customer perception
affecting pricing which was common to multiple case companies was goodwill. Although goodwill
as an accounting term refers to the intangible side of assets, in this context it refers to the Business-
to-business (B2B) equivalent of consumer surplus, or the difference between what the customer is
willing to pay and what they are actually charged. However, the source of this goodwill was
different in each case. At Auto-Site, the customer perception of goodwill provided through pricing
is a cap on costs, which their competitors do not provide. At Heatsaving Co, goodwill was provided
by offering increased energy savings benefits due to the rising costs of district heating. Because the
actual value of these benefits is subject to risk, they do not affect the price. Goodwill at NAV
Consulting stems from charging the customer the same hourly rate regardless of what function they
are providing to the customer. Although some types of work can provide much more value to the
customer than others, prices remain the same. Perhaps the clearest example of providing a
perception of goodwill to the customer is Survey Blend’s deal on their evaluation tool for art
schools. Although current costs per implementation are clearly lower than they are for their other
customers, they offered the low rates even at the beginning, when costs per implementation were
relatively high.
8.4. The rel ati onship between prici ng pri nci pl es and sal es strategies
Whether pricing principles guide sales strategies or the other way around can be an indicator of the
successful implementation of a pricing strategy in general. If sales strategies guide pricing, it is
probably a sign of either a lack of competitive advantage or a shortfall in pricing strategy and/or the
communication of value. At three of the case companies, the rule is sales strategy guiding pricing.
The exceptions found help to define the extent to which this phenomenon was observed. At Survey
Blend, the exception to the rule was the special deal they offered to art schools. They purposely
61
built an alternative pricing structure in order to serve a new customer constituent for which their
main pricing model would not have produced many clients. The exception at NAV Consulting is
their pricing of add-on components of their ERP offering, such as billing modules. They have clear
prices for these products for which they do not offer discounts regardless of the extent of the
volume purchased by a single customer. Because the exceptions to the rule of sales guiding pricing
principles are only in marginal offerings, their strategies can be considered sales driven, rather than
pricing driven.
The two companies whose sales strategies were guided by pricing principles were Heatsaving Co
and Multi-Software. Heatsaving Co built its pricing principles based on the value of their service to
potential clients. The revelation that price increases have not yet dropped their hit-rate from a very
high level demonstrates two forms of evidence that their pricing strategy indeed comes first. First,
they have increased their prices even recently, which means they are purposefully approaching the
level of value provided to customers with their pricing, rather than leaving much of the consumer
surplus on the table. Second, when making prices changes, they are looking for changes in sales
figures, which they hold as an indicator of whether their pricing strategy is working. At Multi-
Software, pricing principles are built on the proposition of being one of the best custom software
service companies in the market. However, they limit the upside of their value pricing in order to
seem fair to customers. By principle, they would not charge higher than a certain level for a project
that is quickly completed, regardless of how much more time and/or money a competitor might
have required for a similar project. In their view, the customer would feel cheated, and they cannot
price the project much above market prices because it would be too hard to sell. However, there are
examples of pricing being driven by sales strategy. When in a particularly competitive situation or
working with an unhappy customer, the team leader is allowed to award discounts. Because this
exception to the rule is a peripheral case and not their normal way of doing business, theirs can
nonetheless be considered a pricing driven strategy.
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9. CONCLUSIONS
9.1. Empirical findings of prici ng method usage
Market-based competitive and cost-based pricing were common methods across most of the case
companies. Heavy use of these traditional methods was not surprising, but the interviewees were
also quite articulate in their familiarity with these pricing methods. Value-based pricing and price
skimming were less common, but were closely related in practice. Case companies employing one
use the other as well. The use of customized pricing was explicitly stated by only one case company,
while lifecycle and experience pricing were only referred to lightly, as they were unfamiliar
concepts to most interviewees. All the case companies used hourly-based pricing, although it was a
staple of revenues for only two of the five case companies. The use of target return pricing was
difficult to ascertain, as the term was new to most interviewees. Group /segment-based pricing, as
well as versioning and bundling, were used mostly by those companies with standardized offerings.
An interesting finding of the research was that everyone claimed to use pricing as a signal, which
also demonstrated a clear understanding of this aspect in practice. However, discounting was
perhaps the most misunderstood concept discussed, with some interviewees claiming not to use
discounting, while later describing even elaborate discounting policies. One interviewee even
claimed to use discounting, and proceeded to describe a practice quite different from traditional
definitions of discounting. Data on the usage level of different pricing strategies was used to build
the pricing framework for this thesis. However, it also demonstrated the lack of familiarity with
pricing concepts among a sample of leaders in the IT service sector in Finland.
9.2. Findi ngs from the four descri pti ve research questi ons
9.2.1. How does a firm’s revenue model relate to differentiation strategy?
Across the board, differentiation was related to the choice of revenue models. The more
standardized offerings used more on-going payments, while the custom offerings were centered
more on one-time payments. This finding supports the idea that the core product, a standard or
custom offering, is what drives the choice of revenue model in the studied firms. However, an
alternative explanation is that the type of core offering makes adoption of a certain revenue model
more natural, but does not restrict the choice. This explanation is supported by the connection
between differentiation and revenue model, as well as the expressed goals of the company leaders to
63
push for on-going revenue models. Because the leaders of case companies with one-time revenue
models shared a conviction of moving towards more on-going revenue models without changing
their core differentiation, this connection can be viewed as a tendency at outset, but not a cause and
effect relationship.
9.2.2. Do economies of scale or economies of scope dictate pricing strategy?
Some companies’ pursuit of economies of scale or scope had an effect on pricing strategy. However,
for others, the connection was unclear. Among the case companies there were numerous examples
of economies of scale providing opportunities for lower prices. Some companies based price
discrepancies on savings from economies of scale, while others were aware of the possibility, but
strategically chose not to apply it to prices. Economies of scope was generally less applicable in the
case group, but was used to price multiple product bundles at one case company.
9.2.3. Which customer perceptions effect pricing and revenue model use?
The two most common customer perceptions affecting pricing and revenue models were fairness
and goodwill. Although goodwill as an accounting term refers to the intangible side of assets, in this
context it refers to the B2B equivalent of consumer surplus, or the difference between what the
customer is willing to pay and what they are actually charged. This perception is driven by the
objective value of an offering and the subjective perception of what the offering is worth. The other
customer perception found with the case companies was fairness. This perception mired the internal
goals of moving toward value-based pricing, and was addressed in the case group of case
companies particularly through transparent pricing principles.
9.2.4. Do pricing principles currently guide sales strategies or vice versa?
Two of the case companies had sales strategies which were guided by pricing principles, while the
other three allowed sales strategies to guide their pricing. These concepts have bearing on one
another so categorizing the case companies required some judgment. However, each interview
transcript provided sufficient evidence for the categorization of these case companies as either a
sales or pricing driven enterprise. The firms with a premium differentiation were those that placed
pricing before sales. The companies categorized as sales driven enterprises each confirmed this
finding as correct as part of the validation strategy of this research.
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9.3. Impli cations for theory devel opment and future research
The current study describes the pricing strategies and methods in use at five SMEs in the IT service
sector in Finland. The case companies used pricing methods to varying degrees, but all of the case
companies had ambitions to use value pricing. However, on a general level they struggled to
implement their value pricing goals in practice. There is therefore a need for greater dissemination
of knowledge on value pricing methods and their implementation in practice. Continued exploration
of new value pricing methods is also essential in order to bring value pricing as a concept to the
next level.
This paper suggests a framework as a tool for building and maintaining partnerships using two
dimensions: 1) Value-based versus market-based pricing strategies, and 2) On-going versus one-
time revenue models. In this study, the level of value-based pricing was evaluated on the use of 14
different pricing methods. A relative scale was used to emphasize the differences between offerings
among the group of case companies, thus the values found in this study are not directly comparable
to other firms. However, the relevance of using a scaling system for the value-pricing dimension
was verified by feedback from the interviewees.
The level of ongoing versus one-time revenue models used by case companies was evaluated based
on the use of two different pricing methods. A greater number of inputs would have produced a
more robust framework, though the current method also demonstrated the value of employing a
scaling system for revenue models. Further studies could focus on building a more comprehensive
set of factors for both dimensions.
A cross-case analysis resulted in groupings of the case companies into those that had a value pricing
strategy and one-time revenues, and those using market-based pricing and on-going revenue
streams. Some case companies had product lines that followed strategies significantly different
from their main product line from the pricing and revenue model perspectives, and these were thus
scaled separately in the framework for pricing strategies. Most studies to date on partnerships have
focused on sharing of information and expertise or on building cooperation between operational
functions. (Lombardo, 2005; Merhout and Havelka, 2008) In a study on supply chain pricing, Voeth
and Herbst looked for opportunities for suppliers and customers to use pricing as a tool for building
mutually beneficial relationships. In order to reach this goal, they state that pricing must be viewed
65
as a tool for outcome optimization rather than a distributive parameter (2006). In a review of value
added partnerships, J ohnston and Lawrence found that even in commoditized fields such as
construction, contractors make contracts with partners offering reasonable prices, and not always
the lowest bid (1988). Although the literature has attempted to describe pricing as a tool for
partnerships (Voeth & Herbst, 2006; J ohnston & Lawrence, 1988; Porrini, 2006), there has been no
attempt to explain what aspects of pricing and revenue strategies make the most significant
contribution to the success of partnerships (Shipley & J obber, 2001). Sainio and Marjakoski
describe value based pricing and revenue logic as key determinants in building business models, but
do not make the connection between these inputs and the goal of building partnerships (2009). We
addressed this gap in the literature by proposing a framework to assess pricing as a tool for
partnerships based on these two dimensions: 1) value versus market pricing and 2) on-going versus
one-time revenue models. This emergent outcome confirms the finding from previous research that
pricing should be considered at a strategic level.
The dimensions used in the theoretical model were supported by the stated future aspirations of the
interviewees, and can be used by companies to build partnerships with their clients. Those who used
one-time pricing planned to move towards on-going payments and those using market-based prices
planned to move towards value-based pricing.
9.4. Managerial Implicati ons
Pricing should be considered on a strategic level for the sake of profitability and building
partnerships. Managers who find that the value of their offering is superior to the prices they are
charging have the most to gain from pricing strategy in terms of profitability. Those in particularly
competitive markets may see that value pricing is not allowed by market competition, and if they
are using cost-plus or market-based pricing, this may be true. However, a truly limiting factor is
likely to be an awareness of value pricing options available. Data from the interviews demonstrated
that many pricing concepts were new or misunderstood; discounting being the clearest example of
this lack of familiarity.
For firms who see clients as partners and want to build deeper cooperation with them, pricing can
be used as a tool to meet these ends. It is acknowledged that there are numerous dimensions
relevant to partnerships and the claim is not that a carefully orchestrated pricing strategy and
66
revenue model alone will build a partnership. Rather, the implication for managers is that pricing
has been traditionally been treated as a necessary evil of doing business. There are at least three
reasons that this view is wrong. First, customers are not as sensitive to price as generally believed.
Second, a value pricing strategy can align the interests of both parties. Thirdly, an on-going revenue
model can place additional pressure on the supplier to deliver continuous value. The framework
proposed can be used as a strategic tool to build deeper partnerships with clients.
9.5. Strengths and limitati ons
The multiple case study method employed in this study helped to overcome the hurdle of novel
terms by providing clarification of concepts to the interviewees. The interviews were structured
which encouraged comparability between the cases. The integrity of the interview data was ensured
by conducting all interviews within a short time frame, producing full transcripts of interviewee
comments, and translating the complete texts. The framework for using pricing as a tool for
building and maintaining partnerships was based on the literature, particularly research done by
Sainio and Marjakoski, and the final framework was populated with eight different offerings from
the five case companies (2009). The stated future directions of the partnership pursuant firms
supported the validity of the framework as a measure of partner cooperation.
Future research on the validity of these axes as measures of partnership is needed. A refined scale of
measuring the extent of value-based pricing would also help to verify the findings. The measure of
ongoing versus one-time revenue models could be easily improved, at least in theory, by using
direct figures from the companies studied. However, this method is more likely to suffer from
confidentiality issues, even assuming the target companies collect this information in the first place.
9.6. Lessons learned
The thesis project taught about many aspects of both the professional and academic sectors in
addition to the stated findings mentioned earlier. Building a strong structured interview is a difficult
task for a novice researcher and it was important to seek help from someone with more experience
in research. Studying the literature on the case study method of research made clear that there are
many advantages to this method that quantitative methods do not offer. An in-depth understanding
of the companies and a personal connection to the business leaders interviewed may open doors to
67
future collaboration with this particularly strong group of case companies. Building and testing a
framework, which is simple enough to be a useful tool in building pricing strategy, was a satisfying
result of the research process.
68
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11. APPENDICES
11.1. OUTLINE OF THE STRUCTURED INTERVIEWS
1. Introduction
a. Background
b. Confidentiality issues
c. Permission to record the interview
d. History and the current state of the firm
2. Revenue model (general)
a. How would you describe your market and the firm’s position in that market?
b. Describe the revenue model(s) of your firm. (How do you monetize your services?)
c. Has your revenue model changed during the years of operation?
d. What are the future expectations concerning your firm’s revenue model(s)?
3. Revenue model (specific)
a. Do you aim at differentiating your offering?
i. By offering something different?
ii. By increasing the customer’s perceived value compared to the competition?
iii. Through customized prices?
iv. By selling to customers at different prices (eg. depending on their ability to
pay)?
v. Versioning?
vi. By offering choices and allowing the customer to decide?
vii. Group or segment based pricing
b. Do you pursue price (and cost) leadership?
i. Through economies of scale? (serving many customers)
ii. Through economies of scope? (expanding offerings to select customers)
c. What is your revenue model?
i. Sources of revenue?
ii. Forms of revenue? (support services, maintenance, others)
iii. Complementary or alternative offerings
iv. Licensing model
v. How do you strive to keep existing clients? Are clients experiencing
significant switching costs?
vi. Do your customers compare your service prices to the competition? to in-
house?
vii. Do you use pricing as a cue?
viii. What is your general pricing scheme? (Market-based pricing, Margin/Cost
based pricing, Value based pricing)
d. What are your customers’ rights to use your software based on?
i. Time (monthly, annual fee)
ii. Location (office, market area, language area etc.)
iii. User type (company, organization, private individuals, students) and number
iv. Hardware environment (number and quality of processors) and software
environment (operating system, platform, database access, etc.)
v. Transactions (purchase or use frequency)
75
vi. Income (income or profit sharing, royalties, OCM-contracts)
vii. IPR management (source code availability options, rights to further distribute
solutions, restoring derivatives to the original developer)
e. Do you apply some of the following principles in pricing?
i. Cost-plus pricing (markup prices) Describe your cost structure.
ii. Competitive pricing (Neutral parity prices, above market prices, below
market prices)
iii. Life cycle pricing (skimming high entry prices, penetration aggressive low
entry prices
iv. Experience curve pricing
v. Target return pricing
vi. Economic value based pricing (contingency pricing)
vii. Bundling (sticky or non-sticky goods/services)
viii. Discounting (where are discounts common, where are they less common?)
4. Other
a. In addition to yourself, is there someone else who could provide insight about the
revenue model or pricing used in your firm?
b. Are there any documents (about your firm/products) available that would be useful
for my research?
c. Are there other important issues about your revenue models or pricing that were not
included in this interview?
76
11.2. Value pri ci ng factor weights and scores
Table 3: Value pricing factor weights and scores
Pricingmethod Weight Auto-Site
Heatsaving
Co
Multi-
Software
NAV
Consulting
Survey
Blend
Auto-Site
white label
Survey Blend
election machine
HeatsavingCo
deal
Market-based -1 8 1 1 9 8 6 2 1
Competitive -1 9 1 2 9 8 6 1 1
Cost-based -1 6 1 2 8 7 7 2 1
Value based 1 4 9 8 2 4 8 8 9
Price skimming 1 2 8 9 4 2 7 7 9
Customized prices 1 2 1 9 2 7 8 8 1
Lifecycle 0,5 3 5 2 1 2 4 1 7
Experience curve -0,5 1 1 6 6 5 1 1 1
Target return 0,5 7 8 6 4 7 8 8 8
Segment based 1 9 8 5 5 8 9 9 8
Versioning 0,5 9 8 1 6 4 3 1 8
Bundling 0,5 9 9 3 1 9 8 7 9
Pricing as a cue 0,5 9 8 9 8 7 9 6 8
Discounting -1 7 1 6 9 7 1 1 1
77
11.3. Revenue model factor weights and scores
Table 4: Revenue model factor weights and scores
Revenue Weight Auto-Site
Heatsaving
Co
Multi-
Software
NAV
Consulting
Survey
Blend
Auto-Site
White label
Survey Blend
election machine
HeatsavingCo
deal
Hourly based -1 2 1 7 9 3 7 2 1
Licensing 1 9 2 1 6 9 7 1 2
doc_468638575.pdf
The goal of this research is to study the two managerially and academically important issues of 1) the level of value based pricing used in SMEs and 2) pricing strategy as a tool for partnerships.
Pricing Strategy and Revenue Models: A Multiple Case
Study from the IT Service Sector in Finland
Management Science
Master's thesis
Joonas Wuollet
2013
Department of Information and Service Economy
Aalto University
School of Business
Powered by TCPDF (www.tcpdf.org)
Pricing Strategy and Revenue Models
A Multiple Case Study from the IT Service
Sector in Finland
Master’s Thesis
Joonas Wuollet
15.11.2013
Information and Service
Management
Approved in the Department of Information and Service Economy 01.01.2012
and awarded the grade _______________
ii
AALTO UNIVERSITY SCHOOL OF BUSINESS ABSTRACT
Department of Information and Service Economy 15.11.2013
Master’s Thesis
J oonas Wuollet
ABSTRACT
Objectives of the Study
The goal of this research is to study the two managerially and academically important issues of 1)
the level of value based pricing used in SMEs and 2) pricing strategy as a tool for partnerships.
Academic background and methodology
In one of the staple articles on the issue of value-based pricing, Hinterhuber explains that
although the effect of pricing on profitability is quite clear, managers often see pricing as a zero
sum game, where the company’s gain comes only at the customer’s expense. (2004) Managers
often do not pursue value pricing because they perceive customers as quite price sensitive.
However, in their research, Avila and Dodds found that purchasing managers ranked price as the
least important criteria in the decision making process (1993).
Although the literature has attempted to describe pricing as a tool for partnerships (Voeth &
Herbst, 2006; J ohnston & Lawrence, 1988; Porrini, 2006), there has been no attempt to explain
what aspects of pricing and revenue strategies make the most significant contribution to the
success of partnerships. Sainio and Marjakoski describe value based pricing and revenue logic as
key determinants of business models, but do not make the connection between these inputs and
the goal of building partnerships (2009). We addressed this gap in the literature by proposing a
framework to assess pricing as a tool for partnerships based on these two dimensions: 1) value
versus market pricing and 2) on-going versus one-time revenue models.
The multiple case study method employed in this study helped to overcome the knowledge gap
of novel pricing concepts by providing clarification of concepts to the interviewees. The
interviews were structured which encouraged comparability between the cases. The integrity of
the interview data was ensured by conducting all interviews within a short time frame, producing
full transcripts of interviewee comments, and translating the complete texts.
Findings and conclusions
The proposed framework was tested and can be used as a strategic tool to build deeper
partnerships with clients. The dimensions used in the framework were supported by the stated
goals of the interviewees, who each hoped to build and maintain partnerships with their clients.
Keywords
value-based pricing, revenue models, partnerships, pricing strategy framework
iii
ACKNOWLEDGEMENTS
I would like to express the deepest appreciation to Professor Matti Rossi, who provided support
and instilled mental stimulation in regards to my research. I would also like to thank Assistant
Professor Risto Rajala, who gave direction when I needed it most. His selfless advice and
assistance at the outset of this process kept me focused on this topic and I greatly appreciate his
input in helping to build the structure of the interviews. Without his guidance, this study would
not have been possible. I would also like to thank my friend and mentor J aakko Tikkanen, who
inspired me to follow through with my studies. Finally, I express my deepest appreciation to my
lovely wife, Emma who supports me every day and inspires me by employing the highest
standards with her own research, albeit in the dental field. Her encouragement is what brought
this project to a satisfying close.
iv
TABLE OF CONTENTS
ABSTRACT .............................................................................................................................. ii
ACKNOWLEDGEMENTS....................................................................................................... iii
TABLE OF CONTENTS .......................................................................................................... iv
LIST OF FIGURES .................................................................................................................. xi
LIST OF TABLES ................................................................................................................... xii
1. INTRODUCTION ....................................................................................................1
1.1. Background Information ...........................................................................................1
1.2. Value based pricing...................................................................................................1
1.3. Rationale for the study ..............................................................................................1
1.4. Pricing as a tool for partnerships ...............................................................................2
1.5. Research Questions ...................................................................................................3
2. Literature Review .....................................................................................................4
2.1. Focus of the literature review ....................................................................................4
2.2. Pricing as a phenomenon...........................................................................................4
2.3. Pricing as a tool for partnerships ...............................................................................5
2.4. Pricing strategies .......................................................................................................6
2.4.1. Market based pricing .................................................................................................6
2.4.2. Competitive pricing ..................................................................................................6
2.4.3. Cost based pricing .....................................................................................................6
2.4.4. Value-based pricing ..................................................................................................7
v
2.4.5. Price Skimming ........................................................................................................8
2.4.6. Customized prices .....................................................................................................8
2.4.7. Hourly based billing ..................................................................................................8
2.4.8. Lifecycle pricing .......................................................................................................8
2.4.9. Experience curve pricing ...........................................................................................9
2.4.10.Target return pricing .................................................................................................9
2.4.11.Group/ Segment based pricing ..................................................................................9
2.4.12.Versioning /Predetermined choices ...........................................................................9
2.4.13.Bundled pricing ...................................................................................................... 10
2.4.14.Profit and Revenue sharing ..................................................................................... 10
2.4.15.Licensing ................................................................................................................ 10
2.4.16.Pricing as a cue ....................................................................................................... 10
2.4.17.Discounting............................................................................................................. 11
3. Methodology ........................................................................................................... 12
3.1. Research method ..................................................................................................... 12
3.2. Case Selection......................................................................................................... 12
3.3. Data Collection (Interviews) ................................................................................... 13
3.4. Data Analysis .......................................................................................................... 14
3.5. Validation Strategies ............................................................................................... 15
4. Case summaries ...................................................................................................... 17
4.1. Aaron Aho, CEO, Auto-Site .................................................................................... 17
4.1.1. Website building automation ................................................................................... 17
4.1.2. The business model ................................................................................................. 17
vi
4.1.3. A strategy for growth .............................................................................................. 18
4.2. Hans Hänninen, CEO, Heatsaving Co ..................................................................... 19
4.2.1. Driving a process patent to market leadership ......................................................... 19
4.2.2. Invest or Deal.......................................................................................................... 20
4.2.3. Customer retention and service development........................................................... 21
4.3. Markus Määttä, CEO, Multi-Software ..................................................................... 21
4.3.1. From products to a service business ........................................................................ 21
4.3.2. A customer oriented service offering ....................................................................... 22
4.3.3. A relationship business ........................................................................................... 22
4.4. Niklas Nenonen, Chairman of the Board, NAV Consulting ..................................... 23
4.4.1. From legacy ERP software to Microsoft Dynamics NAV ........................................ 23
4.4.2. Transitions in offerings ........................................................................................... 23
4.4.3. Business direction ................................................................................................... 24
4.5. Steffan Salmela, Sales Director, Survey Blend ........................................................ 25
4.5.1. Collecting feedback and completing the communication loop ................................. 25
4.5.2. Directions for growth .............................................................................................. 25
4.5.3. Retaining the customer base .................................................................................... 26
5. Exploring the research questions ............................................................................. 28
5.1. Auto-Site’s pricing strategy ..................................................................................... 28
5.1.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 28
5.1.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 29
5.1.3. Which customer perceptions effect pricing and revenue models? ............................ 30
5.1.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 31
vii
5.2. Heatsaving Co’s pricing strategy ............................................................................. 31
5.2.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 31
5.2.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 32
5.2.3. Which customer perceptions effect pricing and revenue models? ............................ 33
5.2.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 33
5.3. Multi-Software’s pricing strategy ............................................................................ 34
5.3.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 34
5.3.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 35
5.3.3. Which customer perceptions effect pricing and revenue models? ............................ 36
5.3.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 36
5.4. NAV Consulting’s pricing strategy ......................................................................... 37
5.4.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 37
5.4.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 38
5.4.3. Which customer perceptions effect pricing and revenue models? ............................ 38
5.4.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 39
5.5. Survey Blend’s pricing strategy............................................................................... 39
5.5.1. How does the firm’s revenue model relate to differentiation strategy? ..................... 39
5.5.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 40
5.5.3. Which customer perceptions effect pricing and revenue models? ............................ 41
5.5.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 42
6. Usage of pricing strategies ...................................................................................... 44
6.1. Pricing strategies ..................................................................................................... 44
6.1.1. Market based pricing ............................................................................................... 44
viii
6.1.2. Competitive pricing ................................................................................................ 44
6.1.3. Cost-based pricing .................................................................................................. 45
6.1.4. Value based pricing................................................................................................. 45
6.2. Pricing methods ...................................................................................................... 46
6.2.1. Price Skimming ...................................................................................................... 46
6.2.2. Customized prices ................................................................................................... 46
6.2.3. Hourly based billing ................................................................................................ 46
6.2.4. Lifecycle pricing ..................................................................................................... 47
6.2.5. Experience curve pricing ......................................................................................... 47
6.2.6. Target-return pricing ............................................................................................... 47
6.2.7. Group/ Segment based pricing ................................................................................ 47
6.2.8. Versioning /Predetermined choices ......................................................................... 48
6.2.9. Bundled pricing ...................................................................................................... 48
6.2.10.Profit and Revenue sharing ..................................................................................... 49
6.2.11.Licensing ................................................................................................................ 49
6.2.12.Pricing as a cue ....................................................................................................... 49
6.2.13.Discounting............................................................................................................. 50
7. A framework for pricing strategies .......................................................................... 51
7.1. Goals of the framework ........................................................................................... 51
7.2. The scale of one-time versus on-going revenue models ........................................... 51
7.3. The scale of value versus market based pricing ....................................................... 52
7.4. Preliminary groupings ............................................................................................. 52
7.5. Building the dimension weights .............................................................................. 53
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7.5.1. Separation of distinctive offerings ........................................................................... 54
7.5.2. Firm and offering level values for scaling ............................................................... 55
7.5.3. Arriving at final dimension values from scaled factor scores ................................... 55
7.6. Stated strategic goals within the framework ............................................................ 56
8. Discussion .............................................................................................................. 58
8.1. Revenue models’ relation to differentiation strategies ............................................. 58
8.2. The effect of economies of scale or economies of scope on pricing strategy ............ 59
8.3. The effect of customer perceptions on revenue models and pricing ......................... 60
8.4. The relationship between pricing principles and sales strategies .............................. 60
9. Conclusions ............................................................................................................ 62
9.1. Empirical findings of pricing method usage ............................................................ 62
9.2. Findings from the four descriptive research questions ............................................. 62
9.2.1. How does a firm’s revenue model relate to differentiation strategy? ........................ 62
9.2.2. Do economies of scale or economies of scope dictate pricing strategy? ................... 63
9.2.3. Which customer perceptions effect pricing and revenue model use? ........................ 63
9.2.4. Do pricing principles currently guide sales strategies or vice versa? ........................ 63
9.3. Implications for theory development and future research ......................................... 64
9.4. Managerial Implications .......................................................................................... 65
9.5. Strengths and limitations ......................................................................................... 66
9.6. Lessons learned ....................................................................................................... 66
10. REFERENCES ....................................................................................................... 68
11. APPENDICES ........................................................................................................ 74
11.1. OUTLINE OF THE STRUCTURED INTERVIEWS .............................................. 74
x
11.2. Value pricing factor weights and scores .................................................................. 76
11.3. Revenue model factor weights and scores ............................................................... 77
xi
LIST OF FIGURES
Figure 1: Pricing strategy for partnership, preliminary framework ............................................. 52
Figure 2: Pricing strategy for partnership, populated framework ................................................ 56
Figure 3: Stated Strategic goals of the case companies .............................................................. 57
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LIST OF TABLES
Table 1: Preliminary groupings ................................................................................................. 53
Table 2: Pricing methods by value pricing weights .................................................................... 54
Table 3: Value pricing factor weights and scores ....................................................................... 76
Table 4: Revenue model factor weights and scores .................................................................... 77
1
1. INTRODUCTION
1.1. Background Informati on
IT services come in many forms and functions, from time-intensive hourly work to Software as a
Service (SaaS), where the variable cost to serve an additional customer is close to nil. Although
some services are provided free to end-users, the unifying theme in the services industry is that in
order for a business to be successful, someone must be charged a price. For this reason it is
perplexing that pricing is one of the least mastered and researched aspects of marketing (Hoffman,
Turley, & Kelley, 2002).
Not only is pricing often a black box in practice; academics have largely avoided the topic as well.
There are three major issues in service pricing research to date: the challenges unique to service
pricing are not understood, there is no well-defined research direction for service pricing research,
and the pricing of goods and services are being studied in isolation (Hoffman et al, 2002)
1.2. Value based pri cing
Nagle and Holden define value pricing as the price of a customer’s next best alternative plus the
value of differentiating features (2002). In one of the staple articles on the issue of value-based
pricing, Hinterhuber explains that although the effect of pricing on profitability is quite clear,
managers often see pricing as a zero sum game, where the company’s gain comes only at the
customer’s expense. (2004) Other researchers view prices as dictated by the market, and therefore
choose to focus their attention on operational functions. However, according to a study on 200
manufacturing firms completed by Avila and Dodds, when the product in question is critically
important to the customer, salespeople give price far too much weight in the sales process, while
customers actually consider product attributes and service first (1993). It follows that pricing should
be considered a strategic choice, rather than a precedent given by the market.
1.3. Rati onal e for the study
Having opened the realm of pricing to a strategic discussion, the theoretical gaps, which the current
study addresses, can be specified. The larger gap in the literature is the small number of studies that
2
focus on pricing. Malhotra found that pricing was the subject of less than 2 percent of studies
published in major marketing journals (1996). Even a more recent empirical study still found that
less than 5% of articles in the Journal of Business-to-Business Marketing cover the topic of pricing.
(Dant & Lapuka, 2008) Nagle and Holden go as far as saying few professional managers consider
pricing in a strategic sense (2002).
While the general lack of focus on pricing in the literature is quite easily demonstrated, the lack of
qualitative studies on the topic is more difficult to evaluate. Most research in the area of pricing has
made use of questionnaires or metadata analyses (Hogan, 2001; Lancioni, Schau, & Smith, 2005;
Sainio & Marjakoski, 2009). While these methods have shown some light on macro effects of
pricing, their ability to link real-life phenomenon to theory is somewhat lacking (Benbasat,
Goldstein, & Mead, 1987). Therefore the current study uses a multiple case study approach in order
to more precisely define the decision making processes which take place within case firms as part of
their pricing processes. If we have a more robust understanding of the pricing decision making
process, future research can find contextual differences which encourage use of different methods
of strategic pricing. With case research, value-based pricing as a process within a firm can be more
clearly described (Ulaga, 2003). In this study, a current cross-section of pricing as a strategic tool is
assessed based on data from structured interviews with leaders of five SMEs in the IT service sector
in Finland. This study also demonstrates pricing as a tool for building partnerships, which is
supported by an emergent framework of pricing strategies.
1.4. Pricing as a tool for partnerships
Most studies to date on partnerships focus on sharing of information and expertise or building
cooperation between operational functions. (Lombardo, 2005; Merhout and Havelka, 2008)
However, some studies have brought the discussion of pricing as a tool for partnership to the next
level. In a study on supply chain pricing, Voeth and Herbst look for opportunities for suppliers and
customer to use pricing as a tool for building mutually beneficial relationships. In order to reach this
goal, they state that pricing must be viewed as a tool for outcome optimization rather than a
distributive parameter (2006). In a review of value added partnerships, J ohnston and Lawrence find
that even in commoditized fields such as construction, contractors make contracts with partners
offering reasonable prices, and not always the lowest bid (1988). Although the literature has
attempted to describe pricing as a tool for partnerships (Voeth & Herbst, 2006; Johnston &
3
Lawrence, 1988; Porrini, 2006), there has been no attempt to explain what aspects of pricing and
revenue strategies have the make the most significant contribution to the success of partnerships
(Shipley & Jobber, 2001). Sainio and Marjakoski describe value based pricing and revenue logic as
key determinants of business models, but do not make the connection between these inputs and the
goal of building partnerships (2009). We attempt to address this gap in the literature by proposing a
framework to assess pricing as a tool for partnerships based on these two dimensions: 1) value-
based versus market-based pricing and 2) on-going versus one-time revenue models.
1.5. Research Questi ons
The goal of this research is to study the two managerially and academically important issues of 1)
the level of value based pricing in SMEs and 2) pricing strategy as a tool for partnerships. To reach
that goal, this study will focus on the following research questions:
1. How does a firm’s revenue model relate to differentiation strategy?
2. Do economies of scale or economies of scope dictate pricing strategy?
3. Which customer perceptions effect pricing and revenue model use?
4. Do pricing principles currently guide sales strategies or vice versa?
5. How can pricing strategies be categorized in a useful manner?
4
2. LITERATURE REVIEW
2.1. Focus of the li terature revi ew
This literature review will follow the guidelines laid out by Hart, who states a literature review
should contain serve the following 11 purposes in research:
1) distinguishing what has been done from what needs to be done;
2) discovering important variables relevant to the topic;
3) synthesizing and gaining a new perspective;
4) identifying relationships between ideas and practice;
5) establishing the context of the topic or problem;
6) rationalizing the significance of the problem;
7) enhancing and acquiring the subject vocabulary;
8) understanding the structure of the subject;
9) relating ideas and theory to applications;
10) identifying the main methodologies and research techniques that have been used;
11) placing the research in a historical context to show familiarity with state-of-the-
art developments (Hart, 1998).
While quite a long list of requirements, a comprehensive literature review will provide a solid basis
for the subject of the research.
2.2. Pricing as a phenomenon
Everything is worth what its purchaser will pay for it.
-Maxim 847 of Publius Syrus, first century AD (Lyman, 1856)
5
As seen from the timeless ponderings of a first century philosopher, pricing has claimed the interest
of generations, and for good reason. Of E. Jerome McCarthy’s four P’s of marketing, price has the
most direct effect on a firm’s bottom line. In his research, Andreas Hinterhuber finds that on
average, a five percent increase in price leads to a 22 percent improvement in operating profits
(2004). According to the basic economic laws of supply and demand, an increased price can
decrease demand. However, depending on the elasticity of demand, this can in turn increase or
decrease revenues. Marn and Rosiello make the importance of pricing quite clear in finding that
holding other factors steady, a single percent increase in price can mean an 11.1 percent increase in
operating profitability, while a single percent increase in volume will only raise profits by 3.3
percent (1992). It follows that poor pricing often leads to poor financial performance, while proper
pricing often increases operating profit. For this reason it is perplexing that pricing is one of the
least mastered and researched aspects of marketing (Hoffman et al, 2002). Nagle and Holden define
pricing strategy as “coordination of interrelated marketing, competitive, and financial decisions to
maximize the ability to set prices profitably”. They also go as far as saying few professional
managers consider pricing in a strategic sense (2002). While research in the area of pricing has
picked up since the early 1990s, much of the research has focused on pricing methods more relevant
to products than services (Avlonitis & Indounas, 2007; Bonnemeier, Burianek, & Reichwald, 2010;
Demirkan, Kauffman, Vayghan, Fill, Karagiannis, & Maglio, 2008; Hultén, Viström, & Mejtoft,
2009).
Arriving at the correct price in the cost-based pricing realm can be an important exercise. However,
as a strategic tool, prices can reflect the value the customer perceives rather than the cost ensued to
produce the good or service (Anderson & Narus, 2004). Although other researchers have explored
the theoretical advantages of value pricing (Narayandas, 2005; Avila& Dodds, 1993; Hinterhuber,
2004), and perhaps due to the novelty of some pricing concepts, little research has been undertaken
to explore the current level of usage of value pricing methods in practice at SMEs or otherwise.
With this research, we attempt to address this gap in the literature.
2.3. Pricing as a tool for partnerships
Most studies to date on partnerships focus on sharing of information and expertise or building
cooperation between operational functions (Lombardo, 2005; Merhout & Havelka, 2008). Other
studies have proven the concept a step further by measuring value creation resulting from alliance
6
announcements (Anand & Khanna, 2000; Neill, Pfeiffer, & Young-Ybarra, 2001). Porrini considers
whether alliance value creation is a zero sum game, hypothesizing that alliances allow firms risk
management by offering incremental commitments to new strategies (2006). All of these studies
attempt to describe the inter-organizational cooperation phenomenon, either what makes it work, or
what could be done to improve these partnerships. However, a review of the literature found no
attempt to explain what aspects of pricing and revenue strategies most affect the success of
partnerships. We attempt to address this gap in the literature as well.
2.4. Pricing strategies
2.4.1. Market based pricing
The default method of pricing for many firms is using market prices. Many managers feel prices are
dictated by the market and they have little or no control over them (Dolan, 1995). However, there
are two very different perspectives from which a market-based price can be derived. The reference
price may be from the product or service, which is viewed as most similar to the firm’s own
offering. In their paradigm-shifting book, Nagle and Holden claim that the reference point should
rather reflect the customer’s perceived alternative to a particular offering (2002).
2.4.2. Competitive pricing
The distinction between competitive pricing and competition based on pricing should be made clear.
Competitive pricing, or the pricing of an offering based on what the competition is charging is most
common in markets where many substitutes are available. Anderson and Narus define competitive
pricing as simply setting prices relative to what competitors are charging (2004). Competition based
on price is the practice of undercutting prices offered by competitors, and is not a sustainable
growth strategy, particularly if it sparks a price war (Nagle & Holden, 2002).
2.4.3. Cost based pricing
Cost pricing or cost-plus pricing is the practice of adding some percentage to known costs to arrive
at the offering price (Anderson & Narus, 2004). Nagle and Holden state that while cost must be
taken into account in pricing decisions, the cost-plus pricer often uses an inefficient chronology of
steps in the pricing process. The method involves setting a volume first, and constructing a cost
based price from that. A more efficient method is to begin by determining a value that customers
can accept and building the market and quantity numbers from there (2002).
7
2.4.4. Value-based pricing
Value based pricing can be defined as setting a price in relation to an offering’s value (Anderson &
Narus, 2004). The reason many managers do not pursue value pricing is that they perceive
customers as quite price sensitive. However, in their research, Avila and Dodds found that
purchasing managers ranked price as the least important criteria in the decision making process.
Sales managers, on the other hand, perceived price much higher on the list of criteria. This
demonstrates their lack of understanding of what is critical in the purchasing process (1993).
A price increase can bring either an increase or decrease in revenue depending on the elasticity of
demand (Hoffman et al, 2002). Nagle and Holden suggest 10 factors which influence customer
price sensitivity in the context of services (2002). They proposed that price sensitivity decreases as
the customer’s ability to build an inventory decreases. Lee and Ng continue this line of thought and
find that more capacity should be saved for the time of consumption as price sensitivity decreases
(2001). The factor which perhaps most directly lends itself to value-based pricing is that price
sensitivity decreases the less price-sensitive customers are to the end benefit (Nagle & Holden,
2002). If the value of the end benefit is central to price sensitivity, the next question is how end
benefits can be quantified. In his research, Hinterhuber stresses that by gaining a clear
understanding of the value sources from the customer’s perspective, under-pricing products,
particularly innovative products, can be avoided. He goes on to describe the process of
implementing value pricing. (2004) While his article describes the value analysis process in depth,
the methods of implementation are only briefly listed. Little research has been undertaken to
understand to what extent firms, particularly service firms, pursue value based pricing. In a more
recent article written together with Stephan M. Liozu, Hinterhuber studied the extent to which CEO
advocation of pricing impacts both pricing capabilities and firm performance (Liozu & Hinterhuber,
2013). While that article takes the discussion to the end benefits of pricing, the intermediate step in
the value pricing process remains largely open. The aim of the current study is therefore to fill that
gap in the literature. The IT industry has been chosen for this study due to the apparent difference
between the cost to produce and the value provided by the various technologies, and the resulting
opportunity to use value based pricing strategies. The current study aims to investigate the extent to
which SMEs in the IT service sector employ different pricing strategies, to describe the internal and
external factors which affect pricing methods, and to build a theoretical framework to describe the
8
relationship between the various pricing strategies. Next we will review the literature on pricing
methods.
2.4.5. Price Skimming
If the objective of pricing strategy is to build market share, low penetration pricing is often
recommended (Nagle & Holden, 2002). However, if the goal is to capture as much of the customer
perceived value as possible, “price skimming” might be the method of choice. Price skimming
relies on the assumption that different customers value an offering at different prices. The technique
involves introducing a new offering at a high price and lowering the price over time, so that as
much as possible of each consecutive level of valuation is captured (Gebhardt, 2006). Price
skimming can be a brief process, but sometimes premium prices are drawn out over years.
2.4.6. Customized prices
While customized pricing in consumer markets is at best slow, and at worst, illegal, it is common
practice in B2B markets (Simon & Butscher, 2001). Clients may have such large differences in
needs that a firm must provide a different solution to every customer. Due to this reality, the use of
customized prices is also widely accepted, even expected, of firms. When the usage of the offering
is what provides the value, a customized price can be built which reflects this unique value
(Narayandas, 2005).
2.4.7. Hourly based billing
Although billing by the hour is one of the most used methods of pricing labor, as workers in
developed economies becomes more skilled and specialized the usefulness of this method is
diminishing. Baker finds that hourly fees are the wrong way to measure value firms provide for
clients (2009). Often, the hourly fee is used due to the perception that it most directly correlates to
cost, but this is not always the case (Scott, 2006).
2.4.8. Lifecycle pricing
Nagle and Holden encourage contemplation of a product’s price through four phases: development,
growth, maturity, and decline (2002). As a long-term concept, its implementation may take years to
complete. The realization of lifecycle pricing procedures may take even longer. For this reason it
can be difficult to observe or comment on its use in newer companies.
9
2.4.9. Experience curve pricing
Experience curve cost cutting goes back to beyond Henry Ford and the Model T, although the first
article on the subject was not published until 1936 (Hirschmann, 1964). In his classic article in the
Harvard Business Review, Hirschmann refers to the experience curve phenomenon and the
resulting price decrease that Ford achieved (1964). In more recent research, the slope of price
decreases in competitive markets is more accurately measured and these tools are suggested for use
in predicting future price decreases as well (Gottfredson, Schaubert, & Saenz., 2008).
2.4.10. Target return pricing
Target return pricing is often used interchangeably with cost-plus pricing. The method’s ease of use,
an assumption of good sales estimates by managers, and close-enough attitudes are factors which
have encouraged its adoption. Brooks claims that the additional time and effort to produce a better
price point may not be offset by the rise in precision (Brooks, 1975). However, already during the
same period, target return pricing had its adversaries. The method is labeled naïve, and less than
precise, although at that time few superior pricing techniques had become mainstream (Kamerschen,
1975).
2.4.11. Group/ Segment based pricing
Buyer grouping or segmentation allows a company to offer an appropriate price to groups of
customers with differing willingness to pay. Each level is carefully separated using a number of
different tactics (Chesbrough, 2010). If taken to an extreme segmentation can be illegal, but many
legal methods are available. Segments do not separate themselves, but require careful consideration
by the firm to distinguish differences in what customers value and how much (Nagle & Holden,
2002).
2.4.12. Versioning /Predetermined choices
In their now classic article on versioning, Shapiro and Varian took the marketing theory of
information goods to a new level. They assert that versioning is not a new way of doing business,
but rather a method used to apply the tested concepts of segmentation, differentiation and
positioning to a new type of offering; namely information goods (1998).
10
2.4.13. Bundled pricing
It is important to note that price bundling of two or more products which are not inseparable from
the customers’ perspective also requires discounting. However, this type of discounting is not in
conflict with value pricing per se, as there is no additional value perceived by the customer which
would demand a premium (Sharma & Iyer, 2011).
2.4.14. Profit and Revenue sharing
Profit and revenue sharing schemes can essentially turn a traditional supply chain into a value chain.
Cachon and Lariviere name the practice “turning the supply chain into a revenue chain” and
describe the practice used by blockbuster in its heyday, which gave studios producing content a
share of rental fees while requiring a lower purchase price for the tapes (2001). They argued already
then, that the practice would be applicable to high technology in particular, due to the high up-front
costs of equipment and the price sensitivity of customers to a relatively new technology. Nagle and
Holden also come to the same conclusion, observing that price sensitivity decreases as shared-costs
for the expenditure increase (2002).
2.4.15. Licensing
Licensing as a business practice began long before software. However, from the success of
Microsoft, among others, it seems that the business model was made for these offerings. Besides
allowing scaling of software products, licensing can also be used to launch a national brand,
penetrate new markets, share investment risk, build brand awareness, increase profitability of
existing products, revive mature product lines, control subsidiaries, or to build a franchise (Quelch,
1985).
2.4.16. Pricing as a cue
Assuming that buyers find a reference price and compare an offering based on the perceived value
differential, price can be used as a signal of the value of an offering. The signal can be either “this is
a deal” or “this must really offer something special”, depending on whether the price is lower or
higher relative to reference points in the market. In any case, pricing is not used as a cue for the
sake of making a point. Rather, the goal is to benefit from the client perception, for example
through cross selling to clients who feel a firm provides a great value on a single product (Dolan,
1995).
11
2.4.17. Discounting
Many researchers including Teng (2009), Tsao (2009), and Choi and Coulter (2012) have studied
the phenomenon of discounting in retailing and other B2C settings. Despite the prevalence of
discounting in B2B situations (Frenzen, Hansen, Krafft, Mantrala, & Schmidt, 2010), far less
research has been conducted on the phenomenon of discounting in these contexts. In their study on
the delegation of pricing authority to the salesforce, Frenzen et. al. find that rigid sales pricing
policies are not the answer, but rather, salespeople should be given sufficient autonomy to price
according to context, especially in the face of uncertain markets (2010). In a single-vendor multi-
buyer context, however, Sinha and Sarmah find that specifically under a level of uncertainty,
coordinated discounting is not an efficient method of building channel profitability (2010).
In his paper on value-based pricing, Hinterhuber offers the use of discounts as a method of
introducing higher prices by first offering a “discount” on a higher price. After this period of
enjoying a discount, the buyer is then much more receptive of the higher price, as it is simply the
end of a temporary discount (2004). While their research focused on the angle of sales force
productivity, Siguaw, Kimes, & Gassenheimer found that the use of discounting to land “national”
customers often led to lower profitability (2003). On the other hand, Siguaw et. al. also found that
discounting off-peak capacity which would have otherwise not been sold was seen as fair pricing
(2003).
12
3. METHODOLOGY
3.1. Research method
The status of pricing strategies in IT sector SMEs is quite diverse. Some use the same hourly
pricing they have since their founding, while others use licensing or value based pricing.
Unfortunately, the single common factor most firms share in the area of pricing is a lack of
understanding of the options available (Hoffman et al, 2002). While it would offer a higher level of
statistical validity, a survey on the topic would fall short of creating accurate information due to this
pervalent lack of familiarity with not only the pricing options available, but the relevant
terminology as well (Roethlisberger, 1977). Because the goal of this research is to more precisely
describe the pricing strategy and decision making processes which take place within SME firms, it
is critical that the descriptions given are not only accurate, but also provide more depth than
provided by a Likert scale (Miles & Huberman, 1994). While a single case study research design
could alleviate this issue of depth, focusing on a single company would fail to populate the
theoretical framework at a meaningful level and critically restrict the universality of any findings.
Interviews of hundreds of company leaders would provide the background for universal
applicability of findings, but this is not possible due to the lack of resources in a Master’s thesis
(Benbasat et. al., 1987). For these reasons this study is based a multiple case study design. Case
studies and other such idiographic research strategies are particularly suited for describing
deepening understanding an observable phenomenon in its context (Davis, Frankz, & Robey, 1984).
The case study strategy of research suits the goal of capturing knowledge from professionals and
using this knowledge to develop theories particularly well (Benbasat et. al., 1987). Studying
multiple cases will help to balance the competing priorities of populating the proposed framework,
the universality of findings, and managing the lack of familiarity with current pricing concepts
among the SME leaders interviewed.
3.2. Case Sel ecti on
In order to achieve a meaningful sample of perspectives, while allowing a substantial depth of study
for each one, five case companies were chosen. The companies were chosen based on several
criteria. Their revenues, apparent stress on one-time or on-going revenue sources, and the apparent
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level of traditional cost or market based versus value-based pricing were considered in order to
provide a diverse set of perspectives for the framework. According to the prescribed criteria, one
case company had revenues of less than 500,000€, one had revenues of over 10MEUR, and the
remaining had revenue levels between these two extremes. Two of the case companies had clearly
communicated on-going revenue models while the other three communicated a mix of on-going and
one-time revenue streams on their websites. Based on the interviews, the actual levels of ongoing
versus one-time revenue models were found to quite closely follow the expected methods. The level
of value pricing used in the case companies was difficult to identify prior to the structured
interviews. However, the level of value based pricing methods used was diverse enough to populate
the framework at a meaningful level. Although diverse offerings were not a set priority of case
selection, the case companies had somewhat different offerings. Key product and service offerings
included website building software, integrated thermostats, ERP implementation services, custom
software services, and evaluation tools. Software plays a role in the offering of each of the case
companies, which was preferred due to the potential for high discrepancies between cost and value
provided, and the consequent opportunities it provides for value pricing. Once target companies
were listed, I simply called the prospective leaders (CEO, Sales Director, or Chairman of the board)
and asked them for a structured interview requesting that it take place in the next two calendar
weeks. After contacting six potential leaders, I had five interviews set up and did not call through
the rest of the list of prospective interviewees. (The sixth one called me back later, to which I
explained that the allotted slots had been filled.) Thus, each of the participants opted in at their own
discretion.
3.3. Data Collecti on (Intervi ews)
Interviews were conducted with the CEO, Sales Director, or Chairman of the Board of the
respective case companies. Interviews lasted 30 to 90 minutes depending mostly on the preparation
level of the interviewees and took place in the company’s premise or another location chosen by the
interviewee. Approximately one week before each interview, I emailed the interviewee with an
outline of the questions and topics I planned to ask. The interview outline was based on the
literature review and included 1) background information about the company, 2) their business and
revenue models, 3) questions about the extent to which they employed the pricing methods and
revenue models uncovered in the literature review, and 4) future expectations for each of the
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previous areas. Risto Rajala, an assistant professor of Operations Management at the Aalto
University School of Science, was consulted on the interview outline due to his familiarity with the
case methodology and experience with software companies particularly from his doctoral
dissertation work (Rajala, 2009). Interviews were conducted according to the structured outline in
order to promote comparability of the case companies during the data analysis phase (Miles &
Huberman, 1994). I took notes during the interviews, but I also made audio recordings, which were
used to produce a full transcript of each interviewee’s comments. One interview was conducted in
English due to the participant’s proficiency in English and his request to do so. The other four were
conducted in Finnish according to the preference of the interviewees. According to the guidelines
set out by Benbasat et. al., at the beginning of all interviews I reviewed confidentiality issues and
received permission for an auditory recording of our discussion. I ensured all participants that
pseudonyms would be used for names, and any figures mentioned could be disguised to protect
confidential information. Lastly, the interviewees were ensured that the publishing of any text
concerning them, the company, or others mentioned would be done only with their approval of the
final draft (1987). Interviews were completed in the space of two weeks in order to minimize
variance in protocol (Benbasat et. al., 1987). The interview questions can be found in the
appendices.
3.4. Data Anal ysi s
Once all of the interviews had been completed, interviewee statements were transliterated word for
word from the audio recording and translated into English. The single interview completed in
English was simply transliterated. Each interview text was then edited for grammatical errors and
sentence structure with the goal of making it more usable in an academic context (Miles &
Huberman, 1994). At the same time, great care was taken to preserve the style and spirit of the
interviewees’ statements despite many cultural and contextual differences between the Finnish and
English languages. I have worked as a translation consultant for four years, and concluded that my
skills suffice to preserve the style and spirit of the interviewees’ message, so a third party translator
was not used. The separation of the steps in arriving at a useable text, namely, transliteration first
and then translation minimized the chance for error in interpretations. According to Eisenhardt’s
recommendations on theory building case study research, the cases were then each studied
separately to “become intimately familiar with each case as a stand-alone entity” (1989). Next, the
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texts were coded for references to the first four research questions and the named research questions
were analyzed and discussed case by case. This approach was recommended by Miles and
Huberman, who argue that studying content through continued readings alone can lead only to a
practical understanding, but not empirical findings (1994). Finally, a cross-case analysis was used to
search for patterns in the relationship between different pricing strategies (Eisenhardt, 1989). A key
element of case study research is maintaining a chain of evidence. The attainment of this goal is
measured by the ability of an independent researcher to come to the same conclusions given the
information contained in the study report (Yin, 2003). In addition to the case summaries, coding,
and cross-case analysis, the full transcripts of all interviewee comments are available from the
author at request.
The second phase of data analysis involved replicating the hypothesized framework for using
pricing as a tool for partnership. This involved naming the factors pertaining to the two axial
concepts: value versus market pricing and ongoing versus one-time revenue models. Each factor
was assigned a weight reflecting its impact on the overall level on the concept. Once these factors
had been identified from the case data, each case company was assigned a value reflecting the level
at which it applied each factor. Some of the case companies had another major offering, which
differed from the firm’s main offering in the two dimensions studied, and these were thus scaled
separately. Replicating the axes of the framework with case data showed evidence for the suggested
partnership through pricing framework.
3.5. Validation Strategies
In order to provide triangulation of analysis, and to take advantage of this particular strength
available to case study research, two sources of evidence were collected of each of the case
companies (Yin, 2003). The initial process of selecting case companies began with a company
search on finder.fi in order to find suitable SME candidates for the structured interviews (Fonecta
Oy, 2013). Candidates were selected on the previously mentioned criteria based on information
available from their respective websites. Information about the product and service offerings of the
different companies were inferred from these websites in order to make final changes to the
interview structure prior to contacting the case companies. According to Yin, interviews can be the
sole source of evidence for case studies, but the use of their websites was necessary to fill the
selection criteria for case companies (2003). The final method of triangulation was to contact each
16
of the case company leaders originally interviewed a second time. Each interviewee was given a
copy of this report, asked to verify that the findings were correct, and given the chance to correct
any miscommunication or other error.
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4. CASE SUMMARIES
Although the focus of this research is the pricing strategies and revenue models of the case
companies, it is necessary to begin by becoming familiar with each of the separate entities
(Eisenhardt, 1989). Each of the companies had a distinct offering, and in some ways it appeared that
a use of software in their offerings was the only common factor.
4.1. Aaron Aho, CEO, Auto-Site
4.1.1. Website building automation
Auto-Site was established in 2008 as a technical website service for marketing and advertising
agencies. Theirs is a specialized niche, which is built upon economies of scale within the technical
side of building websites. They realized that not only could the technical aspects of a website be
repeated with minimal manual work, but that this method would also minimize uncertainties for the
end customer.
At that time we thought about how similar it is to provide the technical side across
projects, despite the differences in projects on the content and layout side. So that is
where we started. We thought we should try to build a common platform where we
could find advantages for advertising agencies to build websites more easily, more
quickly, and with exact pricing and delivery times.
Their core end customer base is anyone who needs a website short of a portal. A typical scenario
goes as follows: The client contacts a marketing or advertising agency who takes full responsibility
for the client and the project. The agency chooses a technical partner to do the actual coding. At
Auto-Site, the agency opens an account for the client and immediately has a full slate of technical
tools at their disposal. This allows a predictable price and delivery date for the project; a rarity in
the website business.
4.1.2. The business model
How we do business is we have a mass product. We don’t focus on big projects; it’s
more about getting a lot of customers. The way to get there is to get a lot of
advertising agencies to sign up and use our product, and to educate them on how to
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use the product. We remind them to use our product, because they do not have to sell
our product, it is just an option for them. We are confident that if they try it out with a
few sites and a few projects, they will bring all of their customers and all of their
projects in. And that is where we will make money, because we do not have to allocate
any resource or programmers’ time, or hire new people whenever we open a new
account. We just open a licensed account for them and they can start providing all
kinds of sites for their customers.
The business model has come a long way from a beginning of direct marketing. However, through
trial and error, they have found that sales people did not have enough knowledge of the complete
website building process and thus preferred that agencies be the ones bringing in new accounts. At
the same time, this allows growth without the overhead of a large sales force. However, Auto-Site
also offers a white label product to larger entities.
That is a model for big operators who already provide their clients with email
addresses and file storage and other services. They have a problem: their clients are
changing providers to cloud services because many of these cloud services bring in
the software and they have included the service side as well. They could not provide
those extra services. For those operators, we give the option to start selling our
product as a white label product, so it is actually branded as if it was their own
product. We take care of the technical side and we take care of as many aspects as
they like. We price the model based on those demands.
4.1.3. A strategy for growth
The growth strategy at Auto-Site is to create one very solid good product around which to create a
following. Once they have reached broad market acceptance, there are many avenues for creating
and introducing new products and revenue models. While the few competitors they have seem to
cater to the upper echelons of the market, Auto-Site is aimed at the mass market with the whole
package of options available to all customers and at an inexpensive price level. They have invested
heavily in ease of use and pricing is also straight-forward with a setup fee and an annual license fee.
Clients can switch marketing or advertising agencies and continue using the same software with
their next partner.
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Let’s say you change and update your website annually. You always have to find a
new operator to upload your files with a website files tool. Every year, you have to
learn a new way to update the site. This becomes very complicated for the customer
and it is annoying because if you look at it from the client’s perspective, they just want
to update the layout. The advertising agency or partner who makes the website always
uses some software. So we keep telling our end customers that whenever you want to
create a new layout and update your site you don’t have to switch away from our
platform. You can just find a new partner to do the job and stick with this platform so
you will still retain your user statistics of who is looking at your site. You can use the
updater possibilities and always use the same user interface to accomplish this goal.
You will not have to go through the annoying processes each time you have to update
the website. Most importantly, you do not have to pay the technical fees each time,
which run from 1000-5000€ for one project.
4.2. Hans Hänninen, CEO, Heatsaving Co
4.2.1. Driving a process patent to market leadership
Heatsaving Co was established in 2002, and was acquired by its current management in 2011. At
the time of acquisition, the company owned a valuable patent and historical data of installations
showing significant savings in heating costs. With district heating costs on the rise, every unit of
energy saved is becoming more and more valuable. Hans sums up how they have transformed the
market:
Previously, the market was made up of manufacturers and contractors. They were
separate companies, and neither of these were responsible for the whole picture. We
have our own equipment, i.e. the method of creating savings. Then we have our own
installation, or service, and we have a warranty securing the investment In other
words, we have a savings guarantee and a satisfaction guarantee. That is, we take
overall responsibility for heating related issues. We are the fastest growing operator
in the energy savings sector in Finland.
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Heatsaving Co‘s process patent is on a method which, on average, reduces heating costs by 17
percent. This turnkey solution provides appraisal, installation, and maintenance packaged together.
There are other operators in the market, but Hans does not see them as a major threat.
End customers may compare us to some automation suppliers, or other alternative
suppliers, but we are superior in comparison, so that is not a problem for us. There is
remote monitoring and heating control based on the weather forecast but they have
not really taken off in Finland, or the rest of the world… In terms of volume, we had
our first good year of sales last year, with over 700 installations, while our main
competitor with a forecasting model has completed 400 installations in the last 5-
years. This illustrates the situation quite well.
4.2.2. Invest or Deal
The Heatsaving Co solution can be purchased using one of two schemes. The Invest option is a one-
off payment, which includes the unit and maintenance costs within a single price. Upon purchase,
all energy savings go directly to the housing cooperative. The price is affected only by the size of
the building and the typical payment period is less than two years. Hans describes the other option:
Then we have a “deal model” which is aimed at "poor" housing cooperatives, which
do not have the cash immediately available, even though the savings are obvious. The
annual fee for that is about 500 euros, and the resulting savings are divided over the
five-year period. That is, for the first two years, the resulting savings are divided
evenly, and then our share of the savings declines consistently. That is, in the last year,
we claim only five percent of the savings, while 95 percent goes to the housing
company. In the 6th year, the equipment and all the resulting savings are received
directly by the housing company.
In addition to the new business model and service packages, Heatsaving Co has made it standard
practice to review district heating charges with their energy company partners and these savings
also directly benefit the customer. However, despite the multiple perspectives employed, what is
most critical for the customer is a good payback time.
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4.2.3. Customer retention and service development
Heatsaving Co differentiates from the competition most clearly in being active with customers.
They meet with over 1000 housing cooperatives on an annual basis. However, it is not only the
volume, but also the content, which counts in customer contacts.
We retain our existing customers because we offer them such a significant savings, we
report on the savings results, and we serve the end users (the residents) well. We
monitor consumption on a monthly basis and report the results every three months to
the property manager and, consequently, the Board of Directors. In this way, we keep
them in our control… Our sales representative will call and tell them, “Hey, I have
reports for the last three months; can I come for a visit?” So they say, of course, come
here and let’s look at it together. It is a good opportunity for further sales. Being the
“bearer of good news” means that it is easy to make more sales.
Heatsaving Co plans to offer energy maintenance services and other additional on-going services to
their existing and future customer base.
4.3. Markus Määttä, CEO, Multi-Software
4.3.1. From products to a service business
Multi-Software was established in 2000 as a software products company. They began to sell
services in the form of projects in order to finance product development and grew both business
models side by side. In 2008, they made the decision to focus purely on services. Markus describes
the market situation:
Our service business is a market, which from the top down, can be divided into two
categories. We have the big giants including Tieto, Accenture, Logica, CGI and so on.
Then there are our kinds; young and different types of small but rapidly growing
companies. This dichotomy is pretty clearly noticeable. We operate here in our own
category, and challenge the big guns, but maybe using a little different means. Our
position in the market is perhaps within the so-called new school, newer, younger, and
more flexible companies, and I see our position as the cutting edge... It depends on
22
how you define the market, but in any case, size-wise, we are quite small. If you
include everyone, we have about one and a half percent of the market share.
4.3.2. A customer oriented service offering
When Multi-Software made the strategic move to services, their portfolio of offerings became more
diverse. The simplification of the business opened opportunity to cater more directly to client needs.
In 2008, we clearly left technology and we have little by little introduced
implementation design, service design and, most recently consulting, which allowed
us to move into maintenance services and more. In this way, we have differentiated the
various stages and have brought added value to customers.
As Markus sees it, they rarely write blocks of code for one customer, which easily fill the needs of a
different customer. When they do come across a common need, there is usually a block of open
source code they can use which fits the bill more readily than in-house recycled code. They have
also avoided reselling third-party software, although sometimes they will discuss a customer’s
capability of building some software themselves. This is part of their philosophy on how they
manage customer relations.
4.3.3. A relationship business
We try to keep our existing customers by doing damn good work. That is, we do not
have any strategy with which we tie down customers, or commit them to us in a
negative way. Of course it is natural that the more we do for them, the more they
become tied to us… If the customer is forced to work with us, it creates a relationship
of confrontation. With everything we do, we aim to do such good work, and handle
things so well, that the client wants to work with us. We do not use built-in logins or
build such difficult-to-maintain software that they have to buy our maintenance
service because no one else is able to do it. We seek to retain clients through positivity,
and not by using hooks, or other such tactics. From us it requires constant
communication, a consistently good attitude, and continually doing good work. It
begins with culture, it begins with attitude, and it begins with how we care about what
we do, and our attitude of commitment.
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Pricing at the top of the market presents a challenge even for a customer oriented company. On the
other hand, Markus explains that whether the customer is willing to pay a higher price is a good
indicator of how well they are delivering the promised value. The comparison to competitors’ prices
is what pushes the team to work at the highest level. While some potential clients may be shopping
around to avoid spending too much on a project, at Multi-Software they have made a clear strategic
decision to focus on value.
Our customers compare our prices to our competitors, and what we want the
customer to say is that, man, you are expensive, but worth it. Yes, it works like this. If
the client sees us as cheap and good, then it is the wrong message.
4.4. Niklas Nenonen, Chairman of the Board, NAV Consul ting
4.4.1. From legacy ERP software to Microsoft Dynamics NAV
NAV Consulting was established in 1992 and it all started when the company where I
and a few other owners were employed folded do to the recession. We took up a
specific part of the previous company's business, mainly the rights to their industrial
and wholesale financial management software and business. At the time, we worked
with IBM and microcomputers, and we had developed software for IBM server
hardware called Navis. Our customers were a few subsidiaries of a large oil company,
mainly in the industrial and wholesale sectors.
NAV Consulting sold and maintained their own software for over 10 years before strategically
replacing it with Microsoft Dynamics NAV. As a reseller of Microsoft ERP systems, they have
delivered complete projects for about 100 clients. Their core client base is medium sized businesses
with 3-50 MEUR in revenues, primarily in the industrial and wholesale sectors. The software is
supplied by fewer than 10 resellers in Finland and is constantly gaining market share as a platform.
4.4.2. Transitions in offerings
Although NAV Consulting’ core offering of an all-encompassing ERP system has remained, the
peripheral offering and delivery has changed.
Our earnings include personnel work, which consists of design, consulting, training,
and application development work. Part of our revenue comes from license sales,
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which is based on the software licensing… When we had our own software it was
much simpler, but personnel hours, application development, and customization had a
larger share and licensing sales were smaller. At the moment, leasing licenses is
emerging as a new concept. Today we are also able to provide [hardware] capacity
as a service whereas in previous years we also sold servers and system software. At
the moment, together with a partner, we provide data center services. Previously, we
sold IBM servers as a reseller, and with Microsoft Dynamics NAV we had server sales
directly. Today we offer server capacity and data center leasing as new offerings.
NAV Consulting offers the complete ERP solution not only to the initial client, but vertically as
well. By offering the solution to specific industries, they differentiate with a supply chain solution.
If a customer group or segment is an industry, take for example the food industry...
the basic package includes food processing extensions.
The user experience is based on the interoperability with the full suite of Microsoft products. Use of
the Microsoft Office, operating system, and databases provide an existing level of familiarity to the
user base.
4.4.3. Business direction
We try to retain existing customers with competent and good service. Now, we
constantly face competition because the software has several suppliers in Finland.
Customers really have the possibility of changing suppliers while continuing to use
the same ERP software. This is quite exceptional overall in the ERP market, which in
many cases in constructed so that one software product has only one supplier.
Customers in such cases have very high opportunity costs if they want to change
partners, because they would have to change the software completely and all
customizations made. We have to consistently be the best supplier, and we use this in
our sales pitch.
With a naturally competitive environment as a Microsoft Dynamics NAV reseller, NAV Consulting
must both serve the customer better than their competitors and charge a competitive rate. Niklas
does not see their pricing as a barrier to growth. With new versions coming out regularly, and a
roadmap of future development already laid out, Niklas sees that the software is consistently on the
25
cutting edge from a technological perspective. They do not price at the highest level in the market,
but they retain a reasonable margin.
We aim to be in the upper-middle class of the market. That is, we feel that we have
experienced consultants, which means we cannot be the very cheapest. On the other
hand, we are not a large company with a heavy cost structure and we do not price in
the upper segment. We aim to communicate through our pricing that we are an
effective and knowledgeable supplier.
4.5. Steffan Salmela, Sal es Director, Survey Bl end
4.5.1. Collecting feedback and completing the communication loop
Survey Blend was founded in 1997 and their first product was an evaluation machine. It was
designed to collect feedback related to employee well-being, customer satisfaction, and other
various studies. Since 2005 they have built Finland’s most popular election machines with a major
media network, and have built their name as a large contender in many other surveying realms as
well. A study, which found that election machines actually affected voting individuals’ choices in
elections, gave rise to their second product, the electronic salesman. Since then, they have added
integrated chat tools to their portfolio.
If we go product-by-product, the election machine is not used almost anywhere, we
have the best solution available, and it has been developed for so long. The evaluation
machine is quite exceptional in its method and we are scaling it up worldwide… The
user describes their needs and the service representative can watch the customer
adjust the preference controls and is able to start a chat session… Chat is one that is
already quite common around the world. However, when chat is connected to our
other tools, it creates additional value… We are really turning an online store into a
brick-and-mortar business.
4.5.2. Directions for growth
Growth at Survey Blend currently stems from extensions to their product offering. Often, a
customer purchases a single solution and once they have seen the benefits, they are offered another
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tool. According to customer demands, they have offered consulting for a fee, but this is not their
strategic direction.
We use free webinars, which can have up to 100 companies tuning in at once, as well
as bigger workshops. We try to avoid individual training and using many working
hours. Rather we try to be scalable, enabling customers around the world to purchase
this tool via the internet. It does not necessarily even require a salesman.
Using a scalable model, Survey Blend plans to ramp up operations worldwide. With the number of
competing products and therefore, quite low user levels outside of Finland, there is reason to
believe these ambitions may be realized.
4.5.3. Retaining the customer base
While some of Survey Blend’s products do not face stiff competition, evaluation tools and
especially chat are contested markets. Customer retention requires a two-fold approach: customer
contact and discounts. Customer contact happens over the phone and in person.
We call and contact all of our customers every 10 weeks and ask how it’s going,
monitor their results, see what benefits they have gained, look for new ideas, and so
on. Also, we currently have one person who is physically meeting with these
customers. Although they do not specifically need any help, we physically go on-site
and talk about how great it is to work together. At the moment, we are investing a lot
in that.
Discounts are available for both economies of scale:
With our evaluation machine, we have a big campaign type of deal in which we
provide all the basic art schools [in Finland] with an assessment tool. The price is
quite different when it involves several hundred different schools, versus a situation
where every school would buy the service independently. Without this project, the
purchase price would be quite different. However, with so many schools participating,
those who want to buy the product will pay less than others will because they are part
of this big project.
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…and economies of scope:
If a customer uses one of our products, the price is one thing. Then, if they want to
fulfill a second need with another separate tool… it is a bit cheaper as a bundle.
Steffan says that marketing at Survey Blend has mostly happened through their sales force. Visiting
clients and implementing projects has been their retention strategy.
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5. EXPLORING THE RESEARCH QUESTIONS
This study of pricing strategy consists of two parts. The first concerns the pricing and revenue
models used by the case companies. The goal is to describe these from the perspective of each
company, taking into consideration the market and competitive situations of each case. In order to
reach a critical depth of analysis with each company, the first four research questions are explored
for one case at a time.
5.1. Auto-Si te’ s prici ng strategy
5.1.1. How does the firm’s revenue model relate to differentiation strategy?
In the website building market in general, the costs of technical implementations can vary greatly
from project to project. Auto-Site’s differentiation strategy is based on a clear price, which is
known from the beginning. Advertising agencies provide most of the revenues at Auto-Site through
on-going payments, and become their partners when they find that costs are truly what they are said
to be from the beginning:
We always focus on what would be the best way for our partners, the advertising
agencies, to profit from these kinds of projects. The advertising agencies have all
kinds of employees. However, for the person who makes the decisions, it is all about
the money and how they can save money, rely on, and profit more from us. As long as
their projects are going ok or better, they do not have any reason to change.
Larger clients represent the minority of their revenues, but they are significant one-time projects,
which can also provide on-going income. With these clients, the revenue strategy follows demands
more than costs.
The white label products [are] based on the expected value to the partner we sign
with. In most cases, they pay some setup fee, from say 20 000-100 000 euros for us to
set up the project for them, and set up and modify it in a way that it fits into their
existing systems and their brand. We always include some monthly fee for the main
service to be there.
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5.1.2. Do economies of scale or economies of scope dictate pricing strategy?
Aaron describes a strategy of achieving economies of scale, after which they plan to use economies
of scope. He sees their pricing as very closely tied to these broader strategies.
Our idea is to create a simple product, find our place in the market, and then scale to
a market leader position. When we achieve that, we would like to implement new kinds
of products within the same account. We would like to try and sell and attach products
for the clients. We see a lot of potential there.
For the time being, however, they hope to focus on bringing in more advertising agencies and thus
more induction channels for new users. The scalability of their SaaS model is what makes this
possible.
[Advertising agencies] have all of the client responsibility so that we do not have to
hire new people and be the first-hand contact to the client… The best type of
advertising agency from our perspective, which bring most of the licensing contracts,
are small companies of 1-5 employees. They sell a lot. They create and work on small
projects and they have many projects ongoing all the time.
An economies of scale approach also entails serving as much of the market as possible. The lower
echelons are also served with their own product, and their own price:
We have created a branch out of these small companies who need a website but don’t
want to spend a lot of money or a lot of time creating such sites. It is basically the
same product. It is a bit easier to use for the end customer.
At the same time they still offer a white label product, which upon first inspection appears not to
drive an economies of scale approach. However, what a white label project brings them is not just a
single large customer, but a large number of end users as well:
Let’s say we see a potential of 1000 or 5000 license agreements. We look at the whole
picture on how much revenue that white label product would bring in and we always
calculate the price at the same level or lower than the existing partner or the ones
they already have and try to compete that way as well. So we price below market
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prices on a general level and even on a strategic level. It is about getting the masses.
Whatever we can do to try to reach that goal, we tend to do it.
5.1.3. Which customer perceptions effect pricing and revenue models?
One of the key aspects of our marketing strategy [is] to be very clear and precise on
how much the product costs and how long it takes for us to deliver such a project.
From the above comment, we see that customer perceptions are clearly linked to differentiation
strategy. However, perceptions take into account even the softer sides of the business, and the
effects go both ways, with pricing affecting customer perceptions and perceptions driving pricing
strategy. Aaron illustrates this phenomenon with an observation of perceptions driving their pricing
strategy:
It is business as usual for the tech companies to rob the advertising companies
because it is so complicated to change tech partners with an ongoing project. It is
almost impossible to do that. For example, let’s say that you buy a website from me
and we agree that you will pay me about 1000€ for the tech side. When I have done
my part you come back and say, “Hey I want to make a few minor changes here.” I
could rob you and tell you it is going to cost another 1000 dollars or years to do that
even though it only took an hour or two. However, it is complicated for you to change
and nobody is going to do it for any cheaper. That is the basic idea behind why
somebody would buy our product instead.
However, particularly with their premium white label products, their pricing strategy has been built
to drive perceptions:
Of course, the reason we do that is that we want to send the signal that if you want to
set up a white label product with Auto-Site it is not a Saturday evening job. It is a big
process and you have to stick to that and take it seriously. You also have to put some
money on the table before we are even going to negotiate with you. It is always easier
to come lower from the pricing when the product is good, but it is more complicated
to give a discounted price before the first meeting.
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5.1.4. Do pricing principles currently guide sales strategies or vice versa?
The sales strategies used at Auto-Site have changed from a direct sales model to an agent model due
to experiences from the former:
We hired 10-15 sales personnel for that purpose but it got very complicated in the first
six months because the sales personnel did not exactly know what it’s like to sell this
type of product and they knew nothing about what it really means to build a website
from the technical side. They let the customer call all the shots too easily and
promised the customer things that we could not provide because they were focused on
their provisioning models and the money they were personally making from the deals.
However, as their business model developed, they saw the need to return to direct sales with the
lower priced segments of the market. The following excerpt illustrates the sales strategy guiding the
pricing model:
We do not have discounts in the main product or the white label product, but when
our partner sells through telemarketing, we do. You always have to have something
extra to get the decision of subscribing to our service so we always have some sort of
offering going on. Sometimes it is about maybe lowering the prices in ways in which it
is hard for the end customer to say no and it does not create any profit within the first
year, but it gets us many sites, a lot of user experience, and many deals. In the
upcoming years, it brings in the profit, once the sales’ costs have been paid for.
In the case of Auto-Site, it appears that the sales strategy drives pricing more than the other way
around.
5.2. Heatsavi ng Co’ s prici ng strategy
5.2.1. How does the firm’s revenue model relate to differentiation strategy?
Of particular significance at Heatsaving Co is the difference between how the business operated
previously, in comparison to today.
Our earnings model has changed in that the former entrepreneur sold a mere device,
not the benefits. We, on the other hand, sell the resulting savings and payback period.
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Heatsaving Co differentiates its technical method from the other offerings in the market by
positioning it as a cost savings plan. The energy saved is on average a percentage of the energy
consumed, which in turn, is a derivative of the size of the space in which it is implemented. Hans
describes their two choices for purchasing the technology and the revenue that they provide:
We have two ways to buy this. We have Heatsaving Co invest, which has a single price.
It is free of leasing and maintenance costs. All the savings go directly to the housing
cooperative. It is priced in such a way that the price is the same for everyone. The
only variable is the volume of the building, meaning the property is priced according
to size. A typical housing cooperative pays about 5000 euros and the payback period
for the investment is less than two years… The deal model is a continuous service. We
share the resulting savings, which means the price is based on benefits.
The revenue model for the invest option is thus a one-time payment, while the deal option provides
the service with an on-going payment. Just as important as where they have taken their offering
from the past, is the future direction of their differentiation and the resulting changes in pricing
strategy:
Our future expectations of the company's revenue model are that we can likely
increase our prices at some point in the near future because the price of the saved
energy rises all the time. In other words, what we do becomes more valuable every
day.
5.2.2. Do economies of scale or economies of scope dictate pricing strategy?
At Heatsaving Co, economies of scale are pursued in that they have developed a technical product
and they provide the same product to all clients. While they benefit from economies of scale on the
costs side, their pricing does not follow the same strategy.
The price is the same for everyone. Whether you have 1200 apartment buildings or 1
apartment building, the price is the same. Therefore, we sell to customers at the same
price.
It is noteworthy that the larger the client’s building, the smaller is the cost of the installation to
Heatsaving Co relative to revenues. In order to accentuate the economies of scale on the cost side,
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Heatsaving Co has also licensed their technique to YIT, for example. Using economies of scope, on
the other hand, is a direction which they are planning to take the model in the future by offering on-
going contracts to their existing customer base:
We consider account value from the perspective of what the value of one account is to
our business. For example, if we sell the Invest model, we need to sell a continuous
service to allow an ongoing cash flow for us, and good continuous service for the
customer.
5.2.3. Which customer perceptions effect pricing and revenue models?
In general, our pricing principle has been value-based, that is, what kind of value we
can create for customers. That is how we justify the pricing of our service.
The above excerpt demonstrates the focus at Heatsaving Co on customer perceptions. It is at the
core of their sales case as well as their revenue model. Attention is diverted from a cost based
discussion entirely, which allows them to push value added with potential customers. There was
little discussion of how customer perceptions may be pressuring for lower pricing, although it is
unclear whether this was simply left out, or whether it is indeed a nonfactor. However, they have
left out the expected increase in energy costs (and therefore expected savings) from their pricing:
We use discounting, if you consider the potential benefit for many years down the
road versus today. Energy prices increase constantly. No one can say how much they
will increase, but they will increase a lot. In the last ten years, they have doubled, so
they will continue to rise quite a bit, likely at an accelerated pace. This has not been
taken into account because we also have the effect of inflation, and we do not know
the overall effect.
5.2.4. Do pricing principles currently guide sales strategies or vice versa?
At Heatsaving Co, pricing principles guide sales strategies. In fact, the feedback loop has yet to be
completed, as price increases have not yet significantly affected sales. In sales terms, the hit-rate, or
percentage of leads which turn into sales, is very good at the moment.
We currently have a very good hit-rate. If we get as far as the Board of Directors, we
make the deal 8-9 times out of ten. So when we have a good hit-rate, and when we are
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able to sell with this model, we calculate that the profit margin is at a sufficient level.
We would do well to be content with our situation and just close deals. That is, if our
hit-rate dropped significantly, then of course we should rethink our pricing model. But,
for example, last year we raised the price of labor 25 percent and the initial payment
in the deal model was increased to an annual fee. So the fixed share of the fee was
increased fivefold, and it has not affected our sales in any way. These are big changes,
but they improve our business, and it is never a deal breaker. The payback period is in
this case the essential ingredient. It is what the customer buys and what it compares to.
The macroeconomic trend of rising energy prices is clearly doing Heatsaving Co a favor. However,
the important point is that they are capitalizing on the trend through their pricing and through their
sales.
The price of district heat has consistently risen. This means that energy conservation
is more important than ever. Every incremental savings percentage becomes more
valuable.
5.3. Multi-Software’s pri cing strategy
5.3.1. How does the firm’s revenue model relate to differentiation strategy?
Multi-Software is aimed at the upper echelon of the custom software market. The basis for choosing
a software partner, Markus believes, is often the trust developed between the customer and supplier.
It is this trust which drives project demand and due to hourly pricing, one-time project demands
drive their revenues.
This is really a confidence-based business, which means a customer often tries us out
for a bit. When they get to know us and gain mutual experience, we seek to increase
the volume, but also to expand. It usually begins with one part and then expands
through service planning. Our earnings logic is hourly pricing.
Not only does Multi-Software work towards becoming the trusted software supplier, they also want
to achieve partner status with their existing customers. Thus, they are not looking to take on every
potential client they come across. Rather they cater to a certain type of client:
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Some clients like to work with different suppliers, buying something from one and
something else from another, so no one single supplier becomes too important. Others
like to say directly, “You are our partner. Make it happen.” We specifically seek those
clients who see us as partners.
The most succinct explanation of Multi-Software’s differentiation strategy is perhaps this comment
by Markus:
We aim at higher than market prices. If the customer wants the lowest possible price,
we do not offer that.
5.3.2. Do economies of scale or economies of scope dictate pricing strategy?
Where many software companies, particularly those focusing on products, seek economies of scale,
at Multi-Software they distinctly choose not to follow this path. Rather, in building custom software
from the ground up for their clients, they not only customize pricing, but they customize internal
roles as well to fit customer roles:
We use customized prices. If all customers were to see each other’s rates, it would not
be the end of the world, but the cost structures for each one are a little different. We
use role names that our customers want to see. In many cases, the customer has a
certain way of understanding because they want to use the same measure for different
locations. They want to dictate that there are such and such roles here and to
determine prices for their roles. Therefore, we adapt our operations to fit their roles.
Multi-Software does not pursue economies of scope either. Their stress on one-time, hourly billing
prevents both of these strategies. Perhaps the closest they come to economies of scale or scope is
their use of open source code for some of the basic blocks of code. However Markus describes the
limitations of lower pricing, even when harnessing open source:
We can begin by building on some open source code, and the source code is in most
cases the property of the customer who can access it if necessary... If the customer
agrees to pay for only half of the amount, it is very unlikely that we will be able to sell
it to anyone else.
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5.3.3. Which customer perceptions effect pricing and revenue models?
When discussing why they no longer pursue licensing software, Markus explained that the decision
stemmed from a difference in perceptions:
This involves a difference in perception. We always talk about the fact that of course
the customer should pay for the value, but what we see, as we have also sold licensed
software, is that who wants to pay anything at all for a software license? Selling a
5,000€ software license costs more than selling a 100,000 project, so that is it.
However strongly we feel that a license includes more value for customers, they still
do not agree. Therefore, I would answer that hourly billing will remain the staple of
our billing.
From the statement above, we can see that it has been difficult to communicate to customers the
value that Multi-Software creates. At this firm in particular, the strategic decision to stick with
hourly billing for the near future is based on an assumption about perceived fairness, and the
difficulty in changing this reality:
Foremost in my mind is that everyone agrees that value is a great thing, but then
again, everyone says that an hourly-based billing business model is the easiest.
Perhaps it is because everyone sees it as more fair. We are constantly considering
how we could successfully implement this model. Yes, we have a very different
position with our customers compared to other suppliers, but the problem is often that
the client is accustomed to the traditional approach, and it takes a lot of effort to
accept that things can be done a bit differently.
5.3.4. Do pricing principles currently guide sales strategies or vice versa?
For the most part, at Multi-Software, pricing principles guide sales strategies. Although they often
see their offering as much more valuable than the competition, they stick to certain criteria for their
pricing. This is due to both customer perceptions and their own costs:
We have very little strict value pricing. In most cases, when you sell services, the
customer wants to see that the price is related at some level to the time spent and the
amount of work assigned. If the bill is 10,000€ and we have spent a week on the
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project, the customer feels cheated, even if the value to the customer was 100,000€.
These are difficult issues. A second Vendor would spend two months completing it, but
the customer still feels cheated, and this feeling must be avoided.
However, by allowing their team leaders to award discounts, Multi-Software allows pricing to also
be affected by sales and customer service strategies.
We have sometimes used discounts. It is the responsibility of the team leader. It is
essential that anyone who gives a discount is the one who is responsible for them, and
that they must always consider whether it makes sense. Sometimes we give a discount
for one reason or another, sometimes due to competitive situations, and sometimes
due to customer dissatisfaction.
5.4. NAV Consulting’ s pri ci ng strategy
5.4.1. How does the firm’s revenue model relate to differentiation strategy?
Because NAV Consulting implements the Microsoft Dynamics NAV software, they directly
compete against just over 10 other resellers in Finland. They must therefore differentiate with other
factors besides the software. However, the Microsoft ERP software itself is not the natural answer
for many companies either. Thus, the first challenge is to make the case for the software, for which
they have a cost and pricing argument:
It depends a little on the customer's industry and the company operations, but more
and more are looking for a ready-made solution, and there are less and less of these
customer-specific customizations. I mean complete industry-specific packaged
solutions. If it is a packaged solution or product, it will be a license or lease-based
payment, because there is no such customization. Again, the share of personnel work
and customization labor remains small. Implementation time is quicker and the
customer receives the benefits of it more quickly.
With set prices for licensing fees, they may struggle to differentiate with price in on-going fees.
However, they take a clear stance to preserve the value of add-ons to their products:
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In my opinion, we do not use bundling. If we have this basic software, and add some
more modules, they have a clear price. We also do not offer payroll software or any
other module at half price. There is always some give and take, but only a little. We
have tried to get the price right from the beginning.
5.4.2. Do economies of scale or economies of scope dictate pricing strategy?
Revenues at NAV Consulting are centered on one-time, hourly fees, which make it difficult to take
advantage of economies of scale or economies of scope. There are advantages to serving a single
customer for an extended number of hours, which at NAV Consulting translates to discounted fees.
Then, with personnel hours, as has already been said, prices are market-based, but
there are also the levels of costs, which play a part. A small discount may also be
applied to hourly work on a project if a customer has purchased a heavy workload.
That is, it is a quantity discount because our work efficiency is higher. One person
could work for a month with one client if needed instead of half days for 10 different
customers.
This effect on costs is not translated to revenues, however. Although they save on down-time for
employees, the value of more efficient work hours that result is not reflected in prices. Niklas
explains their discounting policy:
In principle, we operate according to our price list. Then, of course, there are some
amount of discounts on labor costs. If someone buys 1000 days of services from us,
the price will be different than it is for a customer who buys one hour now and then.
5.4.3. Which customer perceptions effect pricing and revenue models?
One of a new customer’s first perceptions of NAV Consulting is often a quoted price. They ask for
a daily and hourly rate, which they then may directly compare to a competitor. This places
considerable direct pressure on their prices. These price quotes are the de facto prices on all work
completed for a given customer. This approach is apparent in Niklas’ comments on role-based
pricing:
In practice, different people do not have different prices. All work is just application
work, training, or working with the customer. All of the work is the same price. It is
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because we have experienced enough people that we do not use junior and senior
pricing. We begin with the assumption that if we send a person to the client,
regardless of whether he or she is consulting or training, or whatever he or she is
doing for the customer; it is the same person and it would be absurd to start dividing
it. We do not use results-oriented pricing or economic value pricing.
From the above comments, we can see that at NAV Consulting, particular stress is placed on the
customers’ perceptions of fairness. There is also an underlying view of prices as a particularly
important criterion in clients’ decisions of choosing an ERP implementation partner.
5.4.4. Do pricing principles currently guide sales strategies or vice versa?
At NAV Consulting, pricing principles are quite clearly guided by sales strategies. Niklas answered
the question quite succinctly:
Yes, it seems to be that we find out what our costs are and add our margin
requirements to that. However, in practice, we may use market prices more.
However, they are open to new methods of pricing which could in turn guide their sales in a new
direction. Niklas describes the sentiment:
We have considered at some point that it would be good if, instead of selling days or
software, we could sell the benefit which the client received, and price accordingly.
However, we do not actually use that because it is quite difficult to assess the value of
the advantage to the customer.
The challenges of bringing these value pricing ideals into the day-to-day business are clear across
all of the case companies interviewed.
5.5. Survey Bl end’s pri cing strategy
5.5.1. How does the firm’s revenue model relate to differentiation strategy?
Just as stated about Auto-Site, at Survey Blend they also aim to stand out by offering a clear price
with no surprises. However, some of their customers require more handholding than others.
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If a customer has required additional training, we have charged them directly. Then,
if the customer wants us to continue assisting in creating content, we have charged for
that as well… [However,] clients are able to build on their own using these tools
without our help. That is not where we want to focus. However, sometimes it has been
unavoidable. We also have partners who are able to provide these services.
With at least four different product groups among their offerings, Survey Blend also has a couple of
different pricing strategies. In fact, each differentiation strategy carries its own pricing strategy.
However, most of their services use a revenue model of on-going payments. Steffan explains the
differences succinctly:
For the electronic salesman we have not really considered [competitive pricing] since
we do not have a lot of competition. Our election machine does not really have
competitors either. Those products for which we use market pricing, we basically have
market prices.
5.5.2. Do economies of scale or economies of scope dictate pricing strategy?
In perhaps the clearest example of economies of scale dictating pricing strategy out of the five case
companies, Survey Blend follows an example of SaaS pricing they have seen elsewhere:
We have studied a variety of different SAAS providers around the world, how they
have been able to scale successfully, and which issues they have focused on. It is
always very clear that it they have placed their bets on an annual or monthly license,
and then they have these big training days or workshops, and webinars on the side.
The combination of a scalable model and a push for internationalization has accentuated the link
between economies of scale and their pricing methods.
Especially now when we have globalized, it is based almost entirely on licensing. We
have little to no foreign staff, but we have partners who can then sell it separately.
However, we do offer free online webinars and training courses via the Internet. They
are free of charge and are, in practice, marketing.
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As they have introduced new products, the focus at Survey Blend has somewhat shifted from an
economies of scale to an economies of scope strategy. Steffan describes the process:
If a customer uses one of our products, the price is one thing. Then, if they want to
fulfill a second need with another separate tool… it is a bit cheaper as a bundle.
5.5.3. Which customer perceptions effect pricing and revenue models?
As stated in the discussion on differentiation strategy, Survey Blend aims to offer one clear price
that is easy for the customer to understand. At the same time, they equip their sales force with a lot
of autonomy. Steffan explains the benefits and limitations of this pricing strategy in terms of
customer perceptions:
Economic value pricing is very much in the seller's hands. There are certain broad
guidelines, but it pretty much is in the hands of the salesperson to consider what is
expected case by case, according to the level of usage and benefits. But we try to keep
it on a small scale to avoid a situation where one customer pays half of what another
does, which may hurt our level of trust.
However, the discussion of perceptions in pricing strategy can include those customers who cannot
afford the given price. They would be non-customers with a rigid pricing strategy, but with a
diplomatic salesperson they can create additional on-going revenue streams:
We attempt to keep it as standard as possible, but it may be that someone has a very
small shop, but clearly needs our tool. We can provide our tool with very little effort,
so we drop the price to a level in their budget and they reap the benefits. We always
have the annual license, but it is a somewhat less expensive annual license, and it is
consistently inexpensive. Sometimes we can customize the price so that the first year
charges are cheaper to get things started and then, when they like it, we charge them
normal prices.
The price they choose to sell at drives the return side of the pricing equation, but the goodwill
provided can be just as important from a customer perspective. Survey Blend has an ongoing offer
to art schools all over Finland to provide evaluation tools at a group-based discount:
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We wanted to provide the schools with these tools because they would not otherwise
have access to such uniform assessment models. These tools are expensive enough
that schools have not been able to commit the resources. Then, because it involves
data analysis, we have offered those services as well.
5.5.4. Do pricing principles currently guide sales strategies or vice versa?
In the case of Survey Blend, there are examples of both pricing principles driving sales strategies
and sales strategies driving pricing principles, although the latter is clearly more common. One
example of pricing principles driving sales strategy is the campaigns, which are based on a modified
price aimed at increasing sales:
Take this school deal as an example. Because it involves several hundred schools,
their price is much cheaper than the others. It is a group discount. It was constructed
by producing the content, and because they all use the same content, they can all take
advantage of the same content. They all use the same evaluation tool, which takes
advantage of the same content, so we do not need to train them all separately. We can,
for example, hold one training session which can be shared as a webinar, or hold no
session at all, but offer a training video, with which they can then learn how to use it.
Alternatively, we can provide a brief telephone training.
However, this example is an exception to the rule and there are far more examples of sales strategy
driving pricing. The following are excerpts of two example situations:
For some solutions, our price is market-based. For example, we dropped the price for
chat just because the market had more favorable prices.
In principle, [with] these databases and so on, we do not have any specific charges to
use another database. Rather, we charge for the language version. It has been
simplified so that the language version costs this much and that finances those costs.
We simply do not bring it up.
These situations demonstrate the need to adapt pricing to the pressure salespeople experience. At
the same time, Steffan credits their sales personnel for the opportunity to be flexible with pricing:
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We have such good salespeople that it works. For us, sales people’s autonomy is a
pretty big deal. They get to work independently and define and build it themselves.
The seller gets a commission on it themselves, so that is a lure not to sell for too cheap
either.
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6. USAGE OF PRICING STRATEGIES
In order to establish the level of value pricing employed at the case companies, we will compare use
of the following concepts found in the literature: market based, competitive, cost, and value based
pricing, skimming, customized, hourly, lifecycle, experience curve, target return, and group based
pricing. Then we will compare versioning, bundling, profit and revenue sharing, and licensing
schemes. Lastly, using pricing as a cue and discounting will be considered.
6.1. Pricing strategies
6.1.1. Market based pricing
Although every firm short of a complete monopoly faces pressure to price according to their market,
there are often other options available. By differentiating their offering from competing products,
companies can set their prices considerably higher than other offerings in the market. Of the cases
analyzed, the firm whose prices were most market based was NAV Consulting. Their perception of
their place in the market was clearly in the upper, but not the highest level in the market. They
quote a daily and hourly rate as well as services prices very early in negotiations at the customer’s
request. The Microsoft Dynamics NAV software they implement is a retail product, so they have
little room to maneuver from that standpoint. The other case companies also used market pricing,
but clearly at a different level. Auto-Site and Survey Blend also priced according to market pressure
and considered their prices a key competitive edge. Heatsaving Co and Multi-Software, on the other
hand, paved their own path with pricing.
We do not even want to begin competing with those who seek a competitive advantage
through a lower hourly rate. We would rather compete with expertise or other factors,
and then seek to sell to customers at a high price. Then we deliver at the price we ask.
– Markus Määttä, CEO, Multi-Software
6.1.2. Competitive pricing
While very similar to the concept of market based pricing, competitive pricing involves both
proactively and reactively adjusting prices according to expected or realized price changes by
competing firms (Nagle & Holden, 2002). The case companies used competitive pricing at the same
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relative levels as market pricing, but Aaron Aho, the CEO at Auto-Site had a particularly concise
way of stating their position:
We price below market prices on a general level and even on a strategic level. It is
about getting the masses, and whatever we can do to try and reach that goal, we tend
to do it.
6.1.3. Cost-based pricing
In service industries, cost-based pricing often means charging an hourly fee. However, the fact that
hourly fees are used does not rule out the possibility for value-based pricing. The distinction of
cost-based pricing is that the fees correlate most directly with costs, rather than customer value or
other measures. Of the group of case companies, NAV Consulting bases its pricing most directly on
costs, while Heatsaving Co clearly chooses not to use cost pricing.
We do not seek price or cost leadership as it is more important to make the value of
the resulting savings as great as possible.
- Hans Hänninen, CEO, Heatsaving Co
6.1.4. Value based pricing
We use a mix of value and the market based prices. That is, we want to be in the
higher price echelons of the market. Of course, we must also be competitive. We must
be able to justify our value. The company has margin and P&L calculations, but
pricing happens, above all, in the market.
– Markus Määttä, CEO, Multi-Software
At Multi-Software, about 90 percent of revenues come from hourly fees. However, among the peer
case companies, they are a relatively strong user of value pricing. They manage this by charging
premium fees, often differing between customers, projects, and even roles for the same employee.
However, the leader of the case group in value-based pricing is clearly Heatsaving Co; as Hans
states:
When the payback period is good, it does not matter what it costs as an investment.
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6.2. Pricing methods
6.2.1. Price Skimming
As a concept, price skimming is nothing new, but today claiming top-tier prices is not just the
business of monopolies. From the base of companies studied, it appears to be an all or nothing
phenomenon, with three of the case companies opting out, and two quite clearly choosing to follow
this strategy.
Our customers compare our prices to our competitors, and what we want the
customer to say is that, man, you are expensive, but worth it... If the client sees us as
cheap and good, then it is the wrong message.
– Markus Määttä, CEO, Multi-Software
6.2.2. Customized prices
By customizing prices, a firm takes the risk of being seen as unfair by customers, who may find
they are paying much more for a service than another client who at least appears to be receiving the
same service. At the same time, they can capture far more of the value they provide to their
customers. There are many ways to go about customizing prices, but it should always be done
carefully.
Economic value pricing is very much in the seller's hands. There are certain broad
guidelines, but it pretty much is in the hands of the salesperson to consider what is
expected case by case, according to the level of usage and benefits. However, we try
to keep it on a small scale to avoid a situation where one customer pays half of what
another does as that may hurt our level of trust.
- Steffan Salmela, Sales Director, Survey Blend
6.2.3. Hourly based billing
Hourly based billing is by far the most common way to sell services, whether it is a bid for a
number of hours to complete a particular task, or open-ended billing of hours as work is completed.
All of the case companies have some form of hourly billing although Heatsaving Co in particular
does not offer it directly.
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6.2.4. Lifecycle pricing
Lifecycle pricing refers to the practice of planning prices for the different stages during the useful
life of an offering. A level of this concept is implied in virtually every sale, as few goods or services
have value for only an instant and even fewer retain their value indefinitely. While some services
have a value lasting longer than others do, some case companies plan future prices on this value
explicitly.
Energy prices increase constantly. No one can say as much they will increase… but people
understand it that if they will increase, it pays to start saving money right now.
- Hans Hänninen, CEO, Heatsaving Co
6.2.5. Experience curve pricing
Experience curve pricing relies on achieving lower costs than the competition and thus reducing
prices in order to eliminate much of the competition. Usually this requires an economies of scale
approach and a critical mass, which can be difficult for the SMEs in the case group to achieve.
However, within a well-defined niche an element of experience curve pricing is possible.
We have tailored industry-specific packages that are ready for use and do not need to
be customized from the beginning, in which case it is also far less expensive for the
customer. On the other hand, it is also more cost-effective for us.
- Niklas Nenonen, Chairman, NAV Consulting
6.2.6. Target-return pricing
Instead of arriving at price points based on cost and revenue forecasts, the practice of target return
pricing turns the process upside-down by beginning with a profit target, and calculating the price
based on the margin required. Most of the case companies used target-return pricing strategies, but
they generally used single account targets rather than aggregate targets when building their pricing
models.
6.2.7. Group/ Segment based pricing
One of the more straightforward ways of customizing pricing is to divide a single market into
segments which have different requirements. However, it is much more difficult to get customers to
48
self-select into a higher priced segment. By splitting their offering into at least three different levels,
Auto-Site offers what each segment requires, while minimizing product level downgrades by
adding customer service or other bonuses to higher tier offerings. At the same time, they try to
maintain a high quality experience by updating technical components at all product levels
simultaneously.
6.2.8. Versioning /Predetermined choices
Versioning as a concept is quite similar to group based pricing in that versions are often aimed at a
particular segment of the market. However, versions can also be built to accommodate choice for a
single customer. All of the case companies besides Multi-Software use versioning as a staple of
their pricing strategies. As part of their standard procedure, a NAV Consulting representative will
offer a client a host of versions to choose from.
As far as versioning, we may consider a hardware service package with fewer options
for smaller customers. Then again the biggest customers have the need for an ERP
system with more functionality and a broader package, so the price is higher as well.
In these cases, the alternatives are known before we visit the customer, that is, we
offer options from which the customer can choose.
- Niklas Nenonen, Chairman, NAV Consulting
6.2.9. Bundled pricing
By bundling products and/or services together, the customer can be helped along in the purchasing
process. At the same time, a discount on the combined products can give a sense of getting a good
deal. From the firm’s perspective, bundling can create pressure to offer a discount, but at the same
time it can ensure a good customer experience and the possibility of extra sales.
We do not charge maintenance or start-up costs. We have made an effort to keep it
simple… There is no need to divide costs into five different sections. Rather they are
all included.
- Steffan Salmela, Sales Director, Survey Blend
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6.2.10. Profit and Revenue sharing
Profit and revenue sharing models are becoming more popular, but among this case group they are
not used extensively. Heatsaving Co shares energy saving with customers of its Deal model, but
there were few other examples. Markus Määttä of Multi-Software had a particularly pessimistic
view on the practicality of revenue sharing models:
In general, if the customer believes in their own business case, they are willing to
purchase it straight out. If they do not believe in their business case, they may prefer
such a revenue sharing deal… It is kind of a lost cause in any case.
6.2.11. Licensing
Licensing as an art or a science is a broad enough topic to warrant a separate study. However, we
will touch on a few of the possible types: user, usage-frequency, and time-based licensing. User-
based licenses are priced according to either the number of users with access to a product or the
number of users with simultaneous access. With its chat product, Survey Blend bases its price
directly on the number of simultaneous users. They also use usage-frequency to price their
evaluation tool, although a strict formula does not exist. Time based licenses are the foundation of
Software as a Service (SaaS) models and are used by both Survey Blend and Auto-Site. The other
case companies do not use this pricing scheme. Aaron Aho of Auto-Site tells of two different
applications of time-based licensing:
We always include some monthly fee for the main service to be there for white label
partners.
[Individual] clients create most of our revenues. They sign up for the account and pay
a price for the time they use it.
6.2.12. Pricing as a cue
Every firm sends a signal with their pricing, whether they are aware of it or not. When asked about
this, the interviewees invariably answered positively. However, in his comments Markus Määttä of
Multi-Software pointed out that the signals can be used internally as well:
50
For us, it is a significant indicator whether our clients see us as competent, and are
willing to pay some of the highest prices in the market.
6.2.13. Discounting
Pressure from the client or management will often drive sales people to offer discounts. However,
many discounts are unplanned, or go “under the radar.” A discount strategy is a set of guidelines for
using discounts as a tool rather than a last resort for closing deals. Heatsaving Co is the only case
company that appears not to give discounts. However, some of the others claimed not to use
discounting, while describing discounts that have been given in the past at a different point during
the interview. It seems that discounts are, at least for the case companies, a mystery item which is
difficult to pinpoint. At least Survey Blend, NAV Consulting, and Multi-Software use volume
discounts, and Auto-Site has offered one-time discounts to long-time customers. Two of the
interviewees mentioned that the employee granting it should have responsibility for the discount.
Although not their standard practice, Markus Määttä of Multi-Software described a situation in
which they may offer a discount:
We sometimes do, although quite rarely, take a customer who is not terribly solvent
and offer them a lower price. However, in those cases we do not stick to a delivery
timetable, but build it on a "when we have nothing better to do" basis.
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7. A FRAMEWORK FOR PRICING STRATEGIES
7.1. Goals of the framework
In this section, we will attempt to answer the final research question of how pricing strategies can
be categorized in a useful manner. In the best-case scenario, pricing strategies are a direct result of
business strategy. Ideally, value provided to customers’ businesses would be apparent, that value
would be assigned a price accordingly, and this value would be successfully communicated to
customers (Terho, Haas, & Eggert, 2011). In the worst case, prices and revenue models would be
simply due to legacy business models, internal working practices, or the whims of sales people. As
discussed in the literature review of this paper, some research has been done which asserts pricing
can be used beyond the traditional role of distributing profits between market participants (Nagle &
Holden, 2002; Narayandas, 2005; Avila & Dodds, 1993; Hinterhuber, 2004). Voeth and Herbst
suggest using pricing as a tool for building mutually beneficial relationships (2006). In their
research, Sainio and Marjakoski describe value based pricing and revenue logic as key determinants
in building business models (2009). Thus, we suggest the level of value based pricing as a
theoretical success factor for partnerships. Revenue models are often dismissed as merely a matter
of financing. However, if the on-going payments for a service continue at the discretion of the
customer, it requires the vendor to provide value on an on-going basis. Therefore, the revenue
model of a firm affects the level of commitment required of a firm towards their client partners. At
the outset of this research, we propose a framework for using pricing strategy as a tool for building
and maintaining partnerships based on these two dimensions: 1) value versus market pricing and 2)
on-going versus one-time revenue models. The case companies were placed in the framework in
relative terms based on information gained from their websites. Sufficient information about
offerings was a criterion in case selection.
7.2. The scal e of one-time versus on-goi ng revenue model s
On-going payments may be only a matter of financing for a one-time contract. However, if future
payments are subject to value received today, (i.e. the client can cancel the service on short notice)
the firm must provide on-going value in order to secure future revenues from the client. This
distinction makes payments a strategic measure, rather than simply a consequence of financing
methods. Thus, the measure of one-time versus on-going payments is an indicator of cooperation.
52
7.3. The scal e of val ue versus market based pri ci ng
The goal of pricing strategy is most commonly to maximize profits, whether in the short or long
term. However, the goal of value based pricing is to encourage the maximization of value, its
communication to customers, and subsequently, to capitalize on some amount of that value. By
employing value based pricing, the agency problem of maximizing the profits of the firm and the
value provided to the client is alleviated. Thus, the measure of value versus market pricing is also
an indicator of cooperation.
Figure 1: Pricing strategy for partnership, preliminary framework
7.4. Preliminary groupi ngs
From the initial coding of case companies interview transcripts it became clear that the case
companies ran very different businesses. From the perspectives of strategic pricing studied, they
seemed to fit into three groups: Auto-Site and Survey Blend, Heatsaving Co and Multi-Software,
and NAV Consulting.
The similarities found in Auto-Site and Survey Blend were the following:
The main offering was a standard toolkit
Economies of scale were used in pricing
Auto-Site
Heatsaving Co
Multi-Software
NAV Consulting
Survey Blend
0
5
10
0 5 10
Value
Pricing
Market
One-time Revenue model On-going
Preliminary Pricing Strategy Model
53
Pricing was largely market-based
Revenue was composed mostly of on-going payments
The similarities found in Heatsaving Co and Multi-Software were:
The main offering was a premium service
Economies of scale were not used in pricing
Pricing was largely value-based
Revenue was composed mostly of one-time payments
The characteristics that were typical of NAV Consulting were:
The main offering was standard software
Economies of scale were used in pricing
Pricing was largely market-based
Revenue was mostly composed of one-time payments
Because it did not follow either of the patterns set by the other companies, NAV Consulting was
given its own category.
Table 1: Preliminary groupings
Pricing Auto-Site Heatsaving Co Multi-Software NAV Consulting Survey Blend
Differentiation Standard Premium Premium Standard Standard
Revenue model On-going One-time One-time One-time On-going
Economies of Scale None None Scale Scale and Scope
Key Driver Sales Price Price Sales Sales
Prices based on Market Value Value Market Market
7.5. Buil di ng the dimension wei ghts
Factors pertaining to the two axial concepts, 1) value versus market pricing and 2) on-going versus
one-time revenue models were identified. Next, each factor was assigned a weight reflecting its
impact on the overall level of the concept. Market-based, competitive, and cost-based pricing, as
54
well as discounting were given a weight of -1 due to their use in traditional, non-valued-based
pricing. Experience curve pricing was given a weight of -0.5 due to a similar relation. Lifecycle and
target return pricing, versioning, bundling, and pricing as a cue were given a positive weight of 0.5
because they can be used in value based pricing, although they do not directly lead to that outcome.
Lastly, but perhaps most importantly, the use of value-based pricing, price skimming, customized
prices, and segment-based pricing were given a positive weight of 1, given their direct relation to
value-based pricing as found in the literature. The weights are summarized in Table 2. Mentions of
these factors were identified from the case data and each case company was assigned a value on a
scale of 1 to 10, reflecting the level at which it applied each factor. Ranking case companies on the
revenue model employed was more straightforward. The same procedure was followed except that
the only pricing factors used were hourly pricing and licensing, which received weights of -1 and 1
respectively. Scores were multiplied by the respective weights of the two pricing elements and
summed. Totals were normalized on a scale of 0-10 for the sake of comparison. Thus a value of 0 or
10 is not necessarily the extreme case, it is only the relative extreme among the group of case
companies.
Table 2: Pricing methods by value pricing weights
Weight Pricing methods
-1 Market-based Competitive Cost-based Discounting
-0,5 Experience curve
0,5 Lifecycle Target return Versioning Bundling Pricing as a cue
1 Value-based Price skimming Customized prices Segment-based
7.5.1. Separation of distinctive offerings
Some of the case companies had another major offering which differed from the firm’s main
offering, and these were therefore scaled separately. The offerings at Auto-Site, Heatsaving Co, and
Survey Blend (Auto-Site white label, Heatsaving Co deal, and Survey Blend election machine
respectively) which diverged by these measures from the respective firms’ other offerings, were
scored separately for two reasons: 1) to allow more accurate scoring of the other offerings and 2) to
more meaningfully populate the theoretical framework. The peripheral offerings at Multi-Software
and NAV Consulting, mostly hardware and maintenance, were considered minor enough not to be
taken into independent consideration.
55
7.5.2. Firm and offering level values for scaling
Firm level values for the scaling factors of each dimension were arrived at based on statement made
by each of the interviewees, or statements made on their websites, if no comments had been made
during the interviews pertaining to the given factor. A score was assigned to each factor for each
firm/offering on a scale of 0-10, with 10 equating to strong demonstration of the factor, and 0
meaning a clear statement of not using a given method was made. Statements made by the
interviewees were given precedence over website material in determining the factor score unless
they were contradicted by other statements made during the interviews. Triangulation of scaling
was achieved by giving each interviewee a copy of this report, asking them to verify that the
findings were correct, and giving them the chance to correct any miscommunication or error in
scaling.
7.5.3. Arriving at final dimension values from scaled factor scores
Final values for the two framework dimensions were arrived at by multiplying each factor score by
the weight given to that factor and finding the sum of these values. Negative values were avoided
by adding the lowest value to all figures, and the resulting values were normalized to a scale of 0-10.
Thus, the final dimension values are relative to the sample of case companies and not comparable to
the IT service sector in general. The goal of this scaling was to describe the phenomenon of pricing
as a tool for partnership among the multiple case companies in order to demonstrate the value of a
scaling system for the value pricing and revenue model dimensions.
56
Figure 2: Pricing strategy for partnership, populated framework
7.6. Stated strategi c goals within the framework
The framework can be used as a measure of the level of cooperation or partnership between a firm
and its clients. In their comments, the leaders of all the case companies expressed an interest in
building deeper cooperation and partnerships with their clients. Some had specific future goals
through which they hoped to attain that end. At Auto-Site they plan to gain broad market
acceptance, after which they will add other value enhancing products to their offering. For an SaaS
company, Survey Blend is investing heavily in client relationships and the plan is to cross-sell their
synergistic offerings to their clients who currently use only a single product. These two case
companies are thus strategically aiming to move towards value based pricing, while showing no
intention of moving towards one-time payments. At Heatsaving Co, they plan to use their client
base to introduce more on-going payments such as maintenance. At Multi-Software, they are
actively searching for new ways to supplement hourly revenue with on-going contracts of software
maintenance and other services. Thus these two case companies are looking to move towards on-
going payments while increasing the level of value based pricing if possible. At NAV Consulting,
the aspirations are to one day sell the benefit the client receives instead of the software. They also
expressed the movement towards leasing software instead of licensing, so this signifies a movement
towards on-going pricing. There was no evidence of goals to shift closer to market based prices or
one-time payments. These stated goals are illustrated in the context of the framework in Figure 3.
Auto-Site
Heatsaving Co
Multi-Software
NAV Consulting
Survey Blend
Auto-Site White
label
Survey Blend
election
machine
Heatsaving Co
deal
0
5
10
0 5 10
Value
Pricing
Market
One-time Revenue model On-going
Revenue model vs Value pricing
57
Figure 3: Stated Strategic goals of the case companies
Auto-Site
Heatsaving Co
Multi-Software
NAV Consulting
Survey Blend
Auto-Site White
label
Survey Blend
election
machine
Heatsaving Co
deal
0
5
10
0 5 10
Value
Pricing
Market
One-time Revenue model On-going
Stated Strategic Goals
Goal
G
o
a
l
58
8. DISCUSSION
8.1. Revenue model s’ rel ati on to differentiation strategies
For all five of the case companies the link between differentiation strategy and revenue model are
quite clear. Furthermore, it appears that it is indeed the differentiation strategy, which drives the
revenue model as opposed to the other way around. From a strategic perspective Auto-Site and
Survey Blend seemed to have very similar approaches to differentiation; providing a standard tool
to as broad an audience as possible. This goal lent itself to a pricing strategy of market-based prices.
The revenue model itself was, for both companies, an on-going payment with the principle
difference that Auto-Site uses monthly billing, while at Survey Blend payments are primarily
annual fees. However, both companies had other offerings that were based on customized projects
and customized fees, namely white-label products and election machines. These offerings were
considered significant sources of financing for other product development as well as creating
market presence, but were not the focus of future strategic direction.
Heatsaving Co and Multi-Software, on the other hand, are similar in their differentiation as
premium drivers of value in their respective markets. The focus on building trust through good
work in the software market at Multi-Software is matched with a focus on delivering and proving
energy savings at Heatsaving Co. The premium status of their offerings are both met with a
premium price: The former through some of the highest hourly rates in the market, the later with a
pricing scheme far removed from the cost of the device and installation used by much of the
competition in their pricing. Interestingly, both Multi-Software and NAV Consulting focus on
project based pricing with pay-as-you-go and up-front payments the currently preferred methods of
billing. However, Heatsaving Co offers an alternative payment option combining fixed annual
payments and sharing of energy savings. This option appears to chiefly serve the purpose of
positioning their invest model as a value proposition, as sales through the deal method are far below
those of the invest model. Nevertheless, they have customers who purchase using this method, so it
can be considered a genuine offering as well.
As a reseller of third party software, however strategically chosen it may be, NAV Consulting
competes on a relatively modest possibility for differentiation from direct competitors, which offer
implementation of the same software. By choosing certain sectors to serve, they can offer a larger
59
predetermined solution to their client, which reduces costs of implementation. Their revenue model
is based on the license or lease payment for the software and the chosen add-ons, with virtually all
revenue streams stemming from these initial fees. They have maintenance contracts for virtually all
customers, which provide on-going income. However, new implementations provide the bulk of
revenues.
Thus, we find two groupings of 1) companies pursuing market-based pricing, with on-going
payment methods and 2) companies pursuing value-based pricing, with one-time payments. The
outlier currently has relatively limited opportunity for differentiation, and thus very limited choices
of revenue models. However, in their current form, the standard tool customers have adopted
market-based prices, which may indicate either a strategic decision or a lack of choice in pricing.
However, the existence in both companies of offerings with very different revenue models favors
the former explanation. Although the differentiation of a premium service in the case of Multi-
Software and Heatsaving Co does not seem to restrict their pricing options, we cannot be sure that
this is the source of their freedom use value-based pricing.
8.2. The effect of economies of scale or economies of scope on prici ng
strategy
The traditional effect of economies of scale or scope on prices is downward, where an increase in
scale or scope results in the ability to offer lower prices while retaining a profit margin. Economies
of scale and scope appeared to affect the pricing of the case companies in different ways. At Multi-
Software, there were limited economies of scale or scope of which to take advantage. At Auto-Site
and NAV Consulting, economies of scale allow a lower price level than that of many competitors
and they take advantage of this discrepancy by charging less than market prices, or by offering
volume discounts. Survey Blend, they also take advantage of economies of scale by charging prices
similar to those of their competitors. They also employ an economies of scope approach by cross-
selling additional products to existing customers. Lastly, at Heatsaving Co, economies of scale
provide significant cost advantages but the discrepancy is not turned over to clients. Rather, the
price follows a set fee according to the volume of the building, which is the same for all clients
regardless of cost. It follows that, at least among the case companies, an economies of scale or
scope approach can allow cost savings, but its effect on price differs from company to company.
Thus, there is no direct correlation between economies of scale or scope and pricing strategy.
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8.3. The effect of customer perceptions on revenue model s and pri cing
A common factor of pricing across four of the case companies was a priority on customer
perceptions of fairness. While customer perceptions of fairness in pricing are also important at
Heatsaving Co, seen from the lack of discounts, they stress the value provided about all else. At
Multi-Software, there is some motivation to continue moving towards a value-based model, but the
fairness perception and difficulty in addressing these perceptions are holding them back. Similar
issues were asserted by the other three fairness-based companies. Another customer perception
affecting pricing which was common to multiple case companies was goodwill. Although goodwill
as an accounting term refers to the intangible side of assets, in this context it refers to the Business-
to-business (B2B) equivalent of consumer surplus, or the difference between what the customer is
willing to pay and what they are actually charged. However, the source of this goodwill was
different in each case. At Auto-Site, the customer perception of goodwill provided through pricing
is a cap on costs, which their competitors do not provide. At Heatsaving Co, goodwill was provided
by offering increased energy savings benefits due to the rising costs of district heating. Because the
actual value of these benefits is subject to risk, they do not affect the price. Goodwill at NAV
Consulting stems from charging the customer the same hourly rate regardless of what function they
are providing to the customer. Although some types of work can provide much more value to the
customer than others, prices remain the same. Perhaps the clearest example of providing a
perception of goodwill to the customer is Survey Blend’s deal on their evaluation tool for art
schools. Although current costs per implementation are clearly lower than they are for their other
customers, they offered the low rates even at the beginning, when costs per implementation were
relatively high.
8.4. The rel ati onship between prici ng pri nci pl es and sal es strategies
Whether pricing principles guide sales strategies or the other way around can be an indicator of the
successful implementation of a pricing strategy in general. If sales strategies guide pricing, it is
probably a sign of either a lack of competitive advantage or a shortfall in pricing strategy and/or the
communication of value. At three of the case companies, the rule is sales strategy guiding pricing.
The exceptions found help to define the extent to which this phenomenon was observed. At Survey
Blend, the exception to the rule was the special deal they offered to art schools. They purposely
61
built an alternative pricing structure in order to serve a new customer constituent for which their
main pricing model would not have produced many clients. The exception at NAV Consulting is
their pricing of add-on components of their ERP offering, such as billing modules. They have clear
prices for these products for which they do not offer discounts regardless of the extent of the
volume purchased by a single customer. Because the exceptions to the rule of sales guiding pricing
principles are only in marginal offerings, their strategies can be considered sales driven, rather than
pricing driven.
The two companies whose sales strategies were guided by pricing principles were Heatsaving Co
and Multi-Software. Heatsaving Co built its pricing principles based on the value of their service to
potential clients. The revelation that price increases have not yet dropped their hit-rate from a very
high level demonstrates two forms of evidence that their pricing strategy indeed comes first. First,
they have increased their prices even recently, which means they are purposefully approaching the
level of value provided to customers with their pricing, rather than leaving much of the consumer
surplus on the table. Second, when making prices changes, they are looking for changes in sales
figures, which they hold as an indicator of whether their pricing strategy is working. At Multi-
Software, pricing principles are built on the proposition of being one of the best custom software
service companies in the market. However, they limit the upside of their value pricing in order to
seem fair to customers. By principle, they would not charge higher than a certain level for a project
that is quickly completed, regardless of how much more time and/or money a competitor might
have required for a similar project. In their view, the customer would feel cheated, and they cannot
price the project much above market prices because it would be too hard to sell. However, there are
examples of pricing being driven by sales strategy. When in a particularly competitive situation or
working with an unhappy customer, the team leader is allowed to award discounts. Because this
exception to the rule is a peripheral case and not their normal way of doing business, theirs can
nonetheless be considered a pricing driven strategy.
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9. CONCLUSIONS
9.1. Empirical findings of prici ng method usage
Market-based competitive and cost-based pricing were common methods across most of the case
companies. Heavy use of these traditional methods was not surprising, but the interviewees were
also quite articulate in their familiarity with these pricing methods. Value-based pricing and price
skimming were less common, but were closely related in practice. Case companies employing one
use the other as well. The use of customized pricing was explicitly stated by only one case company,
while lifecycle and experience pricing were only referred to lightly, as they were unfamiliar
concepts to most interviewees. All the case companies used hourly-based pricing, although it was a
staple of revenues for only two of the five case companies. The use of target return pricing was
difficult to ascertain, as the term was new to most interviewees. Group /segment-based pricing, as
well as versioning and bundling, were used mostly by those companies with standardized offerings.
An interesting finding of the research was that everyone claimed to use pricing as a signal, which
also demonstrated a clear understanding of this aspect in practice. However, discounting was
perhaps the most misunderstood concept discussed, with some interviewees claiming not to use
discounting, while later describing even elaborate discounting policies. One interviewee even
claimed to use discounting, and proceeded to describe a practice quite different from traditional
definitions of discounting. Data on the usage level of different pricing strategies was used to build
the pricing framework for this thesis. However, it also demonstrated the lack of familiarity with
pricing concepts among a sample of leaders in the IT service sector in Finland.
9.2. Findi ngs from the four descri pti ve research questi ons
9.2.1. How does a firm’s revenue model relate to differentiation strategy?
Across the board, differentiation was related to the choice of revenue models. The more
standardized offerings used more on-going payments, while the custom offerings were centered
more on one-time payments. This finding supports the idea that the core product, a standard or
custom offering, is what drives the choice of revenue model in the studied firms. However, an
alternative explanation is that the type of core offering makes adoption of a certain revenue model
more natural, but does not restrict the choice. This explanation is supported by the connection
between differentiation and revenue model, as well as the expressed goals of the company leaders to
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push for on-going revenue models. Because the leaders of case companies with one-time revenue
models shared a conviction of moving towards more on-going revenue models without changing
their core differentiation, this connection can be viewed as a tendency at outset, but not a cause and
effect relationship.
9.2.2. Do economies of scale or economies of scope dictate pricing strategy?
Some companies’ pursuit of economies of scale or scope had an effect on pricing strategy. However,
for others, the connection was unclear. Among the case companies there were numerous examples
of economies of scale providing opportunities for lower prices. Some companies based price
discrepancies on savings from economies of scale, while others were aware of the possibility, but
strategically chose not to apply it to prices. Economies of scope was generally less applicable in the
case group, but was used to price multiple product bundles at one case company.
9.2.3. Which customer perceptions effect pricing and revenue model use?
The two most common customer perceptions affecting pricing and revenue models were fairness
and goodwill. Although goodwill as an accounting term refers to the intangible side of assets, in this
context it refers to the B2B equivalent of consumer surplus, or the difference between what the
customer is willing to pay and what they are actually charged. This perception is driven by the
objective value of an offering and the subjective perception of what the offering is worth. The other
customer perception found with the case companies was fairness. This perception mired the internal
goals of moving toward value-based pricing, and was addressed in the case group of case
companies particularly through transparent pricing principles.
9.2.4. Do pricing principles currently guide sales strategies or vice versa?
Two of the case companies had sales strategies which were guided by pricing principles, while the
other three allowed sales strategies to guide their pricing. These concepts have bearing on one
another so categorizing the case companies required some judgment. However, each interview
transcript provided sufficient evidence for the categorization of these case companies as either a
sales or pricing driven enterprise. The firms with a premium differentiation were those that placed
pricing before sales. The companies categorized as sales driven enterprises each confirmed this
finding as correct as part of the validation strategy of this research.
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9.3. Impli cations for theory devel opment and future research
The current study describes the pricing strategies and methods in use at five SMEs in the IT service
sector in Finland. The case companies used pricing methods to varying degrees, but all of the case
companies had ambitions to use value pricing. However, on a general level they struggled to
implement their value pricing goals in practice. There is therefore a need for greater dissemination
of knowledge on value pricing methods and their implementation in practice. Continued exploration
of new value pricing methods is also essential in order to bring value pricing as a concept to the
next level.
This paper suggests a framework as a tool for building and maintaining partnerships using two
dimensions: 1) Value-based versus market-based pricing strategies, and 2) On-going versus one-
time revenue models. In this study, the level of value-based pricing was evaluated on the use of 14
different pricing methods. A relative scale was used to emphasize the differences between offerings
among the group of case companies, thus the values found in this study are not directly comparable
to other firms. However, the relevance of using a scaling system for the value-pricing dimension
was verified by feedback from the interviewees.
The level of ongoing versus one-time revenue models used by case companies was evaluated based
on the use of two different pricing methods. A greater number of inputs would have produced a
more robust framework, though the current method also demonstrated the value of employing a
scaling system for revenue models. Further studies could focus on building a more comprehensive
set of factors for both dimensions.
A cross-case analysis resulted in groupings of the case companies into those that had a value pricing
strategy and one-time revenues, and those using market-based pricing and on-going revenue
streams. Some case companies had product lines that followed strategies significantly different
from their main product line from the pricing and revenue model perspectives, and these were thus
scaled separately in the framework for pricing strategies. Most studies to date on partnerships have
focused on sharing of information and expertise or on building cooperation between operational
functions. (Lombardo, 2005; Merhout and Havelka, 2008) In a study on supply chain pricing, Voeth
and Herbst looked for opportunities for suppliers and customers to use pricing as a tool for building
mutually beneficial relationships. In order to reach this goal, they state that pricing must be viewed
65
as a tool for outcome optimization rather than a distributive parameter (2006). In a review of value
added partnerships, J ohnston and Lawrence found that even in commoditized fields such as
construction, contractors make contracts with partners offering reasonable prices, and not always
the lowest bid (1988). Although the literature has attempted to describe pricing as a tool for
partnerships (Voeth & Herbst, 2006; J ohnston & Lawrence, 1988; Porrini, 2006), there has been no
attempt to explain what aspects of pricing and revenue strategies make the most significant
contribution to the success of partnerships (Shipley & J obber, 2001). Sainio and Marjakoski
describe value based pricing and revenue logic as key determinants in building business models, but
do not make the connection between these inputs and the goal of building partnerships (2009). We
addressed this gap in the literature by proposing a framework to assess pricing as a tool for
partnerships based on these two dimensions: 1) value versus market pricing and 2) on-going versus
one-time revenue models. This emergent outcome confirms the finding from previous research that
pricing should be considered at a strategic level.
The dimensions used in the theoretical model were supported by the stated future aspirations of the
interviewees, and can be used by companies to build partnerships with their clients. Those who used
one-time pricing planned to move towards on-going payments and those using market-based prices
planned to move towards value-based pricing.
9.4. Managerial Implicati ons
Pricing should be considered on a strategic level for the sake of profitability and building
partnerships. Managers who find that the value of their offering is superior to the prices they are
charging have the most to gain from pricing strategy in terms of profitability. Those in particularly
competitive markets may see that value pricing is not allowed by market competition, and if they
are using cost-plus or market-based pricing, this may be true. However, a truly limiting factor is
likely to be an awareness of value pricing options available. Data from the interviews demonstrated
that many pricing concepts were new or misunderstood; discounting being the clearest example of
this lack of familiarity.
For firms who see clients as partners and want to build deeper cooperation with them, pricing can
be used as a tool to meet these ends. It is acknowledged that there are numerous dimensions
relevant to partnerships and the claim is not that a carefully orchestrated pricing strategy and
66
revenue model alone will build a partnership. Rather, the implication for managers is that pricing
has been traditionally been treated as a necessary evil of doing business. There are at least three
reasons that this view is wrong. First, customers are not as sensitive to price as generally believed.
Second, a value pricing strategy can align the interests of both parties. Thirdly, an on-going revenue
model can place additional pressure on the supplier to deliver continuous value. The framework
proposed can be used as a strategic tool to build deeper partnerships with clients.
9.5. Strengths and limitati ons
The multiple case study method employed in this study helped to overcome the hurdle of novel
terms by providing clarification of concepts to the interviewees. The interviews were structured
which encouraged comparability between the cases. The integrity of the interview data was ensured
by conducting all interviews within a short time frame, producing full transcripts of interviewee
comments, and translating the complete texts. The framework for using pricing as a tool for
building and maintaining partnerships was based on the literature, particularly research done by
Sainio and Marjakoski, and the final framework was populated with eight different offerings from
the five case companies (2009). The stated future directions of the partnership pursuant firms
supported the validity of the framework as a measure of partner cooperation.
Future research on the validity of these axes as measures of partnership is needed. A refined scale of
measuring the extent of value-based pricing would also help to verify the findings. The measure of
ongoing versus one-time revenue models could be easily improved, at least in theory, by using
direct figures from the companies studied. However, this method is more likely to suffer from
confidentiality issues, even assuming the target companies collect this information in the first place.
9.6. Lessons learned
The thesis project taught about many aspects of both the professional and academic sectors in
addition to the stated findings mentioned earlier. Building a strong structured interview is a difficult
task for a novice researcher and it was important to seek help from someone with more experience
in research. Studying the literature on the case study method of research made clear that there are
many advantages to this method that quantitative methods do not offer. An in-depth understanding
of the companies and a personal connection to the business leaders interviewed may open doors to
67
future collaboration with this particularly strong group of case companies. Building and testing a
framework, which is simple enough to be a useful tool in building pricing strategy, was a satisfying
result of the research process.
68
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11. APPENDICES
11.1. OUTLINE OF THE STRUCTURED INTERVIEWS
1. Introduction
a. Background
b. Confidentiality issues
c. Permission to record the interview
d. History and the current state of the firm
2. Revenue model (general)
a. How would you describe your market and the firm’s position in that market?
b. Describe the revenue model(s) of your firm. (How do you monetize your services?)
c. Has your revenue model changed during the years of operation?
d. What are the future expectations concerning your firm’s revenue model(s)?
3. Revenue model (specific)
a. Do you aim at differentiating your offering?
i. By offering something different?
ii. By increasing the customer’s perceived value compared to the competition?
iii. Through customized prices?
iv. By selling to customers at different prices (eg. depending on their ability to
pay)?
v. Versioning?
vi. By offering choices and allowing the customer to decide?
vii. Group or segment based pricing
b. Do you pursue price (and cost) leadership?
i. Through economies of scale? (serving many customers)
ii. Through economies of scope? (expanding offerings to select customers)
c. What is your revenue model?
i. Sources of revenue?
ii. Forms of revenue? (support services, maintenance, others)
iii. Complementary or alternative offerings
iv. Licensing model
v. How do you strive to keep existing clients? Are clients experiencing
significant switching costs?
vi. Do your customers compare your service prices to the competition? to in-
house?
vii. Do you use pricing as a cue?
viii. What is your general pricing scheme? (Market-based pricing, Margin/Cost
based pricing, Value based pricing)
d. What are your customers’ rights to use your software based on?
i. Time (monthly, annual fee)
ii. Location (office, market area, language area etc.)
iii. User type (company, organization, private individuals, students) and number
iv. Hardware environment (number and quality of processors) and software
environment (operating system, platform, database access, etc.)
v. Transactions (purchase or use frequency)
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vi. Income (income or profit sharing, royalties, OCM-contracts)
vii. IPR management (source code availability options, rights to further distribute
solutions, restoring derivatives to the original developer)
e. Do you apply some of the following principles in pricing?
i. Cost-plus pricing (markup prices) Describe your cost structure.
ii. Competitive pricing (Neutral parity prices, above market prices, below
market prices)
iii. Life cycle pricing (skimming high entry prices, penetration aggressive low
entry prices
iv. Experience curve pricing
v. Target return pricing
vi. Economic value based pricing (contingency pricing)
vii. Bundling (sticky or non-sticky goods/services)
viii. Discounting (where are discounts common, where are they less common?)
4. Other
a. In addition to yourself, is there someone else who could provide insight about the
revenue model or pricing used in your firm?
b. Are there any documents (about your firm/products) available that would be useful
for my research?
c. Are there other important issues about your revenue models or pricing that were not
included in this interview?
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11.2. Value pri ci ng factor weights and scores
Table 3: Value pricing factor weights and scores
Pricingmethod Weight Auto-Site
Heatsaving
Co
Multi-
Software
NAV
Consulting
Survey
Blend
Auto-Site
white label
Survey Blend
election machine
HeatsavingCo
deal
Market-based -1 8 1 1 9 8 6 2 1
Competitive -1 9 1 2 9 8 6 1 1
Cost-based -1 6 1 2 8 7 7 2 1
Value based 1 4 9 8 2 4 8 8 9
Price skimming 1 2 8 9 4 2 7 7 9
Customized prices 1 2 1 9 2 7 8 8 1
Lifecycle 0,5 3 5 2 1 2 4 1 7
Experience curve -0,5 1 1 6 6 5 1 1 1
Target return 0,5 7 8 6 4 7 8 8 8
Segment based 1 9 8 5 5 8 9 9 8
Versioning 0,5 9 8 1 6 4 3 1 8
Bundling 0,5 9 9 3 1 9 8 7 9
Pricing as a cue 0,5 9 8 9 8 7 9 6 8
Discounting -1 7 1 6 9 7 1 1 1
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11.3. Revenue model factor weights and scores
Table 4: Revenue model factor weights and scores
Revenue Weight Auto-Site
Heatsaving
Co
Multi-
Software
NAV
Consulting
Survey
Blend
Auto-Site
White label
Survey Blend
election machine
HeatsavingCo
deal
Hourly based -1 2 1 7 9 3 7 2 1
Licensing 1 9 2 1 6 9 7 1 2
doc_468638575.pdf