Putting a Price on Solutions
Torsten Seifert, Dennis D. Swinford, Eric V. Roegner · The McKinsey Quarterly · 2001
Remember: the whole is worth more than the sum of its parts. Setting the right price for a solution is really crucial: too high, and customers will meet their own needs; too low, and suppliers won't get paid for the value they are delivering and the effort that went into it. How can suppliers figure out the right premium and the pricing model that will suit their customers? A supplier needs to know precisely what a solution is and to be candid about whether or not it is offering one (see Making solutions the answer, in the current issue). A solution isn't simply the bundling together of related components. Nor is it the mere integration of products and services provided by a customer, even if the supplier itself also provides some of the components: a software integrator that provides a sound card in the process of installing software doesn't instantly become a solutions provider. A true solution is defined by and designed around a customer's need, not around an attempt to find a new use for a supplier's current products. And only as the relationship between supplier and customer becomes more collaborative in defining the customer's need--designing the product and service components and integrating the whole into a distinctive offering that is better than any alternative--can a supplier be said to offer a true solution (Exhibit 1). Suppliers can earn a premium in any role. But solutions providers are due the largest premium because they create a new way for components to work together to enhance the solution's overall functionality beyond that of the next best alternative and also spare the customer from the need to deal with multitudes of suppliers and to integrate components and services itself. Add to that the value of a collaborative relationship, in which the solutions provider assumes some portion of its customer's risk and guarantees responsibility for part of the business. Finally, solutions providers earn a greater margin because the value of the integrated whole exceeds the value of its discrete components; indeed, by definition, the margins for a solution's individual components are not transparent. The size of the premium earned varies depending on the value delivered to each of the customers, but the process of setting a price is similar for all of them. The experience of InfraSolv, a network infrastructure solutions provider, shows how one company arrived at its price. InfraSolv developed a new infrastructure solution comprising hardware, software, maintenance, and professional services--a combination that made it possible for its customers' networks to handle data more efficiently and flexibly. Each customer could use different subsets of features to meet its needs. To settle on a price for a customized solution, InfraSolv went through three steps. First, it developed a broad price range based on a standard configuration that would meet an average customer's needs and also identified the maximum and minimum price levels for such a solution. The maximum price was calculated by taking the net present value derived from the functional, process, and relationship benefits that would accrue over the lifetime of the solution compared with the value to be had from the legacy system. The solution's benefits included operating and capital-cost savings as well as increased revenue. From that figure, InfraSolv subtracted the customer's incremental operating and capital costs accrued over the same period. It then added the impact of its offering compared with that of a competitor's next best alternative, which was at least six months behind InfraSolv's in development. (Delay alone could have cost customers that waited for the competitor millions of dollars in lost revenue, and the promised alternative would offer limited functionality when it did arrive. …