The document discusses how the Internet of Things will transform pricing models and processes. It argues that pricing will be based on new sources of data provided by IoT sensors and systems. This data will enable more innovative pricing strategies that are tied to customer value, like pricing based on usage metrics. The IoT may also lead to "composable pricing" where the price is dynamically configured based on the individual components that make up an IoT solution. Overall, the document advocates for using IoT data and new pricing models to both create more value for customers and capture more of that value through price.

1. How will the Internet of Things
transform pricing?
Steven Forth
May 24, 2017
Ibbaka Performance Consulting
steven@ibbaka.com | +1 604 763 7397

2.  Based on a presentation on May 24 at
Liveworx 2017 in Boston
 See also
Pricing the Internet of Things: The Path to
Composed Pricing - A conversation with Andy
Timm and Joe Biron of PTC
Pricing the Internet of Things: Insights from
Liveworx
About the presentation
Steven Forth
steven@ibbaka.com
+1 604 763 7397
@StevenForth
@IbbakaPricing
www.ibbaka.com

3. Key Points
• Pricing is based on the interpretation of data
• The Internet of Things provides new sources of data
• This will change pricing models and processes
• Pricing innovation is a compelling way to
create & capture value
• Design pricing innovation in from the beginning

4. The GE90 Series - Challenge
• Innovative technology
• Skeptical customers
• Information asymmetry
• Price on the value metric

5. The GE90 Series - Solution
• Price on the value metric
(flight time)
• Take on the risk
(GE had more information)
• Get higher margins
(Reinvest in innovation)

6. My basic approach
Create
Value
Communicate
Value
Capture
In Price
Invest
In Innovation
Understand
Value

7. Changing the process
Common
Product Cost Price
Customer
(hopefully)
Value
(maybe)
Customer Value Product Price Cost
Compelling

8. Pricing basics – Three Pricing Methods
Cost Plus
Market Following
Value Based
The Good
• Simple
• Assures Profits
The Bad
• Do you know the costs?
• Open to competition
• Leaves money on the table
The Good
• Responds to market
• Focus of innovation
The Bad
• Focus on competitor not
customer
The Good
• Optimizes profits
• Customer focused
The Bad
• Complex
• Hardest to execute

9. Pricing basics – Three Pricing Strategies
Penetrate
Market Following
Skim
• Optimize market share
• Cross many segments
• Price lower than alternatives
• Use when there is an actual first mover advantage
(land grab, economies of scale, learning curve)
• Optimize revenue
• Segment focused
• There is a price giver in the market (not you)
• Value is driven by an external factor (energy prices,
interest rates …)
• Optimize profits
• Customer/Segment focused
• Value-based
• Requires real understanding of customers

10. ModelsStrategies Penetrate Market Following Skim
Cost Plus
Are you the low-cost
solution?
Understand the risks in
your cost structure
You don’t have enough
data to execute
Market Following
Price at a discount to
market leader
Price relative to market
leader (slight premium
or discount)
Price at a significant
premium to market
leader (if you have the
value)
Value Based
Give most of your
differentiated value to
your customers
Connect price to
market drivers that
drive value
Demonstrate
differentiated value,
share fairly with
customers
Putting it together

11. Value is
For the customer
(has nothing to do with cost of your inputs or how cool
you are)
Relative to an alternative
(there is always an alternative – even if it is ‘doing
nothing’)
Economic (quantifiable in dollars) and Emotional
(in some cases there are other important ways to quantify
value, like Quality Adjusted Life Years in healthcare)
What is value

12. Economic value (Economic Value Estimation)
Price of Next Best
Competitive Alternative
Lower Capital
Investment
+ Value Driver
Lower Working Capital
+ Value Driver
Lower Operating Cost
+ Value Driver
Higher Revenue
+ Value Driver
Shortcomings
- Value Driver
Unique Costs
- Value Driver
Differentiation Value
Economic Value
Based on the work
of Tom Nagle

13. Economic value and price
Price of Next Best
Competitive Alternative
Lower Capital
Investment
+ Value Driver
Lower Working Capital
+ Value Driver
Lower Operating Cost
+ Value Driver
Higher Revenue
+ Value Driver
Shortcomings
- Value Driver
Unique Costs
- Value Driver
Price Range
Based on the work
of Tom Nagle

14. Economic value and price strategy
Price of Next Best
Competitive Alternative
Positive
Value
Drivers
Negative
Value
Drivers
Price Range
Based on the work
of Tom Nagle
Skim
Market Following
Penetrate
Price Strategy

15. Emotional value (Maslow’s hierarchy)
The higher
the need
served the
higher your
pricing
power.

16. Pricing across the technology adoption cycle
Sustaining Innovations
Disruptive Innovations From Moore
Crossing the Chasm

17. Pricing across the technology adoption cycle
From Moore
Crossing the Chasm
Tend Not
to Pay
Tend to
Overpay
Look for
unique value
drivers for
specific segments
Look for common
value drivers
across segments
Innovate for focused
differentiation
Unbundle services

18. Pricing Model
Usage Model
Value Model
The pricing data supply chain
Your data model is your DNA
You need three models
(Value, Price, Use)
Connect the models
Understand the feedback loops
Sensor
Data
External
Data
Enterprise
Data
Value Pricing
Data
Invoice
Data
Policies
• Risk sharing
• Discounting

19. The economic value model
• Allow your customer to access a new market
• Give a customer a way to increase prices
• Improve pipeline metrics for your customer
Revenue
• Make a process more efficient
• Reduce use of an expensive input
• Substitute a cheaper input
OpEx
• Make a process more efficient so a new plant investment can be deferred
• Prevent failures that could take an asset offlineCapEx
• Reduce inventory
• Accelerate inventory turns
• Reduce accounts receivable
Working Capital
• Use formal risk models
• Identify how you provide data
• Model how you reduce risk
Risk Reduction
• Use Black Scholes or other standard modelValue of an Option

20. A practical example
Predictive disease models
(savings & revenue)
Crop value models
(revenue)
Energy & water
consumption (savings)
Pheromone consumption
(savings)
Price per acre based on
economic value

21. • Use new access to data to understand
value to the customer
• Find pricing metrics that model value
• Leverage your deeper understanding to
manage risk for your customer
• By accepting the risk you can charge
higher prices
Pricing model innovation
ROI x769,000

22. Alternatives
• IoT solutions are comprised of many
components from multiple sources
• Some are easily swappable
• Underlying prices can and will vary
• Value to customer will depend on use
• How do we price in such an environment?
Composable Pricing?
M2M Auctions?
Dynamic Price/Value Based Configuration?
Is the future Composable pricing?
$
$
$
$
$
Economic Model
• Costs
• M2M Auctions
• Contribution
Usage Data
Pricing
Components

23.  Model how you create value for customer
 Capture as much of that data as you can in
 Your own data (sensors)
 Systems integrations
 Open source data
 Connect your value – use – pricing models
 Look for feedback loops – positive and negative between the models
 In a ‘skim’ strategy – connect price to value
 Monitor actual results of value – use – pricing and improve your models
Checklist

24. Key Points
• Pricing is based on the interpretation of data
• The Internet of Things provides new sources of data
• This will change pricing models and processes
• Pricing innovation is a compelling way to
create & capture value
• Design pricing innovation in from the beginning

25. ?
?
?
Questions
Steven Forth
steven@ibbaka.com
+1 604 763 7397
@StevenForth
@IbbakaPricing
www.ibbaka.com