Designing a commercial model to unlock revenue potential

It requires a great deal of balance to strike a win-win partnership between buyers and service providers. The partnership that is mutually beneficial flourishes only when both the parties are satisfied. When buyers see compelling results from their investments that positively impact their top line and bottom line, and when the service providers are empowered and incentivized to innovate, think out of the box and outperform.

Traditionally, the buyers and the service providers have always engaged in the souring models that are based on staff augmentation and Full Time Equivalent (FTE) pricing. Undoubtedly, this model is safe and linear but it is substandard as it approaches outsourcing as a method to receive the appropriate skills, with the appropriate pricing. This traditional model does not allow the buyer to link the IT services with its business outcomes, and the service provider gets stuck and never moves up the value chain and become a trusted partner.

With the new wave of matured outsourcing and the rise in customers’ expectations of getting higher value from the service providers, the next generation buyers and best-in-class service providers are challenging the status quo, moving towards the co-development and co-GTM models, and utilizing emerging commercial models.

The service providers are compelled to innovate and provide greater business value and impact.

There are various commercial models that are available in the industry with their respective pros and cons, however, a specific commercial model that helps to unlock an asset’s revenue potential is discussed here.

Commercial models - pros & cons

The commercial models that are available today in the industry can be largely divided into three categories, input-based, output-based, and outcome-based.

Input-based pricing model: This model is based on the amount of input provided. This is a traditional pricing model wherein the price that is charged to the customer is based on the FTE’s rates/hour and the number of FTEs provided. This is also called staff augmentation model.

Output-based pricing model: This pricing model refers to the amount of output that is generated by the service provider for the buyer and the payment is solely based on the generated output. Here, output refers to any business output such as the “number of claims processed” or “number of invoices generated” etc.

Typically, in this model, a base price is agreed against a volume band between both the parties, and any increase or decrease in the output is priced based on the already defined price-volume bands.

Outcome-based pricing model: In this model, the pricing is based on the business outcome that is achieved by the buyer through the service provider’s contribution. The sole scope of this model is customer’s business outcome such as positive revenue impact or positive impact on the bottom line.

Another approach

Apart from the above mentioned commercial models, there is another approach which can be applied to come up with the best suited pricing model for the assets/solutions/intellectual property. This approach is largely based on three parameters indicated below. This can be either used as single instance or as a combination of two. The commercial modelling can be done by:

• Instances of accepted price points by the customer: The historical price-points i.e. at what price point the customers have accepted the asset in the past deals.
• Competition and industry selling points: This refers to the price points at which the competition or industry is selling the asset.
• It requires feature mapping and understanding of the competitive advantages.

Other methods: These may refer to how an asset has benefitted the customers in terms of generating potential value i.e. effort savings/cost reduction etc. The pricing is based on the benefit-sharing of the potential value which is generated for the customers.

Advantages of the above-mentioned approach

• It is simple and straightforward as it gives an edge over the competition on the pricing in any deal.
• It also takes care of the fact that the customer is an existing client, so it will take the historic price point in consideration.
• The above approach can be applicable for any hybrid model wherein the organization wishes to keep its existing client base intact by not altering the old pricing model but wants to introduce new services with different pricing models.

Summary

The commercial modeling is an intrinsic part of any service organization; however, the industry models cannot be applied as-is. These models when rightly applied can help the organizations to generate additional license revenue with higher operating margins. The revenue impact can be huge and when used as a deal differentiator, it can do wonders for any service organization that is looking to outsmart the competition.

About the Authors

Hina Jatale has been with Wipro for five years and has around ten years of total experience in IT and technology consulting. She has been involved in multiple technology and transformation assignments that span across various domains such as Manufacturing and Hi-Tech, Consumer & Industrial and Telecom. In her current role, she is a consultant with the IP & platform solutions team that focusses on non-linear growth. Hina has a Masters in Management from the UK and a Bachelors in Engineering.

Mandar Vanarse (General Manager – Innovation & IP) is a design thinker, innovator and digital strategy expert. He has been involved in large transformation programs. He is the author of ASSIMPLER Framework for EA and IT Strategy. Currently, Mandar is heading the IP portfolio at Wipro.