Who Values Value Pricing?

I had a delightful conversation last week with Thomas Wieberneit, Marshall Lager, and Ralf Korb on CRMKonvos. These CRM Gurus and I were talking about the future of CRM and some of my recent research when the topic of value pricing came up.

I didn’t have a strong opinion about value pricing, in fact I haven’t thought about it a lot. It’s the idea that CRM products should be priced according to the utility they deliver, which sounds good, but it raises a lot of questions too.

For instance, who gets to determine the value received and, while we’re at it, what is the right measure of value?

If we each buy a car and you drive yours 20,000 miles and I drive mine half of that, it’s sort of clear that you are getting more value, at least as measured in miles driven, all other things being equal. But your car deteriorates and depreciates more than mine, so the residual value in my car might be greater.

That’s a simple example and things get complicated from there when trying to make a comparison to CRM or any software for that matter. Software isn’t a manufactured product in the same way that a car is, so it doesn’t deteriorate except as business processes change making software less useful.

Old software works fine but only as it was designed to work. It doesn’t wear out like a car, but it does become useless and I have research that shows this. But so what? That’s not an answer to why we don’t have value pricing.

Establishing Value Metrics

You might say that subscription-based CRM is the answer to value pricing since it dramatically lowers the cost of acquisition and implementation over conventional software, but that’s not value pricing. Subscription or cloud computing really just represents the commoditization of IT and its savings reflect normal competitive pressures that every industry goes through as there are more competitors and fewer customers new to the market.

With value pricing on the other hand, you might expect the cost of CRM to rise and fall like a tide as a business gets more or less use and value from its investment, but who decides that?

The holiday season we’ve just been through had weeks of sub-peak CRM activity (except in e-commerce). I suspect that many business users used their CRM systems to a lesser extent and thus got less value from them, at least if you measure value as a function of users banging away. Some might disagree and I’d be one of them. If only one person is using the system and it happens to be the CMO or head of sales or someone like that, the value received for such things as year-end analysis or future planning can be quite high.

We can go on like this, but it seems pretty clear to me that value pricing, as a subjective metric, is not easily quantified; and this, not vendor greed or some such formulation, is the reason we don’t price CRM differently.

This is not to say that value pricing can’t work in any situation. My favorite example is any customer that instead of buying earthmoving equipment, as an alternative subscribes to a daily fee for parking the equipment on a job site plus a fee for cubic yards of earth moved. That seems about right. Naturally, the daily fee would include the wages of an operator, fuel, insurance etc.

It’s a lot harder to do that in the software world because even if we wanted to, we’d have to come up with some fancy algorithms and calculations to get to the CRM equivalent of cubic yards moved.

If It’s Not Broken…

This isn’t the first time humanity has been up against an imponderable like this. My favorite example is the common law: the oldest laws which we have usually but not exclusively handed down through English-speaking civilization and goes back to the Magna Carta of the Middle Ages.

The common law covers all sorts of legal stuff like theft and murder, but it also forms the basis of hospitality law and family law that many of us don’t think about. I am no expert but one of my favorite jurists was Oliver Wendell Holmes, Jr.

Holmes sat on the Supreme Court — and in his early career in Boston wrote a famous analysis of common law which is still a reference work today. “The Common Law’s” author set out to find a way to rectify a lot of case law that seemed divergent and contradictory. Holmes concluded that the common law’s great value was that the abstruse network of laws and rulings make sense, more or less, when seen from the perspective of a case, homogeneity be dammed.

Holmes’ great contribution to common law was to say that it works, and it isn’t broken so don’t bother trying to fix it. That’s a tough admission for any expert and things don’t always work out that well. I am reminded of the story of the young plumber who, upon seeing Niagara Falls for the first time says, “I think I can fix it!”

No, you can’t. It isn’t broken. Sort of like CRM pricing.