I need ideas for my public service announcement.

Need examples and ideas for a unique pricing model for a new service

• I am rolling out a new specialized outsourced groupware service and am looking for ideas for an alternative pricing model. We have a unique target customer (risky startups), and they don’t have the initial funds to afford the standard cost of our proposed service. Here is what I mean. HERE IS THE SCENARIO: ----------------------------------- - The target client for this service is a risky startup that won’t have revenues for 6 months. If they pass the 6 month mark, it is assumed that they will have plenty of revenues. If not, it is assumed they will be history. - A 50% discount will be given on the front end (the first 6 months of service will be discounted), and in return there needs to be some kind of a payoff after the 6 month mark. - Since the discount is given, and the company purchasing is risky startup (i.e. the payoff for the discount may never come because the company is toast before the 6 months), the payoff amount should be a risk premium, meaning that it should be more then just a repayment of the discounted amount. - Equity (shared, options, or warrants) are not an option The reward must come in money. Even if it is in the form of a price increase for the same service. - The service being given needs to be the same after the 6 months as it has always been. - For example, the service would normally cost $10,000 to setup, and then $4,000 a month for hosting a 10 account version (10 employees). The discount given would be 50% off the setup, and 50% off the first 6 months. - The goal of the service is to make the company run more efficiently (and able to utilize temporary outside contractors/consultant/vendors with the same level of collaboration as a in-house permanent employees), so that more hiring a significant number of new employees does not become necessary after startup takes off (after the first 6 months). - The service is setup in a way that it cannot be metered, it is an unlimited service. HERE IS WHAT I AM LOOKING FOR: ----------------------------------- I am looking for 2 specific things in this answer: 1 - Examples of unique and innovative pricing models that other service companies have used. Preferably something that might apply to what we are doing, or might spark an idea that evolves into what we are doing. I am looking for models that have the characterizes (and fit the following scenario) as noted above: 2 - Suggestions from Google Answers fans for an innovative pricing model for our new service. (in the form of Comments to this question). Any contributions are very much appreciated. Thanks in advance!

• Answer:

  Dear Sherpaj, I decided to go ahead and do some research for you. Which gave me some additional perspective on your situation. The best way to establish any kind of share-risk pricing arrangement is to have a way to quantify the value of the product or services being provided. You have two initial stumbling blocks in that regard: 1) The service is setup in a way that “it cannot be metered, it is an unlimited service.” So, you can’t tie long-term compensation to any specific action generated within your system. 2) “The target client for this service is a risky startup” – so, they don’t have any existing sales or performance to measure. Everything is new. You can’t negotiate a share of the increased profits or sales. These two things make your situation particularly unique. You have a strong bargaining point, though: You are providing some core services for this business. They would not be able to effectively operate without your tools. Looking through shared risk models discussed online, the following structures are repeated in many articles or scenarios. The general concepts apply to you. Although, I think one of the best models really comes from the film industry. Coincidentally, in today’s September 15, 2002 issue of Parade Magazine, Walter Scott’s Personality Parade column talks about Mike Myers’ compensation for Goldmember. Despite playing several key characters, co-writing the script and coming up with the concept, he only got a flat fee for his work - $25 million. However, to make up for the flat fee, he also gets 21% of the film’s gross. (I couldn’t find this online. But I have a copy of the printed article from this Sunday’s newspaper.) Seeing what else experts have used, here’s the Google search I did: 'pricing models' 'shared risk' -"risk management" -health -actuarial -arbitrage -"ad pricing" Outsourcing CRM is Worth a Look By James Adams http://www.realmarket.com/experts/experts041502.html · Cost-based charges or client risk models - where the outsourcer charges based on the number of agents or calls received; · Revenue-based charges or shared risk models - such as per sale (in a sales environment) or per customer (in a customer services environment) charges. Pricing Structure by Michael F. Corbett & Associates Ltd http://www.firmbuilder.com/articles/5/32/541/ See example 4: 4. Shared risks and rewards pricing A shared risk/reward pricing structure is a major step toward linking compensation to end-user or back-end performance. Variability is greater and the connection to end-user goals is stronger with risk/reward pricing. Quite often contracts involve incentives such as gainsharing, value engineering, savings-based pricing, and revenue-based pricing. For example when IBM and Mercedes-Benz formed a deal at the car manufacturer's Alabama plant, not only were the incentives tied to IT related activities, but they were also linked to meeting the plants production quota. This reward structure makes IBM part of the Mercedes team. For organizations that are first in the industry or early adopters, there is a tremendous opportunity to strike these kinds of pricing deals, because providers recognize that their customer's success could likely expand their business. Winds of Change By Mark Leon http://www.infoworld.com/articles/hn/xml/00/11/06/001106hnconsult.xml "When we build a b-to-b [business-to-business] exchange for a client we need to add some additional value," says Chuck Burns, global senior vice president for the services industry at KPMG, in Radnor, Pa. "It is not enough just to bring buyers and sellers together. This means we are prepared to participate as a business partner and could bill on a transaction or subscription model. Maybe the term for this kind of pricing hasn't been invented yet, but it will not be time and materials, fixed price, or equity sharing." Retailer Pays Web Hosting Firm With a Slice of Sales By Julekha Dash http://www.frymulti.com/noflash/press/archive/a_coach.asp Coach, a division of Sara Lee Corp. of New York, said it will pay Fry for its Web development and hosting service with a portion of sales generated from the Coach site. As I see it, you have three choices with respect to compensation that takes into account your shared risk in the project. You have opportunity costs for the money you expend to support this company. And if they fail, you have a huge risk of loss. 1) Higher compensation and bonuses spread over a longer period of time, at a set rate, regardless of the company’s success or performance. 2) A percentage of revenues for each of a specified set of time frames (quarters, years), or targets. This is the only one that requires quantifying the company’s success. 3) And/or a solid, long-term contract, with something like a golden parachute clause. i.e. You’ve taken the risks, so, when they become successful, they don’t replace you with someone else for at least 5 years. Greed aside, if you make sacrifices and, essentially, help fund their company for the first six months, you really ought to be rewarded with share in their rewards. You are, essentially, a partner. However, you don’t want stock, since that doesn’t help you recoup your out-of-pocket costs for several years. It sounds like you will be The first option (1) would give you a predictable cash flow, as long as the company survives. Here is one way to implement it: a) You would set it up by giving them the 50% discount you mentioned, for the first six months. For the next six months, they pay you full price PLUS an increase. The increase would depend on the company’s cash flow. If they can repay your full 50% shortfall immediately, then set the increase at a 100% increase for the next six months. That has you repaid in full, except for interest. As a reward/interest, have them pay you the increased fees for, say, another 6 months. That would be a hefty bonus. b) Get 50% for the first six months. Subsequently, bring the monthly fee to full price, plus, say, 12.5% - 25% additional fee for the next 5 years. Make it enough of an increase that you not only get your 50% reduction back, but an increased stream of income for the first 5 years of the contract. Frankly, while this is easy for the accounting department to work with, once you’ve established the numerical parameters, you shortchange yourself. Option (2) let’s you do what producers and star actors do in films. Take the lower compensation up front, but share in the profits of the entire project. Accept your 50% reduction, which is a considerable investment and gamble. Then, (rather than stock) arrange to get a percentage of their gross revenues for as long as you are working with them plus, at least two years. The reason I say gross revenues, is that those are very easy to verify without audit. (Just look at copy of sales tax returns, or income tax returns and use line 1.) Depending on the company’s sales, they could give you as little as 1%-5% of gross revenues to make the contract really lucrative to you. And numbers that low are not threatening to them and barely affects their bottom line. After all 5% of a million dollars is a $50,000 bonus. A version of Option (3) is something you should really add to any arrangement you make with the company. It needn’t only be an alternative. If you are going to take this risk and provide some very expensive support with the possibility that you might never get reimbursed, you should receive some assurance that once everything runs smoothly, they don’t boot you out for someone less costly. If you'd like me to give you more detail about any of these options, please let me know with ones you want to pursue. I'll be happy to give you some guidance in structuring your arrangement. Best wishes Your TaxMama-ga