Outcome-based pricing – examples and tips

Dear Friends,

This week I was traveling to Vegas and saw an ad of a lawyer while driving: ‘you pay nothing until we win’. Great example of pricing based on results. More about this pricing model below.

The PPS pricing workshop I held in Vegas this week was an amazing experience: we had a great attendance and lively debates. Find more details here. Also nice to meet some new readers of the workshop topic related to the 10 rules of effective pricing in Vegas like Alex Smith :

Please continue sharing photos and feedbacks.

In case you missed them, here selected posts:

Strategies & Tactics of Pricing in Amsterdam: join me on November 12-13 for a training on Strategies & Tactics of Pricing with the EPP - Pricing Platform. Expect several case studies, tips and tricks you can easily apply. Find a deep dive here.

Join me at in Berlin, November 20th: I will welcome you to a 1 day workshop at the Professional Pricing Society conference in Berlin on the 10 Rules of Highly Effective Pricing (post to follow).

Great pricing masterclass in Munich: join legendary Verne Harnish and me for an inspiring session about compensation and pricing to boost value, profits and talent. Join here.

Join one of Europe’s fastest growing consulting companies: at Valcon we are hiring. Shape the future of AI and AI-based pricing, with us. Apply here.

Outcome-based pricing – examples and tips

This week I was traveling to Vegas and saw an ad of a lawyer while driving: ‘you pay nothing until we win’. See the ad here:

Outcomes-based pricing refers to an agreement where the payment is tied to the results achieved, rather than the specific activities provided. This model focuses on delivering measurable results and meeting defined objectives. It offers advantages for both service providers and clients by aligning incentives toward successful outcomes. Outcome-based models provide several benefits, especially during challenging times, by giving businesses more flexibility with their customers. These contracts often involve shared risks between both parties, allowing for greater adaptability.

Outcome-based pricing, has ancient origins

Though not based on historical evidence, the story goes that a certain Chinese Emperor’s personal physician was paid according to how many days the sovereign enjoyed good health.

The new, twenty-first century technologies make it easier and easier to base pricing metrics on performance: by combining digital platforms, machine learning, cloud computing, and the Internet of Things, the customers’ conditions (health, too) will be monitored in order to produce more sophisticated solutions and give a better guide to their needs.

In the field of health, for example, we can imagine that it will be possible to measure the effects of drugs, medical devices, or certain services by means of sensors.

Prices could be set on the basis of real outcome. Of course in this case, too, the technically measured value must be translated into price units. This is basically no different from the general issue of benefits being expressed in prices.

Thus, using this model of pricing, customers pay on the basis of outcome and perceived value. And the more closely the pricing aligns with the value recognized by the customer, the more successful the business will be.

The risk linked to performance is born entirely by the company that provides the product or service. No result means no payment. The customers benefit from a reliable and predictable performance, otherwise they don’t pay.

The result is marked by three elements

In order to be suitable as a basis for a model of monetization, a result must first of all be important and substantial to the customer. This may seem obvious but many companies neglect this point and focus on the characteristics of the product or service they have an intrinsic interest in or where they have a technological advantage, even when these characteristics are unimportant or just a “nice-to-have” that do not correspond to the customer’s readiness to pay.

Secondly it must be measurable. The organization and its customers must agree on one or more parameters that best reflect the results, so as to be able to verify their actual outcome.

Lastly, it must be independent. Neither the company nor its customers, nor third parties must be able to tweak the result to their own advantage. This is the only way to have a result that is objectively suited to obtaining a recompense.

Now let us take a look at a series of applications of the outcome-based concept of pricing.

Examples of outcomes-based pricing

Plenty of examples of this pricing model are available:

• Equipment availability contracts: Manufacturers may offer agreements that ensure a certain level of uptime or performance, with payments based on how well the equipment performs.
• Pay-for-performance (P4P) in healthcare: Providers are compensated based on patient outcomes or quality metrics rather than the number of services provided. Hospitals might receive bonuses for lowering readmission rates or improving patient satisfaction.
• Output-based contracts: Suppliers are paid based on the quality and quantity of goods produced, rather than labor hours or materials used.
• Value-based care contracts: Insurers may tie payments to overall health outcomes, such as reducing chronic disease rates or increasing preventive care.
• Software as a Service (SaaS) agreements: Some SaaS providers use outcome-based pricing, where fees depend on metrics like user engagement or business impact.
• Managed IT services: Providers may offer contracts guaranteeing specific uptime levels or system performance. Clients only pay if these targets are met.

Why choose outcomes-based pricing?

Revenue models that focus on usage or business outcomes can more accurately measure the value provided to customers. Here’s why:

• Increased customer lifetime value and net revenue retention: Aligning your company’s objectives with customer benefits fosters strong, long-term relationships. As customers gain more value through cost savings or revenue growth, they pay more, improving metrics like customer lifetime value (CLTV) and net revenue retention (NRR). This can drive higher growth and increase enterprise value.
• Shorter sales cycles and reduced acquisition costs: By charging customers based on the value they receive, you lower barriers to purchase and simplify the sales process. Additionally, these models rely on data that tracks usage and value, helping you build strong case studies that demonstrate the benefits of your solution.
• Stronger link between product and business success: A revenue model tied to specific financial outcomes strengthens the connection between your product’s performance and your commercial success. The more value your product delivers, the more it drives revenue growth.

What is your view on this?

Interested in learning more about hoe to best manage pricing? You will find pricing insights in the book The Pricing Model Revolution.

‘After the best seller The Pricing Model Revolution, this new book by Dan Zatta deep dives new key topline topics, proposing to CxOs simple but effective rules to lead the Pricing Transformation in The 10 Rules of Highly Effective Pricing. With the support of several concrete cases Dan also shows how in this journey C-level pricing attention is a key factor of success to reach above average profitability’.

Luigi Colavolpe, General Manager & CFO UniCredit International Bank (Luxembourg)

Get your copy of ‘The 10 Rules of Highly Effective Pricing’ here.

Get your copy of ‘The Pricing Model Revolution’ here.

You are most welcome to share your views, feedbacks and own pricing experiences. Thanks a lot for your interest and support!