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BVM - Value-Based IT Pricing Strategies
   
Pricing can be derived from many sources and mean different things to different companies.  Consumer’s reaction can drive price, industries can set standard pricing and companies can determine pricing using profit inspired formulas. While there are many, the method for determining price is less relevant. The objective and the impact resulting from price are most important. While profit is the motivator for many, Internal IT departments, Government Agencies and Not-for-Profit companies are looking to just break even. Are you recovering all your current costs? Will future outlay’s of cash cause your price to fluctuate?  Does price include the cost to refresh or maintain currency? Is there enough room between cost and price to meet company hurdle rates and make a profit?    
  
To determine the correct approach to pricing, one must first establish who their customer is and what relationship exists.  Generally speaking, external customer pricing is profit driven whereas internal customer pricing would focus on cost recovery.
   
Consumer Driven Price
 
   
This is often called market pricing. Price is derived from research and analysis of target customer demand, demographics and market competition. The basic principle being that price is set at what the research reveals the market will accept and a consumer is willing to pay. The advantage is obvious. However, if the products are not truly comparable or if cost exceeds market pricing, profits will be negatively impacted or even non existent.
   
Standard Pricing
 
   
Price can be derived from industry set pricing.  The logic behind standard pricing is that the consumer would pay the same price regardless of the manufacturer or service provider. The differentiator between manufactures or service providers is the level and ability to provide good customer service. Like market pricing, standard pricing may not be reflective of the costs to produce the product or provide the service and therefore negatively impact profitability.
   
Profit Inspired Pricing
 
   
Profit inspired pricing methods use pre calculated costs adding a percentage mark up. The advantage to these pricing models is that profit is a consistent percentage and reasonably assured.  The disadvantage is that if cost fluctuates, so to will price and profit. Further, calculating price without regard to customer demand or market conditions could negatively impact sales and the bottom line.
   
Recovered Pricing
 
   
Many believe this to be the easiest of all methods.  Not true. Cost recovery is the most difficult form of pricing, primarily because there is no profit margin to absorb any errors.  The benefit to this method, is that pricing is based on cost and therefore available to its customers at a reduced rate from market.  The drawback is that costing fluctuates making budgets and planning difficult. To overcome this, many organizations set price at the beginning of the year, allowing departments to create budgets and plan.  This results in variances between cost and price that are either “funded” by corporate or require a “true-ups”.
   
Baix IT Pricing Methodology  
   
The Baix IT Pricing Process uses a combination of pricing methods customized to meet the specific needs of your organization. We will partner with you to calculate price, using Baix BVM Value Based Costing, expectations and projections for future costs (such as: product refresh to remain current), customer demand and demographics, market conditions, competitor pricing and profitability. Further, we will consider service level agreements, portfolio management and total cost of ownership. This information may already exist or may be derived by the Baix Service Management process.. While this isn’t an exhaustive list, it is meant to show the basic components of pricing and encourage thought.
   
The Baix IT Pricing Framework Focuses On:
  
  Building Transparency
  Effective communication and execution strategies
  Analyze market and industry demographics
  Build defend-able pricing models
  Analyze and/or develop service level agreements
  Determine customer profitability
  Total cost of ownership

   
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