Innovators and marketers use a business model canvas when they need to think strategically about a new opportunity, gauge the attractiveness of an existing offer, or pivot an existing opportunity. With the emergence of business model innovation as part of strategic innovation, it is not surprising to see an increase adoption of canvases. They are great tools to map ideas, discuss high-level concepts, and to create alignment around a new idea. Business model canvases are used by digital incubators, design thinking teams, and creative marketing minds. They are used in the C-suite and at very prestigious conferences. While the trend is real, most of these business model discussions do not include members of the pricing profession or go deep into the analysis of pricing models. In fact, in B2B, I posit that pricing model innovation is often an afterthought discussion. The purpose of this paper is to briefly present the two commonly-used business model canvases and to introduce the Pricing Model Innovation Canvas that can be used by pricing, innovation, and marketing teams to better frame their pricing model(s) and to make better pricing decisions.
Background on Two Canvasses
A business model canvas is defined as “a strategic management and lean startup template for developing new or documenting existing business models. It is a visual chart with elements describing a firm’s or product’s value proposition, infrastructure, customers, and finances.” Today, the two most commonly used business model canvases to support entrepreneurial and innovation projects are the Lean Canvas and the Business Model Generation Canvas. Let us take a quick look at what they do.
- The Lean Canvas is “a 1-page business plan template created by Ash Maurya that helps you deconstruct your idea into its key assumptions. It is adapted from Alex Osterwalder’s Business Model Canvas and replaces elaborate business plans with a single page business model” (extracted from www.leanstack.com on 08/11/2018). Lean startup canvas was created to provide a tool to innovators to apply the Lean Startup principles. The Lean Startup process was developed by Eric Ries. Lean Startup is a “scientific approach to creating and managing startups and get a desired product to customers’ hands faster. The Lean Startup method teaches you how to drive a startup-how to steer, when to turn, and when to persevere and grow a business with maximum acceleration. It is a principled approach to new product development” (extracted from www.theleanstartup.com on 08/11/2018).
- The Strategyzer business model canvas is used to better inform innovation and digital decisions. This canvas is “a global standard used by millions of people in companies of all sizes. You can use the canvas to describe, design, challenge, and pivot your business model. It works in conjunction with the Value Proposition Canvas and other strategic management and execution tools and processes” (extracted from www.strategyzer.com on 08/11/2018).
Both canvases propose a series of blocks that are aggregated and integrated into a business model. Both of them include a “revenue streams” block. Block 5 of the Lean Canvas include elements such as revenue model, lifetime value, revenues, and gross margin (when combined with the other side of block 5 focused on cost structure). The Strategyzer canvas also proposes a “revenue streams” block (block 9) focusing on types of revenue streams, fixed pricing, and dynamic pricing. They also discuss willingness-to-pay. This is good news to have revenue management included in both canvases. But the reality is that both methodologies do not provide the types of analysis that need to be conducted, the detailed sources of information that need to be collected, and the integration of all information that is needed to make intelligent and informed pricing decisions. They barely cover some of the very critical components of value-based pricing, pricing research, and digital pricing. So there is room for improvement for sure.
The 4C’s of Pricing
For the past four years, I have been developing and testing the Pricing Model Innovation Canvas (PMIC). The purpose of this canvas is to offer a framework to innovators, marketers, digital experts, and pricers to conduct deep dives in the revenue model block of the existing business model canvases. The Pricing Model Innovation Canvas focus on the three Cs of pricing (cost, competition, and customer value) and one C related to change management to support the design and execution of new or revised pricing models. The PMIC describes the various methods, analyses, and outcomes of the 4Cs. Working with it leads to the selection of the proper pricing model(s), the relevant pricing test plan, and to a more informed pricing decision.
The information contained in the PMIC is not new. In fact, pricing based on 3C’s of pricing have been used for a while under the leadership of some of the best pricing scholars. Kent Monroe’s 1990 book highlighted concepts of the final price discretion using the 3c’s (customer, competition, and cost).
Source: Kent Monroe’s (1990), Pricing: Making Profitable Decision
The PMIC uses these three Cs while adding the change component. For each of the Cs, five methods, tools, or analyses are proposed for a total of 20. Innovators, marketers, and pricers select the most relevant to use and assemble the information using the canvas. The end game is to generate the outcomes and outputs that are necessary to better frame an opportunity and to make better pricing decisions. I recommend five of these framing decisions are shown in the PMIC:
- Pricing model(s): What is the right pricing model(s) for this opportunity? Is it product pricing, subscription-based pricing, usage-based pricing, outcome-based pricing or a mix of these?
- Price-point Decision: What is the right price level for the new opportunity? What is the right pricing structure and discount level?
- Price Testing: What needs to be tested, when, and with whom before it is launched? All canvases recommend testing but very little is said about pricing. Is there a need for further and specific pricing research to test the pricing model and price level?
- Profit Formula: With the pricing model(s) and price-point selected, what does the P&L look like? What happens to EBIT and cash flow? What are the impacts of switching from an ownership model to a consumption model?
- Pricing Execution Plan: Last but not least, who does what in pricing? Who is accountable to implement the guidelines and scaling plan? How is pricing governed for this innovation when it moves back in the core business? How do we train the sales force especially if there is a new pricing model?
PMIC Focuses on Key Questions
A lot of information needed to fill out the PMIC should be already available from the analyses conducted in the rest of the business model blocks. Data may come from other processes as well. The key is to assemble a multi-functional team of experts to have a dedicated and intelligent discussion on pricing as part of the framing process of the innovation using the canvas. That discussion will for sure leads to the uncovering of information gaps and neglected areas. Some of the questions we need to answer for each of the 4 Cs are listed below.
- What are your customer segments?
- What are your customer’s pains and gains?
- How are customers expressing value?
- What drivers impact the customer’s P&L?
- How do customers compare value and price (apples to apples)?
- Which competitors occupy the mind of the customers (NBCAs)?
- What are your TRUE differentiators?
- What are your WOW differentiators?
- What are marketing and technical switching costs?
- What are your competitors price levels and pricing strategies?
- What are your main cost drivers?
- What are your top-down margin targets?
- What is your break-even point?
- How do costs evolve during scaling?
- What is your customers’ price sensitivity?
- Who is in charge of pricing pre/post launch?
- Are your sellers trained on value/pricing models?
- What are expected pricing objections?
- How are price special conditions approved and by whom?
- How do you quickly scale commercially?
A full version of the Pricing Model Innovation Canvas is available on Slideshare and videos are available on YouTube. You will find the basic version of the canvas, a version with questions, and a detailed version with all 20 methods and analyses with relevant outputs/outcomes. I want to promote the use of the PMIC in digital incubators, in start-ups and in marketing circles. It is the right time for the pricing function to make a push for wider adoption of key concepts. A dedicated pricing model canvas does just that. To help with adoption, this canvas was designed and released with the Creative Commons attribution. A Creative Commons (CC) license is one of several public copyright licenses that enable the free distribution of an otherwise copyrighted work. It is used when a creator wants to give people the right to share, use, and build upon a work that they have created. So be bold, share widely and make use of it. Updates and revisions will be made on a regular basis.