by Tim Smith, PhD, 2 April 2003

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As with all business products and services, the value of technological offerings is determined by the benefits provided to customers. Greater benefits imply higher customer value, and fewer benefits imply lower customer value. Creating value is the first requirement to producing business products and services that customers will demand. Capturing a portion of that value is the second. Businesses offering products and services capture value through their pricing.

But how does a business know where prices should be set? Should prices be raised? Should they be lowered? Dan Creinin, Director of Marketing, shares with us how EMNS is addressing their pricing.

EMNS
EMNS, a 2001offshoot of Lucent, initiated business with providing high-availability hosting solutions to a few key clients. Since then, EMNS has focused its sales and marketing efforts on GSQA, a supplier quality management software solution (www.gsqa.com).

GSQA is a hosted enterprise application which manages the communication and workflow between suppliers and manufactures. It addresses issues of quality management for incoming materials of manufacturers through the collection, storage, and analysis of material quality information.

GSQA’s target market is manufacturers who blend ingredients, including chemical, food, automotive and pharmaceutical. Some key clients include The Goodyear Tire & Rubber Company and Sargento Foods, Inc. in cheese. GSQA addresses the needs of supply chain management one to two steps beneath the consumer and can addresses multiple levels in the supply chain in its target market.

With blending ingredients, manufactures require certificates of analysis (COA) to demonstrate that the ingredients meet values specified by R&D departments. Turning the paper trail associated with COAs into an electronic transaction provides immediate value for both the supplier and the manufacturer, but GSQA doesn’t stop there. It also streamlines supplier based quality workflow management associated with material non-conformances, such as corrective action planning, cost recovery, supplier audits, supplier-manufacturer messaging and alerts, as well as advanced shipment notice in support of just-in-time supply chain management.

For firms like Goodyear and Sargento, with hundreds of shipments arriving each day, each of which requires verification of material conformance, the value of automating the supplier quality management process and improving supplier/purchaser communications is readily apparent.

Price Structure
Given the large value that customers receive in using GSQA, how well does EMNS capture a portion of that value through its pricing?

GSQA’s price structure currently has two components. An upfront fee is charged to set-up a new manufacturer within the GSQA system. A per-transaction fee is charged on an ongoing basis thereafter.

The upfront fee is priced according to a cost-plus approach. The direct-cost of setting up a manufacturer is determined the labor costs for system configuration, interfaces, and customization. This upfront fee is relatively small.

The per-transaction fee represents an annuity for EMNS. Once a month, customers are billed according to their usage. Charge rates for each transaction are dependent upon volume, starting at under $10 and decreasing with increasing volume.

A price sheet has been set by management. As with most business markets, small deviations from the price sheet occur with management approval in response to specific sales challenges. Often, EMNS will tradeoff lower prices for longer contract terms.

GSQA’s pricing structure appropriately captures value in association with the value provided through the per-transaction fee but are the pricing components appropriately priced? Many customers report an ROI north of 30 times the price paid for the GSQA system. Should EMNS raise prices? To address the appropriateness of the price level, Mr. Creinin examines the cost of substitutes and industry benchmarks.

Price In Relation to Alternatives
One price benchmark is provided through EDI. EDI is priced in the range of $1 to $2 per transaction. Like GSQA, EDI handles supplier-manufacturer communications. Unlike GSQA, EDI does not manage supplier quality, collaboration, workflow, and a host of other supply quality management issues. Because of the much higher value of GSQA over EDI, GSQA should be priced much higher than EDI. Thus, the pricing of EDI provides a lower bound benchmark price for GSQA.

A substitute price benchmark is provided by considering the potential for customers to create their own system. Mr. Creinin reports that many of EMNS’ customers currently have not automated their supplier quality management process. If they were to create their own system, they would have to dedicate internal resources and accumulate the expertise to design, create, and manage the system. Once the system was operational, many of these resources would then have to be reassigned to another project. Rather than accumulating the expertise internally and managing a fluctuating IT budget, customers prefer to outsource this function to a reliable firm and pay according to their usage. This approach addresses both ROI issues and cash-flow issues for the client. For EMNS, the potential for customers to create their own system provides an upper bound on prices.

A third alternative for customers is to purchase a business application that directly addresses supplier quality management. Mr. Creinin suspects that the purchase of a SQM business application would cost above six figures. Once implemented, the business application would also require ongoing maintenance expenses from the IT department, a maintenance license fee and potential connectivity costs from the supplier community. This possibility sets a benchmark for GSQA pricing.

Room for Improvement
From conversations with customers and prospects, Mr. Creinin believes that the pricing of GSQA is reasonably set. Higher transaction fees are expected to drive customers away. And, given the upper bounds set by customers making their own or purchasing an alternative system, this suspicion may be well grounded.

Where might we expect Mr. Creinin to make price changes? There are two areas wherein pricing may be improved. First, as GSQA continues to make headway in the market, the price for system-setup may increase. An increase in the price of system-setup will be a direct means for EMNS to capture value from new clients in association with its brand name without negatively affecting their relationships with existing customers. Second, as the market for GSQA grows, Mr. Creinin may find it necessary to segment the market according to customers’ demands for the advanced functionality of GSQA. Customers demanding only a portion of the functionality of GSQA may require a lower price. A “versioning” or “complexity-factor” price structure may evolve as GSQA grows.

For now, EMNS is off to a good start in it pricing strategy. Its approach to pricing rationally utilizes benchmarks, substitutes, and competition to construct an economic offering that provides value to customers while capturing value for EMNS.

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Tim Smith, PhD is a principal at Wiglaf, a Market Research and Sales and Marketing Strategy consultancy serving tech-driven businesses operating in business markets. Small and medium sized businesses select Wiglaf for our quantitative and fact driven approach to intelligent revenue growth. www.wiglaf.biz.

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