New Pricing Models for RFID

Apr 30, 2012Lately, I've been thinking a lot about the chasm between "early adopters" and the "early majority." For those who have not read Crossing the Chasm, Geoffrey Moore's seminal work about the technology-adoption lifecycle, the author explains that there is a wide gap between those willing to adopt a new technology and those who wait until that technology has essentially gone mainstream.

One major reason that such a chasm exists is the risk involved. It is risky for a company to adopt a new technology, since it might not work as advertised. And even if that technology did work as advertised, uncertainty would still remain regarding whether it would deliver the promised benefits.

There is also personal risk involved. If a warehouse manager or an operations manager were to push for an RFID system and it failed, that individual could end up out of a job (even a CEO could be ousted for supporting a project that went badly, if it disrupted a firm's operations and adversely affected sales). If he or she waited until everyone else was using RFID, there would be less risk, as the uncertainty around the system's usefulness would thus be reduced. The solution would be proven—and if it failed, no individual would be held responsible, because the company would have had to do what all of its competitors were doing. At that point, the risk of falling behind would be greater than that of the project failing.

So to shrink the chasm, RFID solutions providers must reduce risk. They have been working hard to minimize technical risk, but the same cannot be said about minimizing risk caused by uncertainty regarding a solution's expected value. One way to address this uncertainty would be through the use of alternative pricing models, which could decrease business risks and create an incentive for more organizations to become early adopters of RFID solutions.

Pankaj Sood, a researcher at the University of Cambridge and an advisor to McMaster University's RFID Applications Lab, has been studying value and pricing. He and I discussed alternative pricing at IEEE RFID 2012, held last month in conjunction with RFID Journal LIVE! 2012. Pricing could be based on value—both certain and uncertain value. Traditional return-on-investment (ROI) models and business cases rely on quantifying value, by forecasting value achieved through various business outcomes. However, the confidence in some outcomes might be higher than in others.

A senior executive, for example, might be very confident that an RFID solution would deliver $500,000 in asset-management benefits, but less confident that the reduced time spent searching for assets would result in the hard savings of $1 million promised by the solutions provider. So the certain value would be $500,000, and the uncertain value would be $1 million.

Under a conventional pricing model, if a system cost $1 million, the end user would pay the entire amount up front. An alternative way to price the system would be to separate the outcomes into certain and uncertain—which we call a hybrid-pricing model. So in the scenario described above, the solutions provider would charge an upfront fee of $650,000, based on the certain value of $500,000. Moreover, the provider would sell the end user an option to charge an additional amount down the line, in the event that the forecasted, or uncertain, value was realized. An option worth $150,000, for example, would trigger an additional payment of $400,000 if the end user experienced at least $500,000 in labor savings.

A hybrid-pricing model would allow both the end user and the solutions provider to share the risk. The end user would lose $150,000 instead of $500,000 if no labor savings were experienced.

The solutions provider bets that the end user will use the technology, as designed, to make decisions leading to better business outcomes. The challenge might be in trusting that the end user will accurately report the labor savings achieved. If the system works and the end user shares accurate information about the benefits, the solutions provider stands to make a little more than it would have under a conventional pricing model: $500,000, plus the $150,000 option, plus an additional $400,000, for a total of $1.05 million.

This approach would send a signal to end users that providers have confidence in their RFID systems. And it would encourage more companies and organizations to carry out pilots and deploy solutions to solve their business challenges. While providers would need to share the upfront risk, they would ultimately sell more solutions.

Hybrid models have their challenges, but reducing the risk for end users would speed up adoption. It's worth exploring alternative pricing models with your solutions provider (if you are an end user) or your customer (if you are a solutions provider).

Mark Roberti is the founder and editor of RFID Journal. If you would like to comment on this article, click on the link below. To read more of Mark's opinions, visit the RFID Journal Blog, the Editor's Note archive or RFID Connect.