Getting Paid Based on the Value You Create

"Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.”

That famous line from department store owner John Wanamaker is over a century old, but the sentiment feels incredibly current. Businesses and individuals still pour billions into products and services without any real guarantee of a return, a bit like trading a cow for a handful of magic beans and just hoping for the best.

But that’s starting to change, thanks to a combination of new technology and a shift in how we think about pricing. A model often called "pay if it works," or performance-based pricing, is gaining traction everywhere from healthcare and consulting to manufacturing and construction. It’s a fundamental change that’s resetting the relationship between buyers and sellers, making it a critical concept for anyone in a .

A Battle Over Price

Traditionally, buying and selling is a zero-sum game. The seller wants to charge more, the buyer wants to pay less, and they meet somewhere in the middle. In most cases, neither side walks away completely satisfied.

Take the pharmaceutical industry. For years, drug companies held the upper hand. A life-saving drug has about the strongest value proposition you can imagine, and people were willing to pay. But in the last decade, that has changed. With prices rising faster than inflation and the industry’s reputation taking a nosedive, customers are pushing back. Consumers, government payers, and insurance companies are all fighting to control costs.

Pharma companies argue their costs are skyrocketing. Developing a new drug now costs around $1.1 billion and takes over 12 years. The FDA is also asking tougher questions, demanding that new drugs aren't just unique but demonstrably better than existing treatments. With all these hurdles, only one in 5,000 compounds ever makes it to market. To make matters worse, companies now have just eight years of patent protection to recoup their investment, down from 12 years in 2001.

This has created a standoff. Drug companies want to charge high prices, but their customers are demanding lower ones. The solution might not be a compromise, but a complete rethinking of the transaction. For many , the real value isn't a physical product but the intellectual property behind it. This opens the door to new pricing models, and "pay if it works" is one of the most promising.

Focusing on Value, Not Cost

This idea isn't brand new, but it’s finally gaining momentum. A great example comes from Johnson & Johnson (J&J), which introduced a new cancer drug called Velcade in the United Kingdom. Britain’s national health system initially rejected the drug, calling it a waste of money because, at £3,000 per treatment cycle, it wasn't always effective.

J&J countered with a radical proposal: a full refund for any patient who didn’t show a 25% reduction in cancer-produced proteins after four treatments. This simple offer changed everything. For patients and insurers, the risk of wasting money vanished. For regulators, it meant the health system would only pay for what was effective.

This strategy did three things for J&J:

1. It turned a definite "no" from a major payer into a "maybe."
2. It addressed the core objection that people shouldn't have to pay for something that doesn't work.
3. It shifted the conversation away from justifying a high price and toward demonstrating the drug's value.

Instead of arguing over development costs, J&J could now show how much more cost-effective Velcade was compared to older treatments. Reframed this way, the value becomes undeniable. This performance-based approach works particularly well when dealing with large institutional payers, a model that could be adapted by those that serves corporate clients.

Beyond the Obvious Applications

The "pay if it works" model is now popping up in a number of industries struggling with similar pricing dilemmas.

• Honeywell ties payment for its building control systems to the actual energy cost savings a client achieves. Forrester Research predicts this will become the norm in IT outsourcing, rewarding contractors for the business impact they deliver, not just the hours they work. This is a crucial lesson for anyone in tech.
• Google’s keyword program was a game-changer, asking clients to pay only for the "effective half" of their ad spend. Performance-based contracts now dominate online advertising, squeezing out the old price-per-impression models.
• While still not common, giants like Accenture and IBM are increasingly making their compensation contingent on the success of their advice, often taking a share of the cost savings or sales gains they help generate.

The Advantages of a Performance-Based Model

This approach isn't just a clever sales tactic; it fundamentally improves the transaction for both parties, which is a key goal when .

The biggest objection—the buyer's upfront risk—is removed. For the seller, taking on more risk also creates the potential for a much greater reward. Think of personal injury lawyers who have long worked on contingency, typically taking 30-40% of a settlement. Their interests are perfectly aligned with their client's: the bigger the settlement, the more everyone earns. This structure prevents conflicts of interest, like an hourly attorney running up a bill that exceeds the amount at stake.

There's no magic reason real estate agents get 6% or literary agents get 15%. When these conventions take hold, they become an industry standard. Firms then compete on quality and service rather than engaging in a race to the bottom on price. This is especially true in professional where a low price can be seen as a sign of low quality.

This model acts as a form of insurance. The buyer is protected from overpaying for a product or service that fails to deliver. At the same time, the seller is compensated for the huge upside they create if their solution works exceptionally well. It’s a risk balance that benefits everyone when a product is effective. This is an ideal setup for many .

To pay for performance, you first have to agree on what performance looks like. This process forces a clear conversation that can uncover new opportunities. A classic example is the deal between Blockbuster and Disney in the late '90s. Studios charged video stores so much per tape that stores couldn't afford to stock enough copies of new releases. Blockbuster proposed a new deal: a much lower upfront cost per video in exchange for a 40% share of the rental revenue. This allowed Blockbuster to stock more tapes, satisfying more customers and boosting market share. Both companies made more money working together than they did separately.

Making "Pay If It Works" Work for You

This model isn't a fit for every situation. For anyone , it’s crucial to know when it applies. Five conditions are key for success:

• Success has to be both measurable and provable. You can show that a patient’s red blood cell count increased; you can't easily quantify the aesthetic value of a painting.
• The model works best for projects with a limited, quantifiable scope, like saving a client money on a specific process, not ensuring their company's overall success.
• A shouldn't bet everything on a single performance-based contract. The dot-com bust was littered with law firms and consultants that took stock instead of cash and went under when their clients failed.
• The potential gain has to be significant enough to keep the client invested and cooperative.
• Ultimately, this pricing strategy puts you and your client on the same team. By putting your money where your mouth is, you send a powerful message about the value you provide and your commitment to their success.

As technology makes it easier to track and measure outcomes, we can expect to see more of these flexible, customer-focused pricing models. The old methods that relied on a buyer's ignorance are on their way out. The future belongs to pricing that treats customers like knowledgeable partners—the smart price.