NEW INNOVATIONS AND ASSOCIATED PRICING CHALLENGES
Michael Rash |MCDA CCG, Inc.
Your company has recently developed new innovative products or services that are promising to add significant value to your customers. However, do you know how to price this new innovative product or service? Are you setting the price to maximize customer adoption and drive maximum value to your company’s bottom line?
5 Reasons New Innovation Launches Fail
#1 Lack of Market Research
This appears in three different ways:
- A market research deep dive isn’t done at the beginning of the product design process. This creates a loss of understanding about features customers will value and pay for. As the product launch date rapidly approaches organizations are typically not able to include any feature changes.
- Generic research procedures such as basic surveys, competitor benchmarking or in a worse case scenario, internal brainstorming are used to set pricing. The results generally put your company into a weak position with a lack of features and a poor pricing strategy.
- We often see that an organizations expectation of the price customers are willing to pay is far above what their market will allow. Management teams overestimate potential revenue, then often times product features and cost structures are designed around an unreasonable price. Companies tend to discover this too late into the launch cycle to correct the mistake or in a worse situation, post launch when the market poorly responds. Underpricing is equally problematic and leaves significant value on the table. We generally see this around technology and equipment manufacturers, where it’s very common that they are using cost-plus pricing.
#2 Product Development Depletes The Budget
We often find that companies will spend majority of their budget on product development leaving little to no budgeted money for market research, sales training, segmentation, etc. Companies find themselves in a weak position with competitors taking advantage of their “build it and hope they buy” pricing model.
#3 Erroneous Targeting
A proper targeting analysis includes deep research and engagement with your market that goes beyond basic segmentation. Due to the very nature of innovation, traditional customer tiering and segmentation models may not apply. In our pricing engagements, we often uncover entirely new categories of customers to target and price differently.
#4 Failure To Clearly Articulate Key Differentiators and Advantages
By failing to incorporate pricing and market research from the beginning of the product development process leads to poorly differentiated offerings. This leaves sales and marketing teams blindly launching into the market without adequate knowledge from case studies, messaging, or value development.
#5 Significant Unexpected Customer Education Costs
It is common for customers to not understand how new innovations can be fully utilized. Customers don’t automatically know how to take advantage of innovation, often requiring a substantial up-front investment in education. Proper market research early in the process will uncover how much education is needed. Getting this wrong can delay revenue realization by months or in some cases even years.
What Are Your Options for Pricing New Innovations?
Option 1: Hire an Expert
Hiring a pricing expert to assist early on in your innovation process puts the right structure in place to avoid not only pricing failures but to increase the market viability of your new product or service. This means allowing an outside pricing expert into the process to help fine tune the elements that drive value for your innovation. Not all customers will perceive or realize the value your team is trying to create. An innovation pricing expert will help define those customer segments, and the features they should receive, then determine the right price for each segment to maximize the product’s success and overall value to the firm.
Option 2: Internal Pricing Team
Many companies have internal teams responsible for pricing new products or services. Typically, these teams have solid industry experience and a combination of product knowledge, marketing, research and financial / analytics skills.
An internal pricing team typically goes through some sort of framework involving intelligence gathering (often with the assistance of an internal or third-party market research group), building a financial model, mapping features vs. benefits vs. customer value, sampling customer perspectives and aggregating all this information into a predictive pricing model.
The challenges internal pricing teams face are many. Do they have deep data science capabilities or the quantitative platform to do it correctly? Are the customer outreach and sampling done effectively in a statistically valid manner? Is enough data available in a usable format? Are key resources like the Marketing team available? Is the team biased by myopic thinking, political forces or traditional industry pricing approaches? Are they aware and capable of adopting successful pricing strategies from other industries? Is there an experienced advisor to play Devil’s Advocate and fill in missing pieces of the puzzle? Is the pricing team involved at the inception of the product design, or only at the start of the go-to-market phase?
Internal pricing teams often do an excellent job with limited resources. But, we’ve found that the challenges they face often lead to sub-optimal pricing, thereby leaving substantial value on the table.
Option 3: Cost-Plus-Margin Approach
A traditional cost-plus approach is common. The team responsible for pricing adds up the cost of development, cost of sales, and any overhead allocated, determines the amortization method to use, and calculates a market price. The projected price is then tweaked to fit in among the competition. This approach is easy to understand (though not necessarily simple) and tends to be driven by Finance.
The problem with cost-plus pricing is it does not reflect the potential value the customer will pay for innovation. There is little understanding of which customers are willing to pay more or less.
Furthermore, projected margins tend to fall apart when the product is taken to market. Sales go out and discount the product. Hidden shipping and return costs appear. The expected 25% margin shrinks to 12%.
Cost should be perceived as a floor on price. However, to drive value, you need to understand and price your product or service according to who will buy at what price point(s). This is inherently an external-facing view versus cost-plus which is internal-facing.
Option 4: Competitive Benchmarking
In this case, you identify equivalent and substitute products from competing vendors, then price your product at parity, discount or premium. This typically involves scanning the competitor landscape and deciding intuitively how your new product or service fits into it.
The problem with benchmarking is it assumes that customer perception is irrelevant or has already been taken into account by your competitors. For highly commoditized products this may be the case, but even there the success of branding proves that customer perception and market positioning can be used to drive value through pricing. Benchmarking is less viable as an effective pricing tool for new innovations. Benchmarks are useful parameters, but it’s critical to incorporate the customer’s perspective to drive the pricing model.
“Design to Price” is Critical to Innovation Success
By incorporating deep market research, value discovery and pricing early in the life cycle — ideally as early as the early design/prototyping stage — companies stand to reap huge benefits by increasing their hit rate and ROI on new innovations.
Companies invest millions in innovation, product/service development, and commercialization. Price is a cumulation of all that investment. It’s too significant to leave pricing to the end of the process. By delaying pricing until late in the process creates substantial real risks that you will mis-price your new offering, potentially destabilize the market (competitors respond with a price war) and fail to capture the expected ROI. To learn how to optimize the pricing of your company’s new product or service innovations, contact us today for a free no-obligation consultation.