This imbalance of effort between developing the product (value creation) and developing the charging mechanism (value extraction) usually leads to price misaligned with value.
Pricing is normally blamed, whereas it is the process that is responsible. Some companies admit to over-engineering products with ‘nice-to-have’ features that end-users will not actually pay for! Organisations should instead incorporate sales force insight and pricing from inception.
A product innovation process will typically comprise four basic steps: research analysis, product development, commercialisation, and post-launch optimisation – with marketing usually coordinating the relevant functions such as product management, sales, finance, research & development (R&D) and operations. Too often, pricing is left until the commercialisation stage, which is far too late.
Research Analysis establishes unmet needs/features customers are willing to pay for, market research such as one-on-one Customer interviews; focus groups etc. are all extremely useful methods to gather this information.
Customer survey methods combined with statistical software can be used to force trade-offs between features and price level, revealing the end-users’ true preferences and willingness to pay.
For B2B sales, where the number of customers is typically smaller, sales force feedback is crucial to understand likely customer reactions. Only when solid, preliminary research is complete can the decision be made to halt or take the right product(s) to R&D.
During product development, there are a host of tools and techniques used to ensure rigor within the process. Unfortunately, in our experience, these seldom extend to cover the required pricing activities.
Therefore, pricing tools need to be built and embedded within the process to set the correct price. It is essential to understand how a change in price will affect demand (i.e. the price elasticity), as only then can a profit optimum price be set.
Financial simulations can be used test your pricing model thus creating better alignment between price and your product’s value in the market.
Commercialisation must be closely coordinated with the sales organisation. In B2B, where negotiation is the norm, preparing the sales force is essential. They will need robust value argumentation, i.e. key messages that you want your sales force to communicate to the customer so they understand the economic benefits resulting from using your product/service. They also need to know how to overcome customers’ most likely objections. They can be considered a mini business case for that particular customer.
Post-launch, continually examine sales performance against predicted Key Performance Indicators (KPIs). KPIs can focus on financial (margin & revenue), customer (share-of-wallet), operational, or sales (win/loss analysis, competition pricing, price variance) aspects. Finally, refine pricing strategy, policies and goals accordingly.
So, for the commercially successful launch of your new creation:
- Translate relevant features into appropriate willingness-to-pay
- Acquire appropriate tools/techniques to set optimal prices
- Establish a cross-company understanding of the products’ true value
- Review and refine the pricing as necessary once launched
Peter Colman is a senior director at Simon-Kucher & Partners
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