This blog normally focuses on faster new product innovation. So you might be wondering, “Why an article on pricing?”
Well speed-to-market is not just about launching earlier. It’s also about generating new product cash flow sooner. New product innovation is all about creating demand and the revenue associated with it. And getting pricing right has a big impact here. Some folks would call this time-to-revenue instead of time-to-market. Tomato, tomahto…
Pricing should be considered long before the product launch. In fact, the best place to start thinking about pricing is at new product inception. Sometimes you have to do a littlle bit more work up front to execute faster overall. And to be most effective, all of that up front work has to be rooted in creating customer value. Easily said, but what does that really mean?
The most successful new products create value by solving an unmet need. Unmet needs reflect the limitations that customers put up with every day. We’re talking about the inconvenient, time consuming, costly, labor intensive, capital intensive, excess inventory creating, dangerous, dirty, smelly, or otherwise undesirable aspects of jobs that users have learned to put up with. Sometimes they’ve worked around these issues for so long that they no longer even notice them—so called unarticulated needs.
Finding unmet needs like these takes careful observation and well-developed questioning skills. Luckily, your people can be trained in both these skills. But at a deeper level, finding unmet needs that you might actually be able to develop solutions for requires the ability to synthesize. You must be able to match unmet needs with elements of your technology that might never have been exploited before or might have been utilized only in another application. That requires the kind of problem solving skills that your technical people can bring to the table by regularly teaming them up with commercial folks for field visits.
But how do you know where to look for unmet needs in the first place? It might seem like there’s a bit of the chicken or the egg going on here. But deciding where to look is actually one of the roles of marketing strategy—your hypothesis for where and how your commercial and technical capabilities can create value. That’s where your field work should be focused.ds that you might actually be able to develop a solution for also requires the ability to synthesize—to be able to match an observed need with elements of your technology that might not even have been exploited before. That requires the kind of problem solving skills your technical people can bring to the table by regularly teaming them up with commercial folks for field visits.
To create value, your solution to the unmet need must do one of these three things for customers:
- Generate more sales cashflow for them
- Reduce their operating costs
- Free up or delay their investment in working capital or capital equipment
With the source of value understood, we get to the important part of this article—what price will customers in your need based segment be willing to pay? Determining that is a simple spreadsheet exercise considering the added value above, less what they pay for your product, and then compared to any investment they have to make to switch. Once you have modeled the economics, it’s a simple matter of varying the price until you find one that delivers an acceptable ROI or payback period—usually 12-18 months.
Of course you may wonder how you are ever going to get sensitive financial information like this from customers. The best way is to make it a quid pro quo. Your company can only invest in developing new products that create value for everyone involved. You will treat their information confidentially, but you must understand the economics for both parties before you can recommend developing the product. It’s really hard to argue with win-win logic.
Notice that so far in our discussion of pricing, cost to produce has not come up. Your cost is irrelevant to customers who only care about the value of solving their unmet need. But it’s very relevant to you—not in setting the price—but in knowing if you should develop the product in the first place. If an attractive customer value based price doesn’t generate an attractive profit margin for you, then you shouldn’t invest in the development.
More Impact Bottom Line
Pricing based on cost plus thinking either leaves value on the table or it prices too high to create value, in which case sales will be much slower than expected. Either way, cost plus thinking isn’t grounded in an understanding of value and is a sure way to eventual commoditization. Instead, start with understanding value early on, before development work begins, and focus on creating high value products that remove limitations. Do this well, and your products will create superior value so you can price accordingly and grow faster as a result.
