Whether you are a new enterprise looking for a company-wide pricing model, or a well-established organization planning to launch a new product, the initial prices will significantly determine your position within the market. A position that is hard to change. In fact, 80 to 90 percent of poor pricing models price products too low, leaving substantial amounts of money on the table and making clients raise doubts about the quality of the offering. On the other hand, if the price is too high, it can scare customers away.
Pricing a new product is one of the most complex marketing decisions to be made. Therefore, discussions on a product pricing model should start long before you plan to enter the market, while pricing strategy should be an integral part of product development cycle. Implementing value-based pricing research will drive your competitive advantage by increasing the new product’s success rate. On the contrary, the typical outcome of a cost-driven pricing process is sales do not meet expectations and there is pushback on price which the company is not equipped to handle.
Unique Challenges
There is a lot at stake when you price revolutionary products, but regardless of the challenge, your ability to tackle it will determine the future success of your product.
As mentioned earlier, 80 to 90 percent of mispriced products are priced are too low. This was the case for the first portable readers. The innovative product turned the publishing industry upside down, permanently disrupting supply chains, inventory management, and delivery infrastructures. As the result of the low price point, the company could not keep up with demand. But what is more important, the company greatly underestimated the value of portable readers and missed out on substantial profits. In some estimates, their initial product pricing model stunted $1 billion of profits for the publishing industry as a whole.
It is extremely difficult to accurately gauge the full spectrum of benefits or even downsides to innovative products. Pricing objectives in the early stages of development should focus on closing these lapses of information, giving you an accurate market evaluation.
Figuring Out Your Value
The gap in knowledge for revolutionary products is wide. Closing this gap is a process that requires intensive research and investment. To assist clients with this perplexing problem we have developed “Value Navigator”, a five-step process for estimating value and pricing innovations.
1. Carve out a Sample
Deciding whom to include in your sample is an important first step. Unlike products launched into existing categories, the success of innovations usually depends on the first 3-5% of adopters. These early adopters not only put products through rigorous use but also stand to benefit from them the most. People in this category seem to be leading-edge thinkers or innovators themselves. They have a stronger grasp on the technology and can ultimately influence the opinions of the entire market. Their views of value and price sensitivity for the product will have a greater impact than a truly random sample. This is referred to as the “Diffusion Effect,” and has been empirically proven in numerous studies of innovations.
2. Prototyping and Clear Education
Educating customers is always an uphill battle. Sometimes the costs get out of control at which point it may be best to re-evaluate the entire pricing model. If the cost of education becomes astronomical then perhaps the product needs to be simplified or re-engineered. Whatever the case, it is imperative that your business provides the customer with an in-depth understanding of the product.
We recently conducted a study/interview on behalf of a healthcare client who had an innovation that was hard to understand. The first few interviews we conducted led to frustration because, even with the prototype, the clients were having difficulty understanding the product. It was only after we went back to the drawing board and made further refinements that the interviewing process went more smoothly and we were able to get realistic and informed opinions.
3. Determine Value Gaps
Through the interview process ask customers to identify and rate the individual attributes of your innovation. Once you have completed that exercise, ask them to rate their level of satisfaction with the products/ services they currently use. This is often an interesting and enlightening exercise. Innovations often replace several different products at one time. Understanding what those products are, their costs, and how customers use them is extremely important. These are ‘reference points’ that customers can use to assess the value of your innovation. The price of innovative products should reflect how much people value the problem you have solved. In other words, how much is bridging the value gap worth to potential clients?
4. Measure the Delivered Value
This is the trickiest part of the process. When clients make a buying decision, they purchase three things: size, speed, certainty. Of the three, certainty is the most important. Therefore, you must measure all three from the customer’s perspective to ensure that you price your product properly.
One of our clients had developed an efficient pharmaceutical product that could potentially save customers money through reduced nursing administration time, fewer consumables and less frequent patient visits to the hospital. However, the company had a hard time in conveying the value to customers and the customers perceived the product as too expensive.
To quantify the value of their offerings, our team developed adjustable Financial Value Mapping Tool that allowed customers to calculate how much money they could save, using the new product. The tool transparently highlighted to the customer which parts of their current expenditure would increase and where cost offsets would occur and reduced their total expenditure. When all of this was taken into consideration the client’s customers were no longer focused on the more expensive list price of the product, but were thinking about the total treatment costs.
5. Working with a Pricing Model
Developing your pricing model should be a process of elimination. Narrow down the price spectrum and cross out unfeasible ranges. This will help you better understand the market as a whole, and the price sensitivities of it. Even though all research is hypothetical and the real results may not exactly match your expectations, the aforementioned methods would still provide you with a close approximation of the right price points.
As many of the industries are in the state of constant disruption with new technologies, pricing strategies should be closely monitored for effectiveness in order to reflect the changing market. Remember, pricing strategies are not stagnant one-time processes and they need to be actively optimized to ensure the success of your innovation.
