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Innovation Isn’t Enough: Here’s Why Pricing Matters Even More

The key to post-launch pricing strategy is to go beyond financial key performance indicators and track monthly outcomes.

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Between 65% and 75% of new products fail to monetize, depending on whose research you look at. Even in normal times, this kind of failure is unacceptable — and these aren’t normal times. 

I’m a pricing guy: a partner at a pricing consultancy (Simon Kucher) and the author of a pricing book (Monetizing Innovation). Some have even called me the “price whisperer” — though I’m not sure I’d go quite that far!

I made my career about pricing because I believe it’s the key to unlocking innovation success. Time and time again, companies embark on the long and costly journey of product development hoping to monetize their innovations, but not knowing if they will.

Businesses need to approach monetization with something more practical. And they’ll need to bring in the right set of tools and technology stack to make the new approach stick.

This might sound daunting, but the gist is quite simple: talk about pricing early, and talk about pricing often. Here are a few principles to guide you.

1. Put pricing before product

In the 2000s, Gillette was the king of razor blades in the U.S. with 60% of the market share. Meanwhile in India, their market share was just 22%.The reason? Price. Their Mach 3 razor cost 100 rupees ($2.24), which was too expensive for most of the Indian market.

So Gillette had a big idea: find the right price before building a new product. They settled on 15 rupees, and made a razor to match. They used fewer components, hollowed out the handle, and used cheaper parts. Two years later, their market share tripled to 60%.

Moral of the story: consider pricing earlier in the process, during research and development. Price is more than just a dollar figure — it’s an indication of what customers want, and how much they want it. When you discover what customers value, and what they’re willing to pay, you can build the right thing.

A key element for putting pricing before product is running agile price experiments. You’ll need analytical horsepower and reliable datasets to get to product-market-pricing fit. That means you’ll need to capture complete data through both quoting and contracting, and you’ll need a good way to analyze data in real time.

2. Give your sales reps the right packaging and bundling strategy

Packaging and bundling — where you determine how to sell products separately or in combination — can open up new segments and profits in surprising ways. The McDonald’s Value Meal entices customers to go all in on a bundle who might otherwise skip the soda and fries. Like all good pricing moves, it’s a win-win. The customer gets the option of more to eat and drink at a better price, and McDonald’s gets more profit.

It takes customer discovery to get configuration right. First, you’ll need to identify what features are “leaders, fillers, and killers” (must-haves, nice-to-haves, and needless-to-haves). Then, in the classic approach, you’ll create good, better, best options to steer your customers to the right choice.

These three options are only starting points. As you keep iterating on features and segments, you may end up with many possible configurations of packages and add-ons. That’s when sales can become a bottleneck (as manual processes multiply), and a liability (as sales reps invent frankenstein configurations from scratch).

Sales reps need a tool that can put guardrails in place without slowing them down, so they can close complex deals fast. CPQ and billing solutions, like Salesforce Revenue Cloud, have several features that can help.

Guided Selling lets users quickly and easily search through a large product catalog and find exactly what they’re looking for. Then, with Bundled Quotes and Product Rules, users can create packages for cross-sells and upsells that are technically valid at the same time.

Head to this demo library to learn more.

3. Focus more on how to charge, than what to charge

The tire company Michelin left its competitors fading in the rear-view mirror when it started pricing tires based on mileage.

About 20 years ago, Michelin invented new tires that lasted 20% longer than they did before. But other manufacturers were turning up the heat, and the new price point for these premium tires was not enough to stay competitive. So Michelin made a bold move, and started charging by mile, not tire, naming the new monetization model “the TK” (short for ton-kilometer). Soon Michelin had the highest profits in the industry, by far.

Michelin was founded in the 1800s. They’ve proven that you don’t need to be a technology company to be a monetization ground-breaker. The pricing model you choose can make a new offering take off like a rocket, and there are a number of innovative (yet proven) models in use today: subscription, dynamic pricing, and usage-based to name a few.

Read this ebook on subscription models to dive deeper.

Choose your pricing structure wisely

Launching new offerings like these will call you to reimagine the systems and processes you have. Legacy tools for quoting and billing were built for one-time product sales. But in the new and extended revenue lifecycle, most of a customer’s lifetime value comes after the initial sale, in add-on transactions like extensions, swaps, and renewals.

Advanced CPQ tools like Salesforce optimizes these new transaction types by automatically flowing sales data down to finance, through quote, order, and billing. Sales and finance can access the same accurate data, and focus on building great customer experiences — and recurring relationships.

4. Maintain price integrity

Innovating on monetization does not come with a guarantee. There will be a time when you launch a product and the market response is lukewarm. After all your hard work, this is a scary moment for your team. “Lower the price!” they’ll say. Price integrity means saying: “No.”

Knee-jerk pricing in the first few months after a product launches can erode profit and customer lifetime value. It also harms your brand by suggesting that your quality is lower than you promised at first. Now’s the time to be patient with the pricing strategy you worked so hard to create.

The key to post-launch pricing strategy is to go beyond financial key performance indicators (KPIs), and track monthly outcomes. Advances in CPQ automation help you track the metrics that really matter:

  • Win-loss ratio
  • Number of pricing deals approved
  • Deviation of the final price from the target price
  • Percentage of time that price is the reason for a lost deal
  • Number of deals escalated for pricing approval (and to what level)

The only winning move in a price war is not to play. By capturing robust data like this, you can understand the ground truth of why you’re winning and losing deals. From there, you can pursue the right non-pricing strategies before you approve a price decrease.

Takeaway

Innovation for innovation’s sake isn’t enough anymore. The spotlight needs to be on monetizing this innovation to achieve profitable growth. And the right place to start isn’t with products, but pricing, and discovering your customers’ willingness to pay.

Head to this webinar to learn about more agile pricing principles.

Madhavan Ramanujam is a board member and partner at Simon-Kucher & Partners, advising companies of all sizes from Fortune 500s to startups. Madhavan has led more than 125 monetization projects, and he coauthored the book: "Monetizing Innovation: How Smart Companies Design the Product Around the Price," which has featured in publications like the Harvard Business Review, Entrepreneur, and Inc. He is also a regular speaker in leading conferences and forums and has extensively spoken on the topic of new product monetization.

More by Madhavan

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