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Pricing and innovation New Ventures BC April 2017

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Pricing is core to early-stage innovation. Learn the best practices. Combine economic and emotional value. Understand how pricing changes across the technology adoption cycle.

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Pricing and innovation New Ventures BC April 2017

  1. 1. April 22, 2017 New Ventures BC Steven Forth @StevenForth Steven.forth@gmail.com Pricing and Innovation
  2. 2. Steven Forth Cofounder of eight companies (Boston, Tokyo, Vancouver)  Most recently the cloud value management platform LeveragePoint  the skill management and team building platform TeamFit.co  and the pricing technology platform Ibbaka Active angel investor (direct and through angel funds)  Participate on due diligence teams Consultant on innovation, pricing and design  Advising several early-stage projects at small and large companies 2 About your presenter Passionate about how to make innovation successful & self sustaining
  3. 3. The Value Innovation Cycle Create Value Communicate Value Capture In Price Invest In Innovation 3 Understand Value The innovation cycle
  4. 4. Key Themes for Today Pricing is about more than picking a number It begins with understanding value to the customer (relative to their alternatives) Price is how you frame the value you provide Pricing is a core part of your offer Pricing is a place to innovate 4 What is pricing?
  5. 5. When to worry about pricing? Theory 1 – Later, it comes down the road After product-market fit Theory 2 – At the beginning, it is core to your business model Pricing is based on value Pricing architecture is core to product Pricing can be the source of innovation  Worry about pricing metric and architecture from day 1  Worry about pricing levels & tactics once you have product market fit 5 When to worry about pricing?
  6. 6. Order of Events Common 6 Product Cost Price Customer (hopefully) Value (maybe) Customer Value Product Price Cost Compelling Order of operations
  7. 7. Technology Adoption Cycle (Geoffrey Moore) 7 Sustaining Innovations Disruptive Innovations Bowling Alley Tornado Moore’s technology adoption cycle
  8. 8. Technology Adoption Cycle & Pricing 8 Tend Not to Pay Tend to Overpay Bowling Alley Tornado Look for unique value drivers for specific segments Look for common value drivers across segments Innovate for focused differentiation Unbundle services Impact on pricing
  9. 9. It is not just feature & benefits 9 Features (what it is) Function s (what it does) Benefits (why it matters) Value Drivers (how it helps) Quantified Value Drivers ($ impact) Quantified Value Drivers have the biggest impact on price. Taking the Bus Transports People Gets to Work Earn Money Save Gas Save Parking … Relative to Car or Bike From Features to Value
  10. 10. What do we mean by value? Value is For the customer (has nothing to do with cost of your inputs or how cool you are) Relative to an alternative (there is always an alternative – even if it is ‘doing nothing’) Economic (quantifiable in dollars) and Emotional (in some cases there are other important ways to quantify value, like Quality Adjusted Life Years in healthcare) 10 What is value?
  11. 11. Economic Value Estimation (Tom Nagle) 11 Price of Next Best Competitive Alternative Lower Capital Investment + Value Driver Lower Working Capital + Value Driver Lower Operating Cost + Value Driver Higher Revenue + Value Driver Shortcomings - Value Driver Unique Costs - Value Driver Differentiation Value Economic Value Value modeling
  12. 12. Economic Value Estimation (Tom Nagle) 12 Price of Next Best Competitive Alternative Lower Capital Investment + Value Driver Lower Working Capital + Value Driver Lower Operating Cost + Value Driver Higher Revenue + Value Driver Shortcomings - Value Driver Unique Costs - Value Driver Price Range Value modeling
  13. 13. Value Driver Examples 13 • Allow your customer to access a new market • Give a customer a way to increase prices • Improve pipeline metrics for your customer Revenue • Make a process more efficient • Reduce use of an expensive input • Substitute a cheaper input OpEx • Make a process more efficient so a new plant investment can be deferredCapEx • Reduce inventory • Accelerate inventory turns • Reduce accounts receivable Working Capital Any positive value driver can also be a negative value driver! Two other classes of value driver are ‘risk reduction’ and ‘providing an option.’ Types of value drivers
  14. 14. How much value can you claim? Pricing Power + Value Drivers 14 Price of Alternative - Value Drivers + Pricing Factors Brand Strength Pass Through Pricing … - Pricing Factors Perceived Risk Switching Costs … Pricing power Pricing Power
  15. 15. How much value should you claim? Pricing Strategy + Value Drivers 15 Price of Alternative - Value Drivers Skim Penetrate Market Following Pricing strategies
  16. 16. How much value should you claim? Pricing Strategy 16 Skim Penetrate Market Following What strategy? Charge as much as is fair Reinvest in innovation Follow a market leader ( + or - ) Track a market input ( interest rates, energy prices) Price as low as possible Grab market share
  17. 17. Emotional value & pricing power (Maslow’s Hierarchy of Needs) 17 The higher the need served the higher your pricing power. Emotions matter
  18. 18. What is a value metric? And why it matters The unit of use by which a customer gets value from your offer 18 The value metric
  19. 19. Gallons of paint or square feet covered? 19 Liters or square meters?
  20. 20. Innovating on the value-pricing metric The ability to instrument cloud software to measure use and to integrate with other systems opens many new possible pricing metrics The Internet of things makes it possible to extend this to the physical world We are in the golden age of pricing metric innovation 20 Value metric innovation
  21. 21. Choosing a pricing metric Tracks Value Across Segments Measurable & Enforceable Fits Buying Process Aligns With Channel Favorable Positioning 21 Pricing Metric Choosing a pricing metric
  22. 22. Pricing & go-to-market strategy are linked 22 Pricing Go-to-Market Pricing and Go-to-Market
  23. 23. What’s a segment Customers get value in the same way  Can market using the same value propositions  Can use the same pricing metrics Customers have the same buying process  Easier to test the segment  Easier to design and optimize your sales process Customers reference each other  Messages get amplified 23 What is a good segment?
  24. 24. What’s a segment 24 What is a good segment? Buy Online Buy from Person Free Trial Demo On Phone Face 2 Face More Leads XXX XX X X More Demos XXX XX More Conversions XXX Fewer Meetings XX XXX
  25. 25. What’s a segment 25 What is a good segment? Buy Online Buy from Person Free Trial Demo On Phone Face 2 Face More Leads XXX XX X X More Demos XXX XX More Conversions XXX Fewer Meetings XX XXX Your buyers talk to each other: get word of mouth working
  26. 26. Segmenting & Targeting Value & Size Revenue = Price X Volume (Duh!) 26 Value (to Customer) Size of Segment High Low Price Price Price Price What is a good segment?
  27. 27. Segmenting & Targeting Value & Size Revenue = Price X Volume (Duh!) 27 Size of Segment High Low Price Price Price X X Segment too small Not enough value Eliminating the obvious Value (to Customer)
  28. 28. Segmenting & Targeting – Cost to Serve Profit = Price X Volume - Cost to Serve 28 Size of Segment High Low Price Price Price Cost To Serve High Low X Costs sneak back in Value (to Customer)
  29. 29. Segmenting & Targeting – Cost to Serve Profit = Price X Volume - Cost to Serve 29 Size of Segment High Low Price Price Price Cost To Serve High Low What is your pricing strategy? Value (to Customer)
  30. 30. Simple process 1. Understand how you create value 2. Define segment = Value x Buying Process x Reference 3. Test your customer acquisition costs and cost to serve (This is where costs come in, when you select segments) 4. Choose your beachhead (market entry) segment 30 Back to basics
  31. 31. Early-Stage Pricing Checklist  Disruptive or sustaining? Why?  What part of the adoption cycle are you trying to sell to?  Do you understand how different types of customer get value?  Have you used that understanding to segment the market?  Have you crafted an offer for a specific segment?  Do you know your value metric for that segment?  Have you found a pricing metric that tracks the value metric? (and makes it hard for incumbents to attack you)  Do you know what pricing factors effect you? (and do you have a plan to enhance the positive, eliminate the negative)  What is your whole product solution? What will you bundle?  Have you decided on a pricing strategy? Why? (skim, penetrate, market following)  Does your pricing strategy align with your go-to-market strategy? How?  For software, how will you leverage a ‘free’ offer? 31 Pricing checklist
  32. 32. Some Resources Professional Pricing Society on LinkedIn Ibbaka Blog for quick pricing insights LeveragePoint Blog a good source of current information on value modeling Steven Forth posts on OpenView Labs Steven Forth Posts on New Ventures BC 32 Some resources
  33. 33. Questions ??? steven.forth@ibbaka.com 33 Twitter @StevenForth Ibbaka Twitter @IbbakaPricing Connect on LinkedIn

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