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Pricing New Products (for the PDMA Competitive Edge Conference)

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What role should product managers play in pricing new products? What knowledge do they need to participate in pricing leadership? A short presentation on the key concepts from the Product Development and Management Association's 2018 Conference

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Pricing New Products (for the PDMA Competitive Edge Conference)

  1. 1. Design your pricing as part of your product Steven Forth Ibbaka, Vancouver, BC November 5, 2018 steven@ibbaka.com
  2. 2. Our goals • Clarify the role the product manager can play in pricing • Provide basic knowledge of pricing methods, strategies and models • Go deeper into value-based pricing • Connect pricing to service design
  3. 3. Key takeaways • Understand how economic and emotional value interact to shape willingness to pay (WTP) • Have a repeatable method to design pricing and packaging • Know what data you need to collect to evolve your pricing model and messages
  4. 4. Steven Forth • Active investor in early-stage innovation • Authoring a book on Value Innovation and Pricing • Advises companies large to small on pricing strategy
  5. 5. Steven Forth – Skill Profile My top skills according to my TeamFit profile. As determined by my peers based on the projects I work on.
  6. 6. Steven Forth – Foundational Skills Foundational skills are used to build other skills. They often give better insight than business or technical skills into how a person works.
  7. 7. What we will cover • When to start thinking about pricing • Who should own pricing • Value is the foundation of pricing • Pricing methods • Pricing strategies • Pricing models and innovation • Pricing and service design • Three key steps
  8. 8. When to start thinking about pricing Let’s do a little poll. When do you start to think about pricing? Just before launch As part of go-to-market planning During development As part the product requirements As part of initial discovery Other
  9. 9. What we often see Innovation Product Cost Price Value?
  10. 10. What we recommend Customer Understanding Differentiated Value Price Product Cost
  11. 11. Who should own pricing Another quick poll. Who owns pricing at your organization? CFO and Finance Sales Leadership Marketing Leadership Product Leadership Operations Leadership Other
  12. 12. Who should own pricing? Whoever is closest to the customer and who best understands how the customer is getting value. Early on this is generally the Product Manager.
  13. 13. Pricing ownership changes over time Owner CFO When financial metrics drive pricing Sales When sales have a close understanding of the customer needs Marketing When pricing is key to brand and positioning Operations When pricing is used to balance resource utilization As an offer matures in the market it can make sense for pricing ownership to change.
  14. 14. Value is the foundation of pricing • We are going to be talking a lot about value. • Customers only buy over the long term when Value Received > Price
  15. 15. Value is always relative • Value is relative to the alternative and there is always an alternative A direct competitor An alternative The status quo Doing nothing
  16. 16. Value is is economic and emotional • Economic – the impact you have on your customer’s business • Emotional – how your offer makes your customer feel about themselves
  17. 17. Economic Value Estimation (EVE) Next Best Alternative Positive Value Drivers Negative Value Drivers Differentiation Value Normal Price Range Developed by Tom Nagle in his book The Strategy and Tactics of Pricing (now in its 6th Edition)
  18. 18. Positive Value Drivers (Economic) Six Types of Value Driver Improve Revenues Market Scale, Market Share, Pipeline Metrics (Conversion Rates, Velocity) Decrease Operating Costs Efficiency, Productivity, etc. Decrease Operating Capital Inventory Turns, Collections, etc. Decrease Capital Expenses Capacity, Utilization, etc. Decrease Risk Liability, Errors & Omission, Competition Increase Options Innovation, Resiliency, Alternatives
  19. 19. Negative Value Drivers (Economic) Relative to the Alternative Unique Costs Unique costs of your solution relative to the alternative • Training • Switching costs • Configuration • Etc. Shortcomings Your competitor’s positive economic value drivers (what they do better than you)
  20. 20. Economic Value Estimation (EVE) Next Best Alternative Shortcomings Differentiation Value Normal Price Range The four most common value drivers are higher revenue, lower operating expenses, lower operating capital and lower capital investment - Capital Investment - Operating Capital - Operating Costs + Revenue Unique Costs
  21. 21. Emotional Value Drivers Pricing power increases as one moves up Maslow’s hierarchy of human needs
  22. 22. Value and Customer Needs Customer Needs Your Solution Competitor Solution Your Positive Differentiation Your Negative Differentiation Commodification
  23. 23. Value and Customer Needs Customer Needs Your Solution Competitor Solution Next Best Alternative Shortcomings - Capital Investment - Operating Capital - Operating Costs + Revenue Unique Costs
  24. 24. Commodification Expands Over Time Customer Needs Your Solution Competitor Solution Commodification In most markets commodification increases over time as a standard offer emerges
  25. 25. Pricing methods Cost Plus – Apply a mark-up to costs (most companies do not know their costs) Market Following – Price relative to a widely accepted price Value Based – Capture part of your differentiation value
  26. 26. The Emergence of Dynamic Pricing Cost Plus Market Following Dynamic Value Based
  27. 27. Outcome Based Pricing is Coming Cost Plus Market Following Value Based Dynamic Outcome Based
  28. 28. Dynamic Pricing • Generally used for transactional pricing • Must be possible to change prices quickly • Used with dynamic offer customization • AI and Machine Learning are being applied here
  29. 29. Outcome-Based Pricing • Tie the price paid to the outcomes delivered • Generally for long-term relationships where there is deep trust • Requires strong contracts that are fair to both sides
  30. 30. When to Use Each Method Method When to Use Cost Plus When the customer controls the offer and how value is received Market Following When there is a well established reference price or when certain inputs control the economics (such as interest rates for many financial products) Value Based When there is strong positive differentiation (use to price subscriptions) Dynamic When value changes rapidly (use to price transactions) Outcome Based Captures the most value, vendor must be willing and able to accept risk, requires strong contracts and great trust on both sides
  31. 31. Pricing strategies • Penetrate price low to enter or grow a market • Market Following price relative to an alternative or market input • Value-Based price to capture positive differentiation
  32. 32. Pricing Power Matters “The single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you've got a terrible business.” Warren Buffet
  33. 33. What is Pricing Power Next Best Alternative Positive Value Drivers Negative Value Drivers Differentiation Value Brand Smaller Scope Pass Throughs Risk Larger scope Lack of completeness Pricing power is the degree to which you can capture your differentiation value
  34. 34. Putting the pieces together Next Best Alternative Positive Value Drivers Negative Value Drivers Differentiation Value Premium Market Following Penetration
  35. 35. Pricing changes as markets mature
  36. 36. Pricing changes as markets mature Prefer not to pay
  37. 37. Pricing changes as markets mature Prefer not to pay Pay for competitive advantage
  38. 38. Pricing changes as markets mature Prefer not to pay Pay for competitive advantage Buy because others are buying
  39. 39. Pricing changes as markets mature Prefer not to pay Pay for competitive advantage Buy because others are buying Buy solutions to their problem
  40. 40. Pricing changes as markets mature Prefer not to pay Pay for competitive advantage Buy because others are buying Buy solutions to their problem Buy when bundled in
  41. 41. Pricing models • A good pricing model – Tracks value delivered – Sharpens your differentiation – Makes it easy to buy • Combine several value metrics into one pricing metric • Combine a subscription or license with a transactional fee
  42. 42. Pricing model innovation Power by the hour (Jet Engines) Pay per click (Advertisements) Charge per output purity (Intelligent Filters)
  43. 43. Pricing and service design • Service design follows the experience of the customer (and the larger community supporting the customer – including staff) as it changes over time • Captures interactions at touch points
  44. 44. Value at touch points • At each touch point map – Value understanding - Do they get it? – Value resonance - Do they care? – Value delivery – Have they gotten value? – Payment – Have they paid?
  45. 45. Include value in your journey map Pay attention to how value perception delivery and payment interact over the customer journey
  46. 46. Look for value disconnects • Understanding vs. Resonance – Do they understand your value when they care about that value? • Value Received vs. Price Paid – Is when and how they pay aligned with when and how they receive value?
  47. 47. Three key steps 1. Understand who you provide value for and how you provide emotional and economic value (begin with value-based market segmentation) 2. Develop a pricing model that connects price to value and that sharpens your differentiation 3. Combine subscription & transactional components and test their interactions
  48. 48. Follow ups Contact me at steven@ibbaka.com Follow our blog at ibbaka.com Join the Professional Pricing Society’s LinkedIn Group

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