For our August Webinar, Tim J. Smith, PhD, walked through best practices for clarifying value propositions, setting your prices from those value propositions, and leveraging that value story into new country markets. To conclude the webinar, he answered some questions from the audience. Here is part one of his live answers, which are focused on organizational challenges in pricing for product launch.
What are the most important organizational success factors in the pricing process you describe in the phase gate process slide? Why do attempts to accomplish this fail?
Research has demonstrated that companies make more money when pricing decisions are a collaborative, cross-functional process. Across the processes, it’s best if you involve sales, marketing and finance in the decisions (and others as you see necessary). Problem is that pricing isn’t necessarily the bailiwick of a finance person, or a sales person, or even a marketing person – it’s a specialized skill set. So the pricing leader needs to drive the process, engaging them appropriately, to drive those questions.
In the early phase, the problems I tend to see are related to getting people to buy in to this process. I have to spend time with the product development managers and marketing managers, and I need to get them to express very clearly what they are trying to do. That takes time. That takes a few meetings. Even after they express what they are trying to do, you might ask for numbers and they might not know them. So then you have to go through some way of either estimating, going through business intelligence, or asking questions to come to a reasonable estimation, or a path to get to even get better numbers.
When you move towards launch pricing, I want to start that process 18 months before launch, because I know some salespeople like to start messaging sales prices up to 6 months before launch, so I want to be way in front of them. At that point, I can get the market research done (and done well). I also often find that market research leaders want to always do quantitative work. But at value discovery, I find that in-depth interviews and more exploratory research techniques help me understand how a customer thinks better, so I actually like to do that before jumping into anything quantitative.
Those are the big areas. How do I get the team led through the path – engaging appropriately my sales and marketing and finance at the core, as well as the rest of the organization – and move this forward.
How can we overcome the inertia of the known/traditional solution when we have a truly unique solution that has real, tangible benefits?
It’s real, and I’ve seen this often. Research in highly-successful entrepreneurs acknowledge that there is going to be a “crossing the chasm” problem. That’s why you start with core customers that are willing to play the full price, then you start to move out from there with a pretty well known path of inflection points until you get to the larger market. Highly successful entrepreneurs don’t sell to people who don’t like or get their offerings. They focus on those who do get it, and believe in that vision. In Chicago, they are replacing water mains right now. You can either dig up the street and kill all the trees to replace the pipe, or you can put some stuff down the water pipe and it’ll expand and keep the pipes clean. Chicago has always dug up streets and killed trees, and even though people are saying that this other approach is cheap and keeps the trees alive, but the city has this basic inertia problem. You’re always going to have that inertia problem in certain market segments, so focus on the customers who love you.
For a large company, it has this huge desire to penetrate the whole market. You can do that, but it will require dropping price to try and penetrate the huge market, and that’s a strategic decision, which should involve your sales, marketing, finance and your pricing expert, and your CEO needs to know why you’re making that decision. That’s a strategy decision.