Driving Innovation in New Product Development, Part II

by | Jan 29, 2013 | Pricing, Quantify Customer Value

HomeBlogPricingDriving Innovation in New Product Development, Part II

Follow Up From January 2013 Webinar with Dr. Stephan Liozu

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In Part 2 of a two-part post, we address more questions from the webinar attendees based on the challenges they face during the New Product Development (NPD) process.

Q: We are launching a new product in two years. The current next best alternatives have had difficulty getting traction after launch and have lowered prices significantly.  Are there good ways to forecast future NBA prices when the market is dynamic?

A: Excellent question. Obviously depending on industry dynamics and the rate of innovation, that may differ. Doing a lot of customer research up-front is critical. You have to support your portfolio management and your innovation process with technology mapping to see how fast it will evolve. There is no standard answer; you need to know your industry and dynamics and study the past. But if you had low traction on the first generation product, then maybe the initial customer research had issues or the value proposition was not appropriately scoped. I would recommend doing a post-mortem on that, try to learn from that, and go even more into the value-in-use analysis to try to understand what happened in your value drivers that led to that situation.

Q: When doing portfolio analysis, even early in the ideation process, one must estimate the selling prices to forecast profit, revenue, etc. and, ultimately, the risk-adjusted NPV. How do you separate the EVE and price estimation in this early phase?

A: That’s a good point, because most of the time you need to create a business plan to estimate your initial pricing level. If you do a quick back-of-the-envelope calculation of your EVE, you can derive a pricing range based on that. Don’t set a price without looking at the EVE first. Early on in the Stage-Gate process you start with one or two value drivers. You have your main value proposition for Product X or Service Y, and the main foundation for that will be one of the drivers. Right off the bat you can start estimating a potential differential value that will guide your initial pricing level. Obviously, that will be subject to refinement and it is a balancing act, but it allows you to start high and go lower, rather than start low and go even lower. So doing that up-front allows you to capture the right pricing strategies.

When you’re looking at this in your Stage-Gate process in the early stages, you’re working with estimates. At that point it’s about your best internal data on what customers value. But as you get closer to launch, and as you validate your assumptions around differentiation, you’re going to need to have some market research to back it up. That validation can also come from the sales team. The beauty of having a Stage-Gate process is that is iterative, which is the way to work because the “right price” is often a moving target as you get more information about customers and competitors.

Q: What final advice would you give on integrating value into a Stage-Gate process?

A: My advice would be not creating another layer of paperwork. If you want to have dedicated value gates, it’s good, you can do that especially for radical innovations. But in your Stage-Gate, simply have one document with value in pricing; the burden of proof, the refinements, the changes you make to the pricing structure, and adding a couple of deliverables at each gate. At the end this becomes one of the criteria to move to the next gate. Do you have the value modeling done? Do you have the pricing structure elaborated?  Do you have your value messages in place?

That way, you have systemically integrated value and pricing into your new product development process in place. It provides a consistent way of looking at a value model, where it’s essentially one page where you can drill into the assumptions and evaluate them, as opposed to a dense report or Powerpoint presentation. Being able to look at things quickly, interpret them, provide feedback, and iterate is key because you have to able to move quickly.

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