Driving Innovation in New Product Development, Part 1

by | Jan 24, 2013 | Pricing, Product Management, Quantify Customer Value

Follow Up From January 2013 Webinar with Dr. Stephan Liozu

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Q: What is the key stumbling block to maximizing ROI in new product development?

A: The biggest one that I’ve seen is focusing too much on pricing too early in the process. When you start discussing price during the business case development and ideation phases, then you can lose sight of the value discussion. The whole focus then shifts to margin and there is no opportunity to discuss value and how best to measure it.  So what can happen is that you say, for example, that “our old generation product was $100, so let’s put 5% on top of it”, and that’s it. Your whole value discussion has gone out the window, and there is no mindful discussion around willingness-to-pay or the value proposition. You are missing an opportunity to really evaluate value, and are leaving a lot of money on the table.

Q: What’s the best way of encouraging team collaboration in new product development?

A: I really encourage the pricing team to sit in on all Stage-Gate meetings and innovation councils. And vice versa; an innovation representative should sit in on the pricing council. So when the discussions are happening on new products and new product pricing, everyone goes through the preparations together. Now in the innovation council when you review your portfolio of products, then you can categorize your pipeline using your matrix of high, medium, or low differentiation. Doing this requires the pricing folks to work with the marketing guys, the innovation guys, marketing research, and the sales team to really validate some of the value drivers. This is a way to converge on one definition of value, and I highly encourage you to experiment with it. It’s innovation in innovation. This exercise of ranking and measuring your product ideas on differential value and competitive advantage will really impress top management.

Q: How do you set the appropriate thresholds for the Innovation Screening matrix (see Figure 1 below)?

A: It depends on the number of products you have.  Look at the average differential value across your product portfolio. Then split those averages based on all the calculated differential value you have. If you have fifty products that you launch at once or in the pipeline, then you can do it in three categories and construct a nine-grid matrix. Then once you have the data, you can sort them into  three levels of low, medium, and high. There is no standard approach; it will be based on the statistics of what’s available in differential value. If you have little variation, a two-way split into high and low may be better.

Q: How can this method be used to continually justify the pricing of maintenance to ensure upgrades meet the value of an ongoing investment?

A: When you set up the matrix and when you look at your value models, you need to determine if you are defining them as a product and service, or a bundle, or just a service. This will ensure that you are making apples-to-apples comparisons when defining the reference value you are comparing it against. If you sell the maintenance as a service only, you need to measure your differentiation versus what is being done by competitors who may be doing the same. If there are no direct competitors, then measure against what is being done internally by customers. There is always something you can compare it to, but you need the right reference and a standard unit of measure.

When you compare it with the correct reference, you can plug that into the matrix and define them as services, products only, etc. Using that standard unit of measure will ensure that apples-to-apples comparisons are being done, rather than apples-to-oranges; five different services, or five different products, or five different solutions. So be careful when you use it, you do not combine things that are not relevant based on the unit of measure.

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