Insights on Value-Based Pricing in the New Product Development Process

by | Jan 31, 2011 | Pricing, Quantify Customer Value, Why LeveragePoint?

Our January 26 Webinar on Value-Based Pricing in the New Product Development Process drew an engaged audience of about 50 people. To view On-Demand Visit: leveragepoint.com/resources/ We had a good mix of industries (from specialty chemical to data and information) and in job roles (from pricing to product development and sales). A recording of the webinar will be available in a few days. Meanwhile, here are some of the high points and a summary of the Q&A.

The key take aways from the webinar are that:

  • New product development is critical to growth and profitability
  • Product development is under pressure to create successful new products
  • Asking ‘value questions’ is a key to success
  • LeveragePoint improves the efficacy of the product development process

We also presented two case studies in the webinar, available as resources:

  • Betting the Farm in New Product Development
  • Extending the Product Lifecycle at an Industrial Material Manufacturer

Questions and Answers

1. I know a number of companies that use value models like EVE in stage gate. One place they struggle is that the gate keepers don’t understand value and pricing. How do you help the gate keepers?

This is a very real problem, one that we have also observed at a number of companies. LeveragePoint addresses this in three ways:

  • By having a consistent presentation of value models, one that you can play with by switching value drivers on and off and by testing different data points, value models become much more engaging and easier to understand.
  • By directly connecting a value driver with the sources of the data used in the value driver it is easier for the gate keepers to evaluate the value model and it makes it more real for them.
  • The platform has compelling learning resources embedded in it – see for example our Brief Introduction to EVE and a Brief Introduction to Value Communication.

2.  Could one say that you help deal with the front of the pricing water fall (the potential price or share of value capture) Versus the back end (managing the leakage in discounting and other things)?

Yes, that is one way to understand it. In product development it is critical to understand the differentiated value if you are going to succeed in creating it. But value models and value communication are also critical during new product introductions (marketing) and in the sales process, where sales people are actually talking to the customer, demonstrating the value of the new product, and negotiating the price.

3. Have you ever conducted a conjoint analysis on a significant new product and compared the premium price indicated by the conjoint to a value based pricing model?

We have not done this, but it would be interesting to hear from anyone who has. In most cases, conjoint analysis will help one to prioritize features, but it doesn’t really give one insight into how economic value is being created or into how to communicate that value to a customer. Getting specific about economic value is critical in B2B for product development, marketing and sales.

4. Do you ever discount the new value model to provide a more conservative price for your customers? If so, what would be the criteria for such a discount?

The value model gives insight into the differential economic value for a specific customer or segment relative to a specific alternative. It does not set a price. When setting the price there are two main things to consider: the pricing sensitivity factors (the Pricing Module of the LeveragePoint Platform helps you to think through these) and your market entry strategy. Examples of pricing sensitivity factors are “Brand Power” and “Perceived Risks ” Pricing strategies include “Penetration Pricing” where a comparatively low entry price is chosen, or a “Skimming Strategy” in which a high-[rice is used at market entry. Value modeling can also be very important is designing your customer segmentation (and it is often important to do a good segmentation as part of a market entry strategy). For example, one can create a segmentation matrix by value driver and relative power of that value driver, so that customers that received a great deal of value for the same reasons (shared value drivers) are placed in the same segment.

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