Capturing the value from new products: price model innovation
In a previous blog, I talked about the three types of value your customers gain from your company’s new products and services:
- Cost reduction
- Value enhancement
- Intangible value enhancement
Capturing your company’s share of that value comes from the pricing model, related to but distinct from the customer value model. There are six dimensions that should each be explicitly considered.
- Offer structure: Are you offering many discrete elements or bundles of products/services? What’s in the core offering, and what’s “extra”? Don’t forget financing and guarantees (implicit or explicit) in your offer.
- Price basis: Is the primary pricing mechanism based on incremental value, market-price or cost-plus? Often a hybrid is best (e.g. market-baseline plus incremental value-add).
- Price carrier: this is what the price “hangs” from. As an example, Michelin Fleet Services switched from selling tires (price carrier: the tire) to selling tire usage (price carrier: the distance driven). Which of the following types of carrier is right for you: Input based (something that is delivered, e.g. the tire))? Output based (what the customer produces based on your input, e.g. the distance driven)? Or time based (e.g. a subscription)? Maybe a hybrid of the three?
- Timing: When will the price get fixed? In advance (think airline seats)? At delivery? After the fact (generally implying risk sharing between your company and the customer)? Or ongoing? Timing of when prices are fixed has a big impact on how risk is shared.
- Customer segmentation: Will “One-Price-Fits-All” capture the value sufficiently? On the other extreme, one-on-one negotiated prices can capture most value – but can you manage the high selling costs and complexity? In the middle are customer segmented prices – if you can fence the segments and manage the complexity!
- Customer incentives: This is about structuring commercial terms and policies to drive desired customer and channel behaviors. What’s the right mix of driving share-of-wallet, customer profitability (e.g. via product mix and reducing cost-to-serve), loyalty and risk sharing?
As it’s clear there is a lot to think about here: a few tips:
- Collaboration and iteration are key. Changing away from an industry-standard pricing model is not without risk. If you haven’t worked through this recently outside help might make sense (especially given the high impact of getting it right). You will need to make sure it all hangs together (including going back to the value model to see if it needs adjusting). Plan to test any changes internally and externally before launching.
- Your “perfect” pricing model is likely to be unsustainably complex. Segmentation in particular adds a lot of complexity: apply only where it makes a big impact (the model can be very simple for secondary segments). Selling through different channels is another area to be careful. Err on the side of the simpler option - you can always add more sophistication later.
- There may be other considerations that don’t fit neatly into the above: two-sided-markets is one example and when there are multiple possible payers is another. The six pricing model dimensions still apply, but must now be considered for multiple business chain participants and not just the end customer.
Getting the pricing model right for your company can be a huge profit driver that should not happen by accident. If you aren’t getting the value you deserve from your products and services, evaluate tweaking (or fully remodeling) your pricing model.
Reach out to me for examples of pricing model innovation in each dimension. I’d love to hear of your examples in this fascinating and under-exploited area.
Soon we will launch a workshop to accelerate the process outlined in this and the last blog. Please contact me for more information.
Thank you to Kiran Raghavapudi for helping me think through this blog, and to Michel Stefan for an excellent HBR article Capture More Value.