Pricing throughout Product Development Cycle
Getting pricing right is business critical: as Raymond Corey of Harvard Business School put it, “Pricing is the moment of truth – all of marketing strategy comes to focus on the pricing decision”. My strikethrough of the word marketing: lots of strategy decisions end up with the price, given that’s how value capture happens. But all too often this doesn’t make it into the product development process.
Why is this? Well as a former research scientist myself, I think it’s due to two reasons: there is too much of a division between product development and product commercialization, and secondly the need to succeed blinds development teams to potential weaknesses in the new offering. This doesn’t need to be the case. A structured approach to pricing based on 5 clear steps can foster a common understanding that identifies winning products faster and helps avoid the missteps.
1. Identify the sources of value. As discussed before, these can come from direct cost reduction (the easiest to quantify), enhancements to the customer’s own product/service offering helping them to grow more or raise prices (difficult to quantify), or other more intangible factors such as enhancing reputation, reducing risk, etc. (very difficult to quantify). It’s critical to understand where the new offer will add value, and where it is deficient to the alternative.
2. Build the offer and pricing architecture. For incremental product enhancements, this step may be trivial, but when the innovation is more substantial it may make sense to change the pricing architecture. There are multiple decisions to make here as outlined in this article.
3. Document the business model. If you change the pricing architecture it’s likely going to change the relationships with other partners stakeholders in the ecosystem. The Business Model Canvas is a great tool for this. This is particularly important and challenging in industries like MedTech where there are so many stakeholders.
4. Outline the business case and associated assumptions. The key here is not so much the business case itself, but more that the underlying assumptions are clear.
5. Identify strengths, weakness and gaps. Pulling all of the above together and including an assessment of the technology readiness, market readiness, business case attractiveness and strategic alignment will highlight the strengths, weaknesses and (perhaps most importantly) the gaps. Understanding this helps to prioritize what should be addressed to close these gaps.
If all of this sounds like a lot, keep in mind that this should be an iterative process: when a product or offer concept is first defined it’s sufficient to just sketch out the above steps. It’s appropriate (and necessary) to guess when answers are not known and tag those guesses as such: critical guesses are then easy to see and can be prioritized to be addressed.
These steps should be done with small cross-functional teams and baked into product development review gates: early phases can and should be ‘quick and dirty’ and focused on getting assumptions on the table so they can be challenged and verified in good time. It’s never too early to start however…too often problems that could be identified early slip by for too long because “we’ll worry about commercialization later”.
Having a structured approach and baking this into development processes, will improve development effectiveness and enable faster commercialization with fewer surprises.
Who’s doing this well today? Please get in touch with me if you’d like test-drive tools to support the 5 steps mentioned above. I discuss this topic at the EBCG MedTech conference in Berlin June 8-9, 2017.