Extracting Full Value From New Product...
Transcript of Extracting Full Value From New Product...
www.simon-kucher.com
Presentation for GMI Conference
Extracting Full Value From New Product Launches
Feb 2015
Joshua Bloom
Silicon Valley Office
100 View StreetMountain View, CA 94041Cell: (650) 691-3315
Source: Simon-Kucher & Partners
Extracting full value from new product launches
Situation Key Question? Profit effect?
Launch: Q1 2006
Launch price: $71,000
Demand: Approx. 80,000 units per year worldwide
Production capacity per year 70,000 units
▹ What would have been the optimal price?
▹ Assumption price elasticity: 𝜀 = -2
▹ Possible volume decrease: -10,000 units / 80,000 units = -12.5%
▹ Possible price increase: ∆ volume / 𝜀 = -12.5% / -2 = + 6.25%
▹ Optimal Price:$71,000 x 1.0625 = $75,437
▹ Profit impact: $4,437 x 70,000 units
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Source: Simon-Kucher & Partners
New product pricing: Possible failure points
R&D:Determine the value of your product
Pre Launch:Establish pricing structure and levels
Launch:Communicate value to the marketplace
Post Launch:Manage pricing over time
Wrong products
Wrong features
Incorrect forecasts
Incorrect budgets
Minimal differentiation
Wrong price structure/ metrics
Sub optimal features
Sub optimal prices
Wrong segments
Unforeseen portfolio effects
Un-deserved discounts
Unclear value prop
Poor sales execution
Channel gaming
Frequent escalations
Matching comp prices
Un-necessary price cuts
Lack of pricing visibility
Unclear upgrades
Poor negotiations
Product Development
Approved
Product Pricing
Approved
Product Launch
Handoff to
Pricing Mgmt.
Gate/ Milestone
3
Source: Simon-Kucher & Partners
Insights from Simon-Kucher new product pricing experience
1. Situations are unique, but frustrations generally fall into one of four
universal categories
2. Success starts with a cultural shift driven by three counterintuitive
guiding principles
3. These three guiding principles give rise to one new paradigm for
innovation
4. Successful implementation depends primarily on senior management
and the right process
4
Source: Simon-Kucher & Partners
Insights from Simon-Kucher new product pricing experience
1. Situations are unique, but frustrations generally fall into one of four
universal categories
2. Success starts with a cultural shift driven by three counterintuitive
guiding principles
3. These three guiding principles give rise to one new paradigm for
innovation
4. Successful implementation depends primarily on senior management
and the right process
5
Source: Simon-Kucher & Partners
Universal category #1: “Feature Shock”
What you hear
“But we can also add this …”
“We want to be on the safe side”
“Customers don’t know what they want, so we need to decide what to build”
“One size should fit; our market is not segmented”
“Let’s build it, then position it”
“Let’s get something out there”
How to solve? “Discipline”
6
Source: Simon-Kucher & Partners
Universal category #2: “Minivation”
What you hear
“It’s good enough”
“We checked all the boxes”
“It hit the targets”
“I don’t want to sign up for a big number”
“I don’t want to over price. I would rather be conservative”
“With our margins, we don’t need to worry about price”
“We need to penetrate the market”
How to solve? “Ambition”
7
Source: Simon-Kucher & Partners
Universal category #3: “Hidden Gem”
What you hear
“We don’t know what to do with this”
“This isn’t business as usual for us”
“We don’t have a process for that”
“We’ll throw that into the deal”
“It’s not in our DNA…”
“This goes against our culture”
How to solve? “Recognition”
8
Source: Simon-Kucher & Partners
Universal category #4: “Undead”
What you hear
“I’m not going to be the one who says ‘no’”
“Personally, I’d never buy this myself, but …”
“Screw what the research says; I know this will work!”
“Let’s wait for more evidence before we pull the plug”
“The train has left the station”
“We’ve come too far. If we kill this now …”
How to solve? “Objectivity”
9
Source: Simon-Kucher & Partners
Insights from Simon-Kucher new product pricing experience
1. Situations are unique, but frustrations generally fall into one of four
universal categories
2. Success starts with a cultural shift driven by three counterintuitive
guiding principles
3. These three guiding principles give rise to one new paradigm for
innovation
4. Successful implementation depends primarily on senior management
and the right process
10
“outside-in” not “inside-out”
Source: Simon-Kucher & Partners
Three counterintuitive guiding principles for innovation
1
2
3
“value first, build second” not“build first, value second”
“no-maybe-yes” not “yes-maybe-no”
11
Source: Simon-Kucher & Partners
Insights from Simon-Kucher new product pricing experience
1. Situations are unique, but frustrations generally fall into one of four
universal categories
2. Success starts with a cultural shift driven by three counterintuitive
guiding principles
3. These three guiding principles give rise to one new paradigm for
innovation
4. Successful implementation depends primarily on senior management
and the right process
12
Source: Simon-Kucher & Partners
One new innovation paradigm
Old paradigm
Design it
Build it
Price it
Market it
New paradigm
Design it
Price it
Market it
Build it
13
Source: Simon-Kucher & Partners
Insights from Simon-Kucher new product pricing experience
1. Situations are unique, but frustrations generally fall into one of four
universal categories
2. Success starts with a cultural shift driven by three counterintuitive
guiding principles
3. These three guiding principles give rise to one new paradigm for
innovation
4. Successful implementation depends primarily on senior management
and the right process
14
Need #1: C-level involvement & dedicated pricing function
Pricing power is the ability of a
company to get the price it
deserves for the value it delivers
100
135
127
Others
With C-level involvement
With pricing function
Source: Simon-Kucher & Partners Global Pricing Study 2012
15
Total
Pharma, biotech/medtech
Consumer goods
Financial services
Automotive
Transport/logistics
65% 35%
* High pricing power is the ability of a company to fully/almost get the money it deserves for the value it deliversSource: Simon-Kucher & Partners Global Pricing Study
All markets have companies with and without pricing power
High pricing power*Low pricing power
“Pricing Power” assessment
53%
47%
30%
27%
19%
47%
53%
70%
73%
81%
Only 35% are able to get the prices they deserve!
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Source: Simon-Kucher & Partners Global Pricing Study 2012
Pricing power has strong impact on profits
133
100
Average profit margin of last three years (index)
Companies with high pricing power
All others
Pricing power increases profits by
33%
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The market has figured this out…and will reward you!
"The single most
important
decision in
evaluating a
business is
pricing power."
Warren Buffett
Source: Warren Buffett in an interview with FCIC, May 2011
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Source: Simon-Kucher & Partners
Need #2: New product pricing playbook
R&D:Determine the value of your product
Pre Launch:Establish pricing structure and levels
Launch:Communicate value to the marketplace
Post Launch:Manage pricing over time
Product Development
Approved
Product Pricing
Approved
Product Launch
Handoff to
Pricing Mgmt.
Gate/ Milestone
19
Source: Simon-Kucher & Partners; *ACBC: Adaptive Choice Based Conjoint; WTP: Willingness To Pay; VW: Van Westendorp; ComStrat & ComStrat Plus are Simon-Kucher proprietary tools
R & D: Pricing activities & methods
Process
R&D:Determine the value
of your product
Pre Launch:Establish pricing
structure and levels
Launch:Communicate value to the marketplace
Post Launch:Manage pricing
over time
Pricing activities Key tools/ methods
Identify needs / value
White space analysis (identify totally new areas for innovation)
Value and benefit analysis (Impact on customers)
Gap analysis (perceived satisfaction with alternatives)
Identify value drivers / key customer buying criteria
Competitive analysis / competitive positioning
Quantify value
Translate value into fair price (WTP*)
Determine premium to competition / alternatives
Identify psychological thresholds (e.g. using VW*)
Model expected uptake (indirect & direct methods)
Segmentation analysis (identify key segments , needs, WTP*)
Build business case
Feasibility analysis (Go / No-Go)
Value chain analysis (share of pie)
What-if analysis (Forecast / simulate outcomes (assuming uncertainty)
Financial modeling/ budgetary pricing using uptake & forecasts
1
2
3
ComStrat*
Gap analysis
Conjoint (ACBC)*
ComStrat Plus*
Simulation
Financial modeling
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Source: Simon-Kucher & Partners
Pricing focus in R&D stage:
Needed to prevent feature shock & undead and to identify hidden gems
Process
R&D:Determine the value
of your product
Pre Launch:Establish pricing
structure and levels
Launch:Communicate value to the marketplace
Post Launch:Manage pricing
over time
21
Source: Simon-Kucher & Partners
Example: Preventing feature shock
Road Navigation
Drivers want the quickest route to their destination
Ability to reroute if driver deviates from original route
Running Distance
Runners want to be able to track their speed, distance and time
Compare running performance over time
Golf Tracking
Golfers want to be able to find distances to the pin and hazards quickly and accurately
Track shot distances to measure how far clubs are going
Hiking Navigation
Hikers and hunters want to be able to find their way in the wilderness
Plot where they have been and where they want to remember
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Source: Simon-Kucher & Partners; Data anonymized
Example: Undoing a feature shock
Simon-Kucher Project Example: Internet
Client’s packages before project:4 packages with 6 pages of features
Project Outcome: Distinct 3 package line-ups for two segments
Challenges:Packages not aligned with needsNeeds not tied to segmentsLong, unfocused and too many features – causing a Feature Shock!
Segment A:
Segment B:
Removed features and simplified offer and focused only on features that truly provide valueDesigned optimal Good / Better / Best packages & pricing for each segment
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Source: Simon-Kucher & Partners; *DCM: Discrete Choice Methods
Pre Launch: Pricing activities & methods
Process
R&D:Determine the value
of your product
Pre Launch:Establish pricing
structure and levels
Launch:Communicate value to the marketplace
Post Launch:Manage pricing
over time
Pricing activities Key tools/ methods
Establish optimal structure
Metrics evaluation: (identify primary / secondary metrics by segments)
Price structure evaluation (e.g. SaaS vs. Perpetual license)
Customer impact analysis due to changes in models/ metrics
Bundling analysis (selling solutions vs. individual products)
Refine value quantification/ segmentation Economic value analysis and total cost of ownership for alternatives
Refine premiums to competition/ alternatives by segments
Price differentiation analysis (e.g. by region, channel, industry etc.)
War-gaming exercises (Model expected competitor moves/ dynamics)
Price elasticity analysis (after including portfolio effects/ competition)
Product lineup analysis: Conjoint methods (DCM*, Menu- based)
Perform detailed financial projections
Acquisition/ churn analysis (control for awareness, realistic growth)
Pilot price tests (A / B testing, multinomial price tests)
Portfolio analysis (include lost sales due to cannibalization)
Lifetime value analysis (from upgrades, expansions, add-ons etc.)
Promotions analysis (including free trial period, early adopter pricing)
1
2
3
Metrics evaluation
Bundling analysis
Economic analysis
PriceStrat
Simulation
Financial modeling
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Source: Simon-Kucher & Partners
Pricing focus in pre-launch needed to prevent Minivation
Process
Launch:Communicate value to the marketplace
Post Launch:Manage pricing
over time
R&D:Determine the value
of your product
Pre Launch:Establish pricing
structure and levels
25
Semiconductor company lost $$ by not applying value-based pricing for a new consumer electronics product
Source: Simon-Kucher & Partners
Example: Price not aligned with value delivered
Simon-Kucher Project Example: Semiconductor
Total Value (Annual)
$0.48
$12M
$2.6M
Value-to-customer ($4.00)
Launch price ($0.85)
Legacy product price ($0.48)
?
Based primarily on legacy product price and cost plus strategies (minimum margin goals)
A rigorous process to measure customer willingness to pay (WTP) when setting product launch price could have captured a portion of this $9.4M in lost value
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54%
?
Source: Simon-Kucher & Partners
Example: Preventing a Minivation and capturing triple the value
Simon-Kucher Project Example: Mobile
Client had little evidence to support go-to-market pricing for an imminent new mobile product launch
1
“We feel like 54% of our web product pricing could make sense, but we are really just guessing”
“This is a critical product launch for us… and the market will be closely watching our performance”
Simon-Kucher designed a live testing approach to evaluate key price ranges by micro-segment pre-launch
2
Category Test Group % of Category Product 1 vs.Product 2
Category 1
Group 1 20% 75%
Group 2 40% 100%
Group 3 40% 150%
Category 2
Group 4 40% 50%
Group 5 40% 100%
Group 6 20% 125%
Result: Higher prices substantially outperformed initial (lower) pricing3
$75k $94k $104k
$k
$50k
$100k
$150k
Low (75%) Medium (100%) High (150%)
Client ultimately settled on a price ranging between 125% - 175% to maximize ARPU
Client is now building “mobile features” to sustain the higher pricing. Without the focus on pricing in pre-launch, client would have launched a Minivation!
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Source: Simon-Kucher & Partners; *SEO: Search Engine Optimization; KPI: Key Performance Indicator; *PM: Product Management; ROI; Return On Investment
Pre Launch: Pricing activities & methods
Process
R&D:Determine the value
of your product
Pre Launch:Establish pricing
structure and levels
Launch:Communicate value to the marketplace
Post Launch:Manage pricing
over time
Pricing activities Key tools/ methods
Establish pricing guidelines/ policies
Create channel specific pricing guides (e.g. on-line vs. distribution)
Rebate analysis (volume rebates, design-win rebates etc.)
Key account analysis (discounts for key/ strategic accounts)
Create promotional guides (free trial, early adopters etc.)
Create discount guides for sales (bundled discount vs., standalone)
Establish approval procedures (criteria and threshold for escalations)
Establish KPIs* for tracking pricing performance/ value capture
Create dashboards to track performance against KPIs
Establish clear roles and responsibilities (e.g. using RACI)
Communicate value
Conduct value selling training (for sales, marketing, PM* etc.)
Conduct negotiation training for sales (tactics to hold line on price)
Build awareness (e.g. SEO*, roadshows, training channels etc.)
Customer ROI* analysis (demonstrate customer specific value)
Manage sales communication (e.g. mktg. collaterals/ whitepapers)
1
2
KPI analysis
RACI analysis
Customer ROI analysis
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Source: Simon-Kucher Project Example; Data anonymized
Example: Give sales the right tools to defend value (1/2)
Simon-Kucher Project Example: Infrastructure
General Information
Business Rationale
Customer Criteria
Deal Criteria
Ramp scheme (if relevant)
Balance of Power
Pricing summary
Matrix of Competitive Advantage
Top competitive advantages for CLIENT in this deal
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A compact Economic Value Calculator enabled sales to quantify the ROI and justify value pricing
Source: Simon-Kucher Project Example; Data anonymized
Example: Give sales the right tools to defend value (2/2)
Simon-Kucher Project Example: Infrastructure
30
Source: Simon-Kucher & Partners
Pre Launch: Pricing activities & methods
Process
R&D:Determine the value
of your product
Pre Launch:Establish pricing
structure and levels
Launch:Communicate value to the marketplace
Post Launch:Manage pricing
over time
Pricing activities Key tools/ methods
Model market dynamics
Create competitive info database (including reasons for win/loss)
Refine premiums to competition/ alternatives by segments
Refine price elasticity estimates based on competitive moves
Conduct win/ loss analysis (e.g. using win/loss logistic regression)
Price erosion analysis (compare with like products / historical rates)
Refine portfolio analysis (after taking into account true cannibalization)
Track pricing performance
Track performance against KPIs (compare forecast vs. actual)
Establish exception based pricing process (to dial in scope)
Prepare for negotiations (use price achieved in similar past deals)
Deal reconstructions analysis (identify opportunities to improve)
1
2
Win/ loss analysis
Price erosion analysis
KPI analysis
Deal deep dive analysis
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Most companies track only financial KPIs for pricing; Best in class use a balanced scorecard approach
Source: Simon-Kucher Project Example; *KPI: Key Performance Indicator; ; Data anonymized;
Example: Use multiple KPIs* to track pricing performance
Simon-Kucher Project Example: Hi-Tech
Financial Operations
Customer Sales
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Source: Simon-Kucher Project Example; Data anonymized
Example: win-loss regression to optimize pricing
Simon-Kucher Project Example: Industrial
Client has a win probability advantage that is at some price points greater than 20%
Client can charge up to $100 in premium over its competitor for being the incumbent
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0 200 400 600 800 1000 1200
Price
Win probability
-100
-50
0
50
100
150
200
0 200 400 600 800 1000 1200
Price
Profit
Win/loss curve for entrant
Win/loss curve for incumbent
Profit curve for incumbent
Profit curve for entrant
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Source: Simon-Kucher Project Example
Example: Define pricing based on lifecycle
Simon-Kucher Project Example: Electronics
Product lifecycle
New(Up to 3 years)
Mature(Continue to invest
and promote)
Legacy(No additional
investment and no promotions)
Product type
Proprietary
(Client only; No competition)
Enhanced
(Non-standard)
Standard
(Commodity)
Reference Price
Target Price
Sales Authority
Base Price
Price
Nu
mb
er
of
Sa
les
Standard products should have the widest range of negotiating room
Legacy products should have flat, high prices with no negotiated discounts
Proprietary Products should have a tighter pricing range
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Source: Simon-Kucher & Partners
Closing comment on NPP playbook: One size does not fit all cases
Established market / similar products
Confidence in knowledge of key value drivers by segment
Confidentiality required: don’t want to share with customers before launch
“Feature” rather than product
Short timeframe (less than 1 month)
Low risk, level of validation required
Minimal portfolio effects
Relatively low financial/ strategic impact
Uncertain benefits and use cases by segment
Psychological price thresholds likely exist in market
Moderate turnaround required (1-3 months)
Key account-based business
Heavily reliant on partners / channel
High complex phone sale
Moderate risk
Moderate financial / strategic impact
Innovative new product/ new technology/ trends
New segments
High economic value add (customer ROI)
Uncertain feature set, value of features, line-up differentiation
High risk
Significant portfolio effects
Turnaround 3-5 months
Strong differential potential by segment
High level of traffic / potential customers
High financial / strategic impact
“Quick & Dirty” Approach
(< 30 days)
“Moderate” Approach
(1 - 3 months)
“Exhaustive” Approach
(3 - 6 months)
35
Source: Simon-Kucher & Partners
Summary
1. Situations are unique, but frustrations generally fall into one of four
universal categories
2. Success starts with a cultural shift driven by three counterintuitive
guiding principles
3. These three guiding principles give rise to one new paradigm for
innovation
4. Successful implementation depends primarily on senior management
and the right process
36
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