Most new product development and Stage-Gate® processes do not manage value and pricing with intention. Most firms rely on legacy pricing levels, competitive pricing levels or their internal cost information to price their innovation opportunities in the Stage-Gate® process. That might explain why a vast majority of new product and service launches are failures. Their value proposition, unique selling points (USPs) and unique value drivers are not clearly identified, studied and stated. I conjecture that this is coming from the lack of attention paid to the pricing and value management dimensions of the innovation process but also on the way the Stage-Gate® process is designed. Let me know explain myself.
Right away in the early stage of the methodology, the Stage-Gate® process forces innovators to make pricing decisions when they might not be ready for them. When the business case is prepared for Stage 2 review, marketers and innovators have to provide a detailed business plan with projected revenues, pricing levels and costs projections. This is a fundamental flaw in the process. Early stages of the process should focus on identifying customer problems, potential solutions, value proposition, and USPs and value drivers. Later in the process, the pricing strategy can then be defined based on the initial value analysis and voice-of-customer activities.
Forcing innovators to set a pricing range too early is a cop-out mechanism that neglects customer value and can lead to leaving money on the table. Once the price range or pricing point is set based on legacy technologies or on costs, the price is set forever. It will not change again at the end of the Stage-Gate® process. This situation reinforce irrational pricing behaviors and strongly encourage innovators to focus on cost and competitive information.
So you may ask yourself the following question: how do then screen the innovation opportunities early in the process if you cannot propose a business plan and set an initial price point? The answer is not easy. It might require a version 2.0 of the Stage-Gate® process. My recommendation is to screen based on expected differential economic value versus the competitive reference value. I also recommend to do the business plan and then quickly remove it from the documentation. Again, once the price is set early on, it is tough to get people to open their mind to a higher price if the value analysis justifies it.
Managing value and pricing in the Stage-Gate® process requires a different approach. In stages 1 and 2, the focus should be on value proposition and value drivers. The focus of stages 4 and 5 should be on value-based pricing strategies and pricing execution. Not the other way around.
Be bold. Join the value-based revolution!
image credit: http: negotiators.com
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Stephan Liozu (www.stephanliozu.com) is the Founder of Value Innoruption Advisors and specializes in disruptive approaches in innovation, pricing and value management. He earned a PhD in Management at Case Western Reserve University and can be reached at firstname.lastname@example.org.