extracting full value from new product launches · pdf fileextracting full value from new...

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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

[email protected]

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

2


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


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






guiding principles


innovation



5


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


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


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


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






guiding principles


innovation



10

“outside-in” not “inside-out”


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






guiding principles


innovation



12


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






guiding principles


innovation



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!

16

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%

17

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

18


Need #2: New product pricing playbook

R&D:Determine the value of your product

Pre Launch:Establish pricing structure and levels


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


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

20


Pricing focus in R&D stage:

Needed to prevent feature shock & undead and to identify hidden gems

Process


of your product





over time

21


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

22

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

23

Source: Simon-Kucher & Partners; *DCM: Discrete Choice Methods

Pre Launch: Pricing activities & methods

Process


of your product





over time


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

24


Pricing focus in pre-launch needed to prevent Minivation

Process



over time


of your product



25

Semiconductor company lost $$ by not applying value-based pricing for a new consumer electronics product


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

26

54%

?


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!

27

Source: Simon-Kucher & Partners; *SEO: Search Engine Optimization; KPI: Key Performance Indicator; *PM: Product Management; ROI; Return On Investment


Process


of your product





over time


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

28

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

29

A compact Economic Value Calculator enabled sales to quantify the ROI and justify value pricing


Example: Give sales the right tools to defend value (2/2)

Simon-Kucher Project Example: Infrastructure

30



Process


of your product





over time


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

31

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

32


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

33

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

34


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


Summary




guiding principles


innovation



36

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