Pricing and Innovation Go Hand in Hand
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.” – Warren Buffet
In our research work, we constantly strive to uncover what customers value. By delivering value to customers, we can design and implement novel ideas with our business partners, which ultimately leads to innovation. Most every company gets this part of the equation. They know the key to innovation is not necessarily new technologies, but is instead closing gaps between customer needs and what they deliver.
However, all value is not created equal. Ultimately, customers demonstrate how much they value a particular innovation by their willingness to pay for it. Despite this reality, corporate innovation groups are almost always completely disconnected from pricing decisions. And, moreover, research on the subject is often completely missing. Many companies simply engage in cost-based pricing – i.e. determining an acceptable margin above manufacturing costs and charging that. The result, according to McKinsey , is a whopping 80 to 90 percent of new products are priced too low. Moreover, McKinsey estimates that fewer than 15% of companies actually do any kind of systematic research on the topic.
Why invest in R&D to develop innovative value for customers if you are going to misprice and ultimately lose out on value for the company? Many companies have a significant opportunity to differentiate themselves from competitors by learning how to create, quantify, communicate and capture customer value by implementing value-based pricing strategies. To do this properly, we recommend linking up innovation discovery research and pricing research from the get go. By knowing the true value of a novel idea, one can best direct innovation efforts and investment.