How to Maximize Your Innovative Products and Services Potential with a Robust Value-Based Pricing Strategy
“What is the best way to price innovative products and services?" This is a question that businesses struggle with when launching an innovative offering. This challenge amplifies when we consider that innovative products and services can fall into four distinct categories: enhancements or extensions of existing products, products that complement existing ones, products that replace existing ones, and breakthrough products. Each category presents unique pricing considerations. The traditional pricing models often fall short. This is where a value-based pricing strategy comes into play.
Why Value-Based Pricing Works for Innovative Products and Services?
Value-based pricing is a strategy that revolves around the perceived value of a product or service to the customer. This is crucial when pricing innovative products because often, there's no market comparison. Innovative products are unique by nature, making them hard to price using conventional models like cost-plus or competitive pricing. When you employ value-based pricing, you set the price according to the innovation's perceived benefits in the eyes of the customer. This shifts the focus from cost or competition to the customer's assessment of the product's worth.
The Key Steps for Implementing Value-Based Pricing
Understand Your Customer
In-depth knowledge of your customers' needs, preferences, and willingness to pay is crucial. Use market research to understand what your customer values in your product or service.
Quantify the Value
Once you understand what your customer values, translate this into monetary terms. How much is your customer willing to pay for the benefits your innovative product or service offers?
Set your Price
Based on the quantified value, set a price that reflects it. Remember, the price should also cover costs and allow for a reasonable profit margin.
Communicate the Value
Ensure your customers understand the value they're getting. Highlight the benefits and differentiation of your product or service in your marketing and sales efforts.
Pricing Considerations for Different Categories of Innovative Products and Services
Enhancements and Extensions
These improve the performance of existing products, such as a feature's performance (e.g., a faster processor, a higher-capacity disk drive, a higher- or lower-dose medication, etc.). Extensions add new features to an existing product. New editions of the software are often extension products. Prices should be set relative to the existing price, based on customers’ perception of the value of the enhancement or extension.
Complement
These are products that reach previously unavailable market segments, utilizing variations of existing products. For example, a Windows version of a Unix product would serve a different audience – those customers running Windows – and complement but not compete with the older product. The iPhone Pro complements the iPhone by introducing a different technology, lower price point, and reduced capacity, making the iPhone available to a market segment that is satisfied with the lower performance. When pricing complementary products, it's important to consider the customers' value perceptions and to set up "fences" that prevent customers willing to pay more from purchasing the lower-priced complements. These fences could be in the form of reduced or increased capacity, different distribution methods, packaging, policies, warranties, or other factors that differentiate the complementary product from the existing product.
Replacement
These are products that are designed to replace or make obsolete their predecessors, including products from your own company or competitors. Examples of replacement products include new versions of software, new generations of computers or peripherals, and new medications. When pricing replacement products, it's important to communicate the improved performance of the new product, but care must be taken not to overprice the product and discourage customers from adopting it. As the example of Intel's Itanium shows, simply offering improved performance may not be enough to induce customers to switch to the new product. In the case of the Itanium, the improved performance was not sufficient to justify the price and effort of adopting the new hardware and software platform, especially given the availability of competitive products that offered similar capabilities while retaining compatibility with existing software. Therefore, when introducing replacement products, it's important to consider the customers' needs, preferences, and willingness to adopt new technology. In some cases, offering compatibility with existing software or hardware may be more important than pure performance improvements, and pricing should reflect these considerations.
Breakthrough
These are products that meet a previously unmet need and provide capabilities and a value proposition that was never before available. Examples of breakthrough products include cellular networks, personal computers, the Internet, the polio vaccine, and Astro-Turf. Pricing breakthrough products is a challenging task, as they introduce an entirely new value proposition. Unlike established marketplaces, where products compete based on known competitors, positioning, features, and value perceptions of customers, breakthrough products must first identify, articulate, and establish an entirely new value proposition. This means that marketers of breakthrough products must elevate the problem set they solve to the level of executive action and convince potential buyers that their product is necessary to meet a previously unmet need. The marketing of breakthrough products must focus not just on the features and benefits of the product but also on the ability to articulate and promote the new value proposition.
Why Choose Value-Based Pricing for Innovative Products and Services?
Because it focuses on the customer's perception of value, making it ideal for products with no market comparables. Remember, though, that this strategy requires deep customer understanding and careful quantification of value. Overcoming its challenges with solutions like tiered and bundle pricing can unlock its full potential.
In the age of innovative enhancements, complements, replacements, and breakthroughs, a customer-centric pricing approach is more relevant than ever. Each category of innovation demands a nuanced application of value-based pricing, reflecting the unique value proposition it brings to the customers. By doing so, businesses can ensure that their pricing strategy resonates with their customers' perception of value, fostering acceptance and success in the market.
Ultimately, successful value-based pricing for innovative products doesn't just mean setting the right price—it's about effectively communicating the unique value of the product to the customers, aligning your pricing with the customers' willingness to pay, and continuously adapting as market conditions and customer preferences evolve.
Download our Guide to the 7 Easy Steps To Successfully Increase Prices.
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