Capturing the value of your innovation

Importance of pricing

Innovation, value and pricing are inseparable. They are part of a dynamic system to create long-term sustainable value for firms. As such, they have to be treated with equal attention, with the required sweat equity from top executives and with the necessary levels of investments.

Firms invest billions in R&D and innovation processes. They deploy much elaborated new product development and product lifecycle processes in the hope of achieving greater innovation rate. Most firms, however, fall short of defining crisp value propositions, of measuring the differential economic value of their innovation versus their competitors and, of capturing their true value through pricing.

There are many root causes for this fact. One of these causes relates to the lack of conceptualization of what value means and the understanding of the value management process. Another is innovators’ lack of basic pricing skills.

Value management

So, first, what does value management mean? My conceptualization of value management takes a holistic approach to business strategy and includes a strong link between the three critical dimensions of value management: value creation, value assessment and value capture. I conjecture that these three dimensions form a dynamic unbreakable chain that can generate greater profit levels for organizations.

Invest, measure, and capture

Many firms I talked to struggle in the area of value creation and therefore have a pricing problem to capture something that does not exist. I challenge them to look at the level of differentiation created through their innovation process.

So the transformation process towards sustainable value excellence starts with significant investments in innovation to generate differentiation and create value. Once value is created, it is critical to measure it and then capture it through value-based pricing. 

To make the wheel turn in a sustainable fashion, it is then imperative to have strong re-investments in R&D and innovation.

Building pricing skills

Second, how do you build pricing skills in innovation teams? This is a tricky subject. Innovators already have to balance technical and marketing skills. Asking them to become expert in pricing and value management activities might be a stretch.

Value-based pricing is a science that needs to be learned. There is no real need for them to become experts in the subject. Innovators might have access to internal pricing experts or might be helped by consultants. They do have to learn enough of the science and art of value-based pricing to be able to converse with multi-functional teams in the Stage- Gate® process. They need to be able to link the outcome of customer research with deep discussions on need-based segmentation while applying the concept of willingness-to-pay. The reality is that pricing activities cannot be improvised.

Invest in R&D projects

Third, how do you better invest in your R&D projects? I conjecture that no sum of R&D money should be spent until projects are firmly vetted with a clearly defined value proposition, crisp unique selling propositions, and credible measurement of economic value. This is what I call the ‘value’ grinder! 

Getting started

So how do you get there? How do you get going with better value management in your innovation process? Here are some recommendations:

Replace fuzzy by formal

The front-end of innovation should include the
most advanced voice-of-customer research methodologies such as ethnographic research, customer observations, willingness-to-pay research, conjoint analysis, for example. Using traditional brainstorming and ideation methods is no longer sufficient.

Screen on feasibility

If it seems impossible to make, it is probably disruptive. Teams screen ideas on technical feasibility and easily reject concepts that do not seem easy
to do or flat out look impossible to produce. That
is a flaw of having R&D teams screen too early for feasibility.

Do the value homework

Do not send $1 in R&D until you have done the value homework. Make it a rule and a discipline. Embed concepts of value proposition, value drivers and Economic Value Estimation® early on the innovation process. That requires strong collaboration between marketing, R&D and pricing teams.

Balance your budget

Every dollar invested in the formal front-end of innovation should avoid waste in the back-end and potentially save R&D efforts by working on the right products that customers will be willing to pay for. Balance your innovation budget and challenge traditional allocation between voice-of-customer research and development costs.

Put your teams in discovery mode

Focus on what you do not know. Move from design- based innovation from the existing ‘sandbox’ to
a discovery-based innovation challenging the knowledge status-quo. Discover hidden customer needs that may lead to greater willingness-to-pay for your innovation.

Start with value work and then set pricing

Your NPD and/or Stage-Gate process should include value and pricing deliverables at every gate. But it
is essential to start with the value work early in the process and to finish with strong pricing deliverables towards the end of the process. Not the other way around. Value comes first and then pricing.

Be bold!

Innovative companies with excellent innovation, technical, and marketing teams can add another set of skills in their toolbox. As the pressure mounts to increase the level of innovation ROI, is it time

to capture the value of your innovation? Managing value and pricing in the innovation process is what it is all about. Be bold. Join the value revolution!