How startups and corporations deal with pricing innovation is one of the simplest assessments of their business acumen. The cornerstone idea that sunk deeply in everyone’s mind is the notion of price elasticity driven by demand vs. availability. Which, to be fair, is amazing… if you were trading wheat or silver in 1890.
Since then, economists have updated their playbooks quite a lot. Not to mention Richard H. Thaler, who got the Nobel in 2017 for his invention of a whole new section of economic sciences called behavioral economics. But hey, I guess that we need a century or so before new ideas end up percolating in our decision-making process?
Meanwhile, we keep thinking that sustaining a ‘price advantage’ when launching new products amid highly competitive markets is key. Whether you are in B2B or B2C, customers need to see they’ll have ‘good value’ and the best price possible out of their purchase. Given this principle, how much do you need your price to be lower to create a competitive advantage? 30%? 10%? 5%? 1%?
Cheaper rarely works
I usually ask executives or entrepreneurs I work with how fast they would buy from me a brand new series 7 BMW with a premium pack if I’d price it at €1,500. Not as a monthly installment, but as its full retail price. As you can imagine, I don’t have many takers. The perceived value doesn’t match the price. Even when the most rational participants (with engineering background more often than not) rationalize that there is a blatant discrepancy between the cost of production and the final price, in reality, the mismatch is always with the value (tangible or not).
However, you want to slice it, pricing low to get more traction is an atrocious reflex. You might just need to price way higher to be effective in a fiercely competitive market. Maybe you’re unlocking unprecedented added value, or you have acquired a premium brand halo, develop best-in-class customer experience or deep social connectivity with your market.
Apple has constantly raised the average selling price of its flagship phones since its introduction in 2007. If they only account for 10 to 20% of the units sold in any given market, they usually harvest the lion’s share of the net margin in each one of these markets. It’s worth remembering that those that fight purely on price are often entirely missing the point — or they are indeed selling strict commodities without any other option.
As for pricing innovation, it should be a no-brainer. When you bring a new value to a market (a simple and effective way to define innovation), you have to price higher than incumbents. If you go lower, you’re building a price dissonance that jeopardizes your launch. The simple mathematics of pricing innovation requires that when you bring a new added value to the market, your price should reflect the benefit created.
Then, of course, check your cost of goods sale, it should be below your price point–which will be always the case when you price to match your value.
The case of disruption
The only exception to this rule will be if your innovation is disruptive. Not disruptive as in most startup pitch decks, as Christensen coined the term: an innovation that starts with the low-end of the market with a cheap technology that step-by-step plunges in irrelevancy the whole value chain and then replaces it entirely. In that case (and that case only), the key innovation is achieving the same performance at a fraction of the initial cost.
There are so few examples of disruptive innovation that 20 years later, Christensen had to walk back some of this theory. It was just not that useful when dealing with innovation pricing and strategy.
Aligning price and value
I’ll go back again to the way we frame innovative businesses and why pricing innovation is actually way simpler than any form of other business:
As soon as you understand the problem you’re solving with your new technology or business model, you know who your customers are and the extra value you unlock for them. Whatever is your technology or the color of your logo, price this value!
When pricing innovation is dreadful
There’s only one caveat to this: if the difference between perceived value and effective value is minor in B2B, it can be devastating in B2C. Yes, consumer markets are always exponentially harder for innovators, to the point that, for example, when don’t treat them in our online startup training program. It’s just too complex to be formatted through a few videos.
But for B2B? Hell yes, as soon as you understand how to do value analysis through the perspective of an SME or a multinational corporation, pricing innovation is easy.
A fair assessment
As a final note, I’d like to go back to this: if you’re a startup or an intrapreneur, the fastest way to assess an innovation program you want to be part of is the way it will address pricing innovation. It should be done within the first 2 weeks because it’s directly linked to understanding the market’s problem. If it’s the latest stage of the program, or worse, if the pricing is based on the product you’ll be designing… then run away.