Very often, when we speak about pricing especially within NPD, most people think that price is just a number, and they will typically focus on price setting days before launching their product.

The truth is that very few businesses have a process in place to set and manage pricing. To be able to estimate your prices, you must start by understanding how much value your products and services create for your customers. Many companies are beginning to understand that price is about value and that it encompasses so many different factors. As an organisation when you’ve put so much effort, money and time into developing your new product, you want to ensure that you’ve priced your new product right. If you set the price too low, you’re leaving money on the table and if you price too high, you lose customers. It’s virtually impossible to come back from underpricing your new product.

One of the biggest reason that new product launches fail is because they do NOT add value to customers. Many studies over the years have show that more than 70% of new product launches fail.

“Adding value” refers to the fact that your customers have a problem and if your product and service offering can solve their problem and improve their business in monetary terms, you are adding value. Selling on price is a lot harder for your sales team. With value-based pricing and selling you are empowering them to demonstrate the economic impact of your solution on your customer’s business. Incorporating value-based pricing within your new product development process is transformational.

Many companies use cost-plus pricing to set their new product price, whereby a fixed percentage (mark-up) is added to the product cost per unit. So essentially, companies start by designing and manufacturing the new product and then they set the price of the new product based on their cost of production. What this does mean is that they now have the hard job of determining the value of their product to their customers and this may even entail the salesperson having to persuade their customers that the price is aligned with their customers’ perception of value. The reason this is such a popular price setting method is because it’s a straightforward calculation and information required is readily available. From a company perspective, it ensures that all costs are covered, and an acceptable profit is made.

BUT it is internally focused on your business needs and your cost structure, and it has nothing to do with customer value. You are either under-charging and leaving money on the table or over-charging and losing customers.

What VALUE-BASED pricing does is flip this thinking on its head and the product’s value and therefore price is determined at the start of the NPD process based on value to customers. This approach requires considerably more investment in time from companies because it requires a deep understanding of your target customers’ needs as well as spending more time evaluating competitive alternatives. Basically, you are determining what customers value and what they are willing to pay. So, when you set the price, if the perceived customer value is less than the product cost, then it’s a case of rethinking product value and /or challenging manufacturing about the costs.

Once you have a good understanding of all the different factors, then the product is designed and built. The outcome is that you are targeting the right customers with the right value proposition and communicating the value to your customers.