Step 1: Profile the current market situation
Precise market profiling is required in the first step for full market comprehension and transparency to deduce the options for price positioning of the product innovation relative to competition. If the product has clear advantages over and above next-best-solutions, then higher prices can be realized compared to the competition. On the other hand, if it has hard to explain or no advantages, then a lower price might be required to launch successfully. Therefore it is important to analyze the current and future customer needs and identify how they are being addressed by the innovation. A competitive analysis by screening the environment for next-best-alternatives helps identifying central (dis-)advantages of the innovation compared to the existing competition. This will serve to understand the strength of the value of the innovation, providing potential leverage for differentiation.
Step 2: Label next best pricing for reference
After gaining an impression on relative pricing options with respect to the next-best competition, it, of course, is necessary to approximate those alternatives’ price levels as a reference. Even without comparable products available, understanding the costs for actual next-best solutions currently fulfilling costumers’ needs can serve as such anchors. Here it is vital to talk to key opinion leaders (KOLs), such as association chairs or researchers knowing the targeted market very well. They will be able to provide close estimations of reliable market potentials. These expert discussions are further valuable in verifying market success factors, entrance hurdles and must-have/outstanding features to ensure the innovation contains the advantages found by profiling the market situation.
Step 3: Understand potential customers
In the third step the customer is put center-stage. Relevant buying centers (e.g. boards within customers’ organization deciding on investments) will be identified and key persons approached for further interviews. The goal is to narrow down the willingness-to-pay in the market and deduce an accepted price corridor. Here, van-Westendorp Method serves as an effective tool. Potential customers are asked four questions: ‘For the following product (i.e. technology hardware innovation), what price do you perceive as (1) too expensive, (2) too cheap, (3) expensive and (4) reasonable?’ The cumulative curves of responses are plotted for each question with the intersections providing top and low price limits as well as the penetration and indifference prices.
This allows for a possible re-orientation of the innovation process and guides the launch with respect to characteristics to leverage in terms of pricing and marketing. Ultimately, revenue expectations can be used for comparison with predicted costs and accordingly decide on most profitable product configuration.
Step 4: Set launch strategy
The final step of the PLUS-Pricing Assessment will set the launch pricing strategy. Based on the qualitative and quantitative insights gained in the first three steps, the innovating company can select between four possible options [Chart 2]:
- Premium pricing: In case of a substantial competitive advantage with unique characteristics, a premium price can be charged to reap-off the pioneer-profit and build up a strong brand which will allow the innovation to be protected against later replicates as done with the iPhone flagship model which is following a premium price strategy until being replaced by a newer model
- Skimming: Sequentially pricing the innovation, charging a premium price at product launch to take advantage of the higher willingness-to-pay of early movers, to afterwards reduce the price in order to capture the lower willingness-to-pay of the large masses and gain market share as is commonly done with video game consoles
- Penetration: A pricing strategy for products where the competitive advantages are hard to explain. This strategy is particularly useful to initiate word of mouth and attract customers away from competitors, allowing for later price increases and building on customer loyalty as was done by Samsung when entering the smartphone market
- Discount: In absence of competitive advantages, rapid market share can be gained by pricing the product below the competition, targeting the price sensitive customers. This strategy is particularly interesting for firms where the cost of production declines sharply due to economies of scale or a learning-curve effect as volume expands. An example is Xiaomi’s TV becoming the best-selling flat-screen model in China’s e-commerce market by being offered cheaper than the competition.