**Steven Forth** is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.

New functionality keeps your solutions relevant and your business alive

In a shifting world the value drivers of any solution are bound to change over time. The only way to stay relevant is to continue to innovate and find new ways to enhance value and to find new ways to deliver value. One can focus on deepening existing markets or on finding new markets. No matter what choices you are making or what innovation model you use you are going to face pricing decisions. The pricing strategy for new functionality needs to be part of innovation strategy.

This used to be much easier. Pricing was much easier back when software licences and on premise installation were the standard approach. Generally there were new versions of the software every 18 to 36 months. The pricing of the version upgrade was generally set at 20 to 30% of the previous price. In addition to the license fee there was an annual maintenance and support fee of 10-to-20 percent. The main pricing questions were (i) whether to change the base price for the license (this was often adjusted up to account for inflation) and (ii) whether or not to create a new product. These are important questions, but cadence was slower and there was more time to think about them. There were fewer pricing models for licensed software and as there was less usage data coming back to the vendor less analysis could be done.

The pace is much faster today and there is a lot more data available to inform pricing decisions. This is fundamentally a different game. It is played continuously, in small moves, with far more information (for all parties) for higher stakes.

Given the new environment, pricing is an “always on activity”, and core to business success.

Value drivers and markets - the critical framing for pricing decisions

As you plan new functionality, you should answer the following questions.

Is the new functionality for existing customers and market segments or is it meant to attract new customer segments?
Does the new functionality enhance existing value drivers or introduce new value drivers?
Is the goal to increase positive differentiation or to reduce negative differentiation (turn your competitor’s advantages into table stakes)?

The answers to these questions determine your pricing strategy.

Enhance Existing Value Drivers for Existing Market Segments - Sustaining Innovation

This is the most common type of new functionality. It actually comes in two forms. (i) Increasing one’s own differentiation and (ii) reducing one’s competitor’s differentiation. This does not create the need for a new pricing model or pricing metric. It can be an opportunity to adjust pricing levels and to introduce higher prices. Your pricing goals (or winning aspirations if you are using the strategic choice cascade) are your guide to what you should do here.

Enhance Existing Value Drivers for New Market Segments - Disruptive Innovation

A market segment is defined as a group of customers that get value in the same way and who buy in the same way. In this situation the first question you should ask is “Why was I not targeting this segment before?” It could be that you were not offering enough value and that the new functionality pushes you over the top, or that the new functionality actually lowers your costs for the segment making it more attractive. Look at the current solutions being bought in this segment. How are they priced? Can you introduce a new pricing metric that tracks value better than the conventional offers? The competitive dynamics in the new segments may be quite different from what you are used to. Make sure you study these before plunging in.

New Value Drivers for Existing Market Segments - Market and Product Extensions

This is often the best opportunity to introduce new products with new pricing models. New value drivers imply new value metrics and the opportunity to put in place new pricing metrics. This is not always the right choice of course. When products are offered as a bundle it is important to be able to design bundled pricing, and the interactions between different pricing models and pricing metrics inside the bundle has to be considered. So in this case one generally wants to

Offer a new product or module that is priced separately
Consider new pricing metrics and pricing models
Design pricing for the bundle and not just the product

New Value Drivers for New Market Segments - Blue Ocean Strategy

New value drivers implies that the new functionality is solving a different problem, doing a different job if you are using the Jobs to be Done approach. If the new functionality solves a different problem and creates value in different ways it will have a different value metric (the unit of consumption by which your customer gets value) and as the pricing metric should track the value metric (this is the founding principle of value-based pricing). This means you will need a new pricing model. Creating a new pricing model is a design process and is best approached using design thinking. New value drivers for new markets is closely related to category creation. See Pricing and value for category creation.

Simplified Decision Tree for Pricing New Functionality

The most important thing to do when pricing new functionality is to determine whether the new functionality is primarily about new value drivers or about enhancing existing value drivers. Ideally this was decided right at the beginning of the development process. If not, the product development was a random stab in the dark. In some cases, the new functionality is not really new, but more of a catch up and a way to convert the competitor’s advantage to table stakes.

The next thing to do is to determine if the target segments are included in the current segments or if new market segments are being targeted. If the target segments are already part of your market, then ask if the new functionality is relevant to all segments or to just some segments.

Answering these two questions, about value drivers and target segments, determines how you should approach your pricing.

The possibilities are as follows:

Enhanced value for all of your current segments. In this case, look at your pricing goals and decide if you want to use your new advantage to raise prices or increase market share. In some cases you can do both. You should not need to create new packages or new pricing models.
Enhanced value for a subset of your existing segments. In this case you are probably looking at a new product or package but not at a change to your basic pricing model.
When you have new value drivers things start to get very interesting. You have to balance the need to bundle with your existing offers and support the ways in which your customers are used to buying from you with the opportunity to create a new pricing metric that more closely tracks value. If you are creating a new category then focus on a new pricing model to go with it. If you will be bundling the new offer with your existing products then be cautious about introducing a new pricing metric.

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