When should pricing get involved in innovation?
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Pricing and Innovation
A series of three posts on why and how value and pricing experts can get involved in innovation.
Part 1 When should pricing get involved in innovation (this post)
Part 2 Pricing innovation and value drivers
Part 3 Pricing AI content generation
Innovation is at the heart of most companies' product and service offers. SaaS (Software as a Service) offerings are generally updated frequently (daily in many cases) and product led growth (PLG) strategies require constant attention to what users are doing on the software and what is being said in the wider community. This is then fed into innovation to drive more value for users, generating greater adoption and more revenues, either directly or through product generated leads (PQLs).
Innovation processes are not random walks or undirected explorations. They are guided and the best guide is value. As the people in the organisation most responsible for connecting value to price, there is an important role for pricing people in the innovation process. Unfortunately, in most companies the pricing team, if it exists at all, only touches innovation late in the game. We should work to change this.
Pricing experts should be part of innovation from the first steps.
Pricing experts spend most of their time working with sales. According to a recent poll I dropped into the LinkedIn Professional Pricing Society Group, more than 60% of pricing leaders spend most of their time with people in sales.
It was good to see 20% of people collaborating with Product, this was higher than I had expected, but anecdotal conversations suggest that these conversations come late in the innovation process.
How do we change this?
Pricing experts will only be taken seriously in the innovation space if they work to understand innovation and product development. We have to meet innovation leaders on their own ground and speak with them in their own language. This means getting an understanding the basic innovation frameworks and where pricing and value can contribute.
The Ten Types of Innovation and Pricing
One of the foundational innovation frameworks is The Ten Types on Innovation developed by Larry Keeley at Doblin back in the 1980s. It has been widely adopted in the innovation space as it covers most of the innovation that organisations engage in.
There are some places where pricing obviously plays a role. Profit Model stands out. Few things impact profit more than pricing. Innovation on the profit model is often pricing innovation.
Anything that touches on the Offering - Product Performance and Product System are also places where pricing and value come to the fore.
Another place where value and pricing should play a key role is the Network. In Strategic and Innovative Pricing by Mathias Cöster, Einar Iveroth, Nils-Göran Olve, Carl-John Petri and Alf Westelius do a good analysis on the role that pricing models can play in building win-win partnerships and connecting ecosystems.
In an economy increasingly based on subscriptions, Experience has a big impact on pricing power. Majid Iqbal presents a model for the impact of customer service on price in Thinking in Services.
(Outcome - Price) / Experience = Net Value
This little equation (discussed in more detail here) connects the key concerns of value-based pricing experts (Outcomes, Price and Value) to the customer experience. It shows how customer experience can directly impact willingness to pay (WTP). Customer experience is becoming increasingly important to pricing, especially in Product Led Growth companies. Pricing is part of the customer experience.
Under the Experience umbrella, pricing experts need to understand how Service and Customer Engagement contribute to value to customer (V2C) and willingness to pay (WTP).
Pricing and Design Thinking
One approach often referenced in the innovation world is design thinking. There is a lot of discussion about what design thinking is (a process, a collection of processes, an attitude, a marketing ruse). Ibbaka manages the >200,000 member Design Thinking Group on LinkedIn where this is a frequent topic of discussion. The consensus of the crowd is that the double diamond approach is the best general way to represent design thinking.
In the double diamond approach, there is a double motion of divergence and convergence. One explores alternative solutions and then focuses in on one alternative. One develops different ways to deliver the solution and then focuses in on one approach as one goes to market.
In the first diamond, one asks where and how to innovate.
The second diamond is focussed on how to deliver the innovation.
Let’s look at how pricing maps to this. One begins with clarity around the pricing goals. There are many possible goals and the goal will shape how one thinks about value and pricing. A few examples …
Is the innovation meant to drive revenues in existing lines of business?
Is it a defensive or flanking play?
Is the goal to enter new markets?
One of the best ways to frame goals in the context of strategy is Roger Martin’s Strategic Choice Cascade, which Ibbaka has adopted to use in pricing context. We will look at how one can frame innovation goals using value drivers in a subsequent post.
The first diamond is about the value metrics
As one defines the solution one needs to generate first generate and then test value hypotheses. For business solutions, this is best done using economic value drivers, though economic and community value are also important in today’s market.
The second diamond is about pricing metrics
In the second diamond, the focus is on developing the actual solution. This means defining the pricing metrics, making sure one can execute on them and then designing the overall pricing.
Pricing metrics should track value metrics.
Value Metric: The unit of consumption by which a user get value
Pricing Metric: The unit of consumption for which a buyer pays
Pricing can be the focus on innovation
One is not just concerned with pricing innovations. How one prices can be a key part of the innovation. New solutions, that create value in new ways, can often support new pricing models that are better at capturing value in price and aligning price to value.
Artificial intelligence (AI) is opening all sorts of innovation. At the PPS Conference in San Francisco my workshop will give people a chance to explore value metrics and pricing metrics for platforms such as Dall-E and Stable Diffusion. Who knows, we may invent some new pricing models as we work on this!