Pricing innovations: the approach at Assa Abloy Global Solutions

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pricing innovative products or solutions requires a special process that is different from pricing in daily business. Karl Holm Director & Head of Pricing at Assa Abloy shares his experience in the book 'Pricing Decoded'. Let’s deep dive below his successful approach.

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Pricing innovations at Assa Abloy Global Solutions

Taken from Karl Holm's chapter in the book 'Pricing Decoded'.

Let’s say you find yourself in a position as a pricing professional where you speak to a colleague who is about to launch a new product, asking for input on his idea for pricing of this new product. The product manager in question, let’s call him Sonny, tells you that this new version of his product is better, faster and stronger than the existing model. He is also proud to say that thanks to great work by the engineering team and the sourcing department, the cost to produce the product has reduced considerably for this new version. These are of course two very good things; a better product which can be produced at a lower cost. His plan based on that is to launch the new model as the same price as the current version, with the rationale that the reduced cost will make us earn more money per unit compared to current version.

That is typically the time when I insert some heat into the conversation, a shame when me and Sonny were having such a good time. I strongly challenge this notion (and I’ve heard it many times), and push to de-couple the added value of a new product, with the reduced production cost. Sonny sees the reduced cost alone enough reason to keep the price unchanged. I see the recued cost also as something great. But I also understand that if we offer more value in the new product, then customers are likely willing to pay for that, and we should be able to charge for it, otherwise we are just leaving money on the table. This is value-based pricing at its core – not charging based on our cost, but on the value we deliver.

My go-to model in these cases is to perform a value analysis. So not me telling Sonny and his team how much they should charge for their product, but instead us together with other team members in structured way understanding the value we offer with this product, and what price point that value warrants.

There are several benefits to spending time on such an analysis. First, we get an understand of what customers care for and do not care for. Second, we analyze how we compare against those criteria. And finally, as a result of the data, this will guide us to the optimal price range for the product in question.

The A-Team

So how does one go about this in practice? My experience is telling me that this is best done in a workshop setting. And in that workshop, different views are important. With only Sonny and his team members included, they will likely be biased in their views on what customers care about. Your customer service team are likely to have a different opinion, as does the sales organization. So, make sure you included them in the work, to use all their experience.

The first step to do is to start understanding the value. In this process this means in concrete terms listing all the things the customer in this certain segment and that certain vertical, values. Naturally, product features will be top of mind for many here. Steve Jobs called it “speeds and fees” or “bits and megahertz” in that famous speech on marketing, meaning the technical specifications of a product. Some of these are of course important to customers, more some than others. But this is also where we as pricing professionals have a role to play; to challenge this a little. Surely our customers also care about other things, such as product quality, our ability to offer technical support post-sale, and our company’s great sustainability engagement? The job to iron this out requires a strong pricing facilitator leading the workshop; allowing for the different viewpoints in the room to be heard, while at the same time moving the conversation along forward. In an ideal world, there is also actual customer insights available either going into or to be collected during such a workshop, to reduce the risk of internal bias.

The outcome of this first step is basically a list of value drivers; things which customer care about for the product in question. A simplified example of how this could look Sonny’s product can be listed below:

• Speed of operation
• Product design
• Ease of use
• Security level
• Product certifications
• Ease of ordering
• Technical support quality
• Delivery reliability
• Sustainability profile
• Financial stability

As can be seen, the drivers listed first are linked to product features, while others are more related to the supplier of those products. And it’s important at this stage to not just list things that “we are good at”, as that may the first thing which comes to mind. The purpose is instead to fully list all the things our defined customers care about – whether we excel at them or not.

Once that is done, you want to define a scale for each of the value drivers; defining what is “good” and what is “bad”, and in between. This will later be used to score all products against, so important to get it right.

Not all are created equal

Once the workshop members have agreed on which value drivers make the list and not, it’s time to assign weighting. Even though all drivers on the list are things which matter to the customers for this segment, they are not equal in importance – some things make a larger impact in how a customer values a certain offering.

This will of course differ between different segments and can also differ between different channel approaches for the same product. If you have are doing business through one or more channel intermediaries, it is critical that you in this work define who is the “customer” you’re looking at. Meaning is it you partner who you are selling your products to, and sending your invoices to, or is it the end user who will actually end up using your product. Again, in an ideal world, you want to do both analyses separately, to see how both values your offering. In real world, with sometimes short deadlines and conflicting priorities, I find that if you need to focus on only one: focus on the end user as your customer.

Some things which may change in relative value is for example:

• Product design. In my experience this scores higher in a B2C than a B2B setting for example, of course depending on the type of product and the segment.
• Financial stability [of the supplier]. This is something which larger B2B customer care about and value, they want to make sure that you as the supplier stay in business in the future, to continue to offer support, spare parts, new products etc. Consumers, at least in some segments, do not value this as high.
• Ease of ordering. If you’re in B2C business running e-commerce, having a website which allows for easy choice and ordering of your products is key. In B2B, there are often other factors which matter more.

Score!

Then, on to the next step, to score! Now it’s time to - as a team – to agree on how all products included in the analyses score against the criteria we defined in the previous step. In practical terms, to go through each value drivers one by one, product by product, and assign it a score from poor to great. The sum of all scores for all value drivers will then generate a value score, which represent the value of that product in the eyes of the customer.

This work will require a substantial knowledge of both how customers view our products and us a as supplier, but also (as we have hopefully included competition in the same analysis) that of our competition. The technical features if you have included such are often easy to find, and compare product vs. product, yours, and competitors’. The other values are sometime harder to agree on data around. I think in very simplified terms it’s three level of knowledge one can hope to achieve here, with the corresponding efforts matching.

Presenting the value drivers

Now, you will have scored all the products in your agreed dataset, against all the value drivers defined as a team. There are several options for reviewing the outcome at this state in the process before we reach the next and often final outcome: the value map.

Option 1 is to simply list the value drivers and products in a matrix, with some sort of coding for great/average/poor, such as color green to red. To help visually, I?tend to list the value drivers in order of importance, from top to bottom.

The second option for visual will zoom in our [relative] performance only, in combination with the importance of each value driver (the weighting). You can visualize this using a matrix of competitive advantage, to see where we perform strong/weak, and which areas the customer cares about or not (see Figure 1).

Value and price come together – The Value Map

Whether you are using this method to evaluate your optimal price point for a future product to be launched later or want to understand your place in the current competitive landscape, this method will produce a value map. This map (see Figure?2) shows all products in the range defined, with price of each product on one axis and customer value as defined in the workshop on the other.

The gray regression line represents the optimal value/price combination. Meaning that in the eyes of the customer, products located below the regression line are potentially underpriced, meaning offering too much value for money. This is not generally an issue for customers, of course, but it is an issue for us as a supplier, as we are then leaving money on the table. On the opposite end, if the analysis tells us that some products are positioned above the regression line, they are offering poor value for money, and we are potentially losing volume due to this.

In case one wants to align one’s offering to be closer to the regression line, there are two levers to pull: price or value. If a product is offering poor value, one can simply decrease the price, to try and gain volume. Same in reverse for too much value, an increase of price can be the solution. But the more interesting aspect that I?usually try to get my team to focus on is the value aspect. How can we move products to the left or the right in the graph, meaning changing their value, to optimize the portfolio.

This can be achieved short term by, for example, adjusting some technical specifications of a product, increasing or decreasing its performance. Longer term actions we’ve looked at is how we can increase our delivery quality, to over time improve the customers’ perception of our services, and thereby increase the value of our offering.

What about Sonny?

Let’s head back to me and my conversation with my colleague, the product manager Sonny. He has a new version of a product in an existing range and market he is about to launch later in the year. And as you may recall, his plan was to introduce this new model at the same price as the predecessor since we’ve been able to reduce the direct material cost by x%, rewarding us with additional contribution margin compared to the former product.

Assuming we’ve done all the steps described in this process thoroughly, and we have proper knowledge of what the customers value and not in this segment, we can now plot where Sonny’s new product would end up in the value map (see Figure?3).

As can be seen, it seems that the new product is offering great value in the eyes of the customers, while the price is inherited from the predecessor, the blue product directly to the left in the graph of Sonny’s new model (in green). This outcome is telling me that with the current assumptions, we stand a good chance of leaving money on the table, since we offer very high value, in fact we seem to offer more than any other product in this dataset, but we currently plan to sell the product at the legacy price point.

I?then work with the team to understand if the price point itself has a strong psychological importance, for example going over 100 USD or some number which could form an obstacle to pass. If this is the case, I?proceed to work with the team to focus on the value of the new product. Is there a way we can reduce the value of the product, to provide a better value/price relationship? For example, reducing or removing certain features in software, or in hardware, or some other kind of reduction of functionality (=?value).

If the price point is not psychologically important, I?then work with Sonny and his team to rethink the price. Many times Sonny and his peers may be on board after such a workshop, but they require help to build the business case internally, to get senior management buy-in to increase the launch price (sometimes quite aggressively).

One good thing here, coming back to the optimal A-team for such a workshop, is to have sales leadership involved. If they are involved throughout in agreeing on the value, and then subsequently to analyze the output, it makes it much harder for them to push back on the price being too high once product is starting to be sold.

Deep dive this case and many others in the book Pricing Decoded.

What is your view on pricing innovations?

Interested in learning more about value pricing? You will find insights in the books The Pricing Model Revolution, The 10 Rules of Highly Effective Pricing and Pricing Decoded.

‘There are many books on pricing. The Pricing Model Revolution is the best read for managers wanting a review of several innovative pricing methods’. Philip Kotler, S. C. Johnson Distinguished Professor of International Marketing, Kellogg School of Management, Northwestern University

Get your copy of ‘The 10 Rules of Highly Effective Pricing’ here.

Get your copy of ‘The Pricing Model Revolution’ here.

Get your copy of ‘Pricing Decoded’ here.

You are most welcome to share your views, feedbacks and own pricing experiences. Thanks a lot for your interest and support!

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