The Silent Killer of New Products: Lazy Pricing

by Sarah Green  |   9:00 AM September 9, 2014

72% of all new products don’t meet their revenue targets. And a quarter of companies, according to the same survey, confess that not one of their new offerings met its profitability goals.

This new (and alarming) data comes from pricing consulting giant Simon-Kucher & Partners, which conducts its survey every other year with the Professional Pricing Society, a professional association. The 2014 survey polled approximately 1,600 executives and managers from over 40 countries and across a range of industries. (About two-thirds were in B2B businesses.)

I talked to Georg Tacke(co-CEO of Simon-Kucher) and Madhavan Ramanujam (Partner at the Silicon Valley Office of Simon-Kucher) about what’s causing this high failure rate – and how some companies manage to improve their batting average. Not surprisingly, they advocate bringing marketing and monetizing concerns much further forward in the R&D process.

What follows is an edited version of our conversation.

HBR: Is new products’ high rate of failure really a pricing problem, or does it reflect a more fundamental innovation problem?

Georg: We believe that there is a more fundamental problem. Of course, the pricing is always whatsignals the problem, but behind that it is how the innovation process is set up. However, our experience has been that [when a product fails] it’s not a technology problem or a pure R&D problem — it is really around marketing, customer segments, and of course pricing.

Madhavan: This is very consistent in our experience working with both startups and large companies. They build a product hoping to monetize, but not knowing whether they will be able to. What allows a company to extract full value is having a clear pricing plan from the get-go, not waiting until the end and then saying, “Oops, we need a price!”

Your survey also details how hard some companies are finding it to raise prices. For instance, you found that only a third of all planned price increases actually get implemented, and for every 5% price increase attempted, only about 1.9% is achieved. Why are companies having such a hard time raising prices?

Georg: It’s partly internal, and partly external. Internally, most companies are only thinking about it at one point in the innovation process – usually right before launch. Our survey showed that 80% of companies fall into this trap.

Externally, the reasons vary by industry. Pricing pressure is more intense in retail, less so in areas like top-branded luxury goods or highly differentiated machinery. If you are undifferentiated, then it’s a no-brainer that the pressure on your prices is going go be even higher.

Geographically, we observed that countries like Japan have some of the highest pricing pressures. When there are lots of companies whose goals are to go for high [sales] volume and high market share, that creates a price war.

One of the odder findings in your survey is that 58% of companies say they are currently in a price war – but 89% of those blame their competitors, not themselves, for starting it. Why does pricing feel so out of executives’ hands?

Madhavan: For many years, CEOs and executives have focused on improving the bottom line through cost cutting, finding efficiencies in operations and the supply chain. Companies have gotten better and better at that. Pricing is also a highly impactful driver of revenue, but companies probably spent the least amount of time on it. Often it’s the most misunderstood driver in a corporate boardroom. It’s not something that gets a lot of attention in business school, relatively speaking. However, it is also one of the easiest things to change and companies tend to be more reactionary [than strategic] about it.

Let’s talk about the outliers – the top 10% of companies who, you found, actually could introduce new products and raise prices. What are they doing differently?

Madhavan: The #1 success factor really for us is the C-level involvement. Having senior leaders participate in pricing discussions is a must. They don’t need to be part of every discussion, but CEOs do need to make pricing and new product development their priority.

The second factor is focusing on pricing being considered from the very conception of an idea. Many companies go through an innovation process where there is a lot of focus on R&D and then right before they are about to launch the product, that is when pricing is considered. [Instead,] think about pricing in the R&D stage. What do customers value, what might they value? If you ask someone, “Do you want this feature?” they might say yes—but if you ask them, “Would you pay two dollars for it?” it’s a totally different conversation. And how to charge for the product is far more important than the price itself. For instance, will it be a subscription or a transaction? Will it be bundled with something else?

Third, the companies with the most pricing power use technological tools to measure value and willingness to pay in a systematic way. They let evidence and facts drive innovation processes. Our study found that the top 10% of companies use pricing software and technology 40% more often than the bottom 90%.

What’s an example of a company that really does do a good job of thinking about price at the R&D stage?

Georg: BMW has been very successful in this area. They do all their research and innovation in one building, and all the functions – finance, marketing, engineering – they either come from their offices to that building, or they are already physically located there. Having such a building sends a strong signal that all these different functions are committed to the innovation process.

Companies that are not as strong, they start with a business case that details the four pillars of their new product — value, cost, price, and volume – but then the development team works in isolation. They start adding features, perhaps, because the competition has these features. That leads to higher costs, which then affects the price, which then affects the volume projections. By the end of the process, the four elements don’t fit together any more.

The important thing is to have those synchronized throughout the whole process. The most effective companies ask their teams to sign off on those four elements throughout the process, at different milestones, to make sure they are still synchronized.