Extracting Full Value From New Product Launches

Extracting Full Value From New Product
Launches
Presentation for GMI Conference
Feb 2015
Joshua Bloom
Silicon Valley Office

100 View Street
Mountain View, CA 94041
Cell: (650) 691-3315
Joshua.bloom
@simon-kucher.com
www.simon-kucher.com
Extracting full value from new product launches
Situation Key Question? Profit effect?
 Launch: Q1 2006 ▹ What would have been the ▹ Possible volume decrease:
optimal price? -10,000 units / 80,000 units
 Launch price: $71,000 = -12.5%
▹ Assumption price elasticity:
 Demand: Approx. 80,000 𝜀 = -2 ▹ Possible price increase:
units per year worldwide ∆ volume / 𝜀 =
 Production capacity per year -12.5% / -2
70,000 units = + 6.25%
▹ Optimal Price:
$71,000 x 1.0625
= $75,437
▹ Profit impact:
$4,437 x 70,000 units
Source: Simon-Kucher & Partners
2
New product pricing: Possible failure points
R&D: Pre Launch: Launch: Post Launch:

Determine the value Establish pricing Communicate value Manage pricing
of your product structure and levels to the marketplace over time
Wrong products Wrong price structure/ Un-deserved Matching comp prices

metrics discounts
Wrong features Un-necessary price
Sub optimal features Unclear value prop cuts
Incorrect forecasts
Sub optimal prices Poor sales execution Lack of pricing
Incorrect budgets visibility
Wrong segments Channel gaming
Minimal differentiation Unclear upgrades
Unforeseen portfolio Frequent escalations
effects Poor negotiations
Product Product Product Handoff

Development Pricing Launch to
Approved Approved Pricing
Mgmt.
Gate/ Milestone
3
Insights from Simon-Kucher new product pricing
experience
1. Situations are unique, but frustrations generally fall into one of four
universal categories
2. Success starts with a cultural shift driven by three counterintuitive

guiding principles
3. These three guiding principles give rise to one new paradigm for
innovation
4. Successful implementation depends primarily on senior management

and the right process
4
experience

guiding principles
innovation

5
Universal category #1: “Feature Shock”
What you hear
 “But we can also add this …”
 “We want to be on the safe side”
 “Customers don’t know what they want, so we need to decide what to build”
 “One size should fit; our market is not segmented”
 “Let’s build it, then position it”
 “Let’s get something out there”
How to solve? “Discipline”
6
Universal category #2: “Minivation”
What you hear
 “It’s good enough”
 “We checked all the boxes”
 “It hit the targets”
 “I don’t want to sign up for a big number”
 “I don’t want to over price. I would rather be conservative”
 “With our margins, we don’t need to worry about price”
 “We need to penetrate the market”
How to solve? “Ambition”
7
Universal category #3: “Hidden Gem”
What you hear
 “We don’t know what to do with this”
 “This isn’t business as usual for us”
 “We don’t have a process for that”
 “We’ll throw that into the deal”
 “It’s not in our DNA…”
 “This goes against our culture”
How to solve? “Recognition”
8
Universal category #4: “Undead”
What you hear
 “I’m not going to be the one who says ‘no’”
 “Personally, I’d never buy this myself, but …”
 “Screw what the research says; I know this will work!”
 “Let’s wait for more evidence before we pull the plug”
 “The train has left the station”
 “We’ve come too far. If we kill this now …”
How to solve? “Objectivity”
9
experience

guiding principles
innovation

10
Three counterintuitive guiding principles for innovation
1 “outside-in” not “inside-out”
2 “value first, build second” not

“build first, value second”
3 “no-maybe-yes” not “yes-maybe-no”
11
experience

guiding principles
innovation

12
One new innovation paradigm
Old paradigm New paradigm
Design it Market it
Build it Price it
Price it Design it
Market it Build it
13
experience

guiding principles
innovation

14
Need #1: C-level involvement & dedicated pricing
function
Pricing power is the ability of a

company to get the price it
deserves for the value it delivers
Others 100
With C-level involvement 135
With pricing function 127
Source: Simon-Kucher & Partners Global Pricing Study 2012
15
All markets have companies with and without pricing
power
Low pricing power High pricing power*
Total 65% 35% Only 35% are

able to get the
Pharma,
47% 53%
prices they
biotech/medtech
deserve!
Consumer goods 53% 47%
Financial services 70% 30%
Automotive 73% 27%
Transport/logistics 81% 19%
“Pricing Power” assessment

* High pricing power is the ability of a company to fully/almost get the money it deserves for the value it delivers
Source: Simon-Kucher & Partners Global Pricing Study
16
Pricing power has strong impact on profits
Average profit margin of last three years (index)
Companies with Pricing power

133
high pricing power increases profits by
33%
All others 100
Source: Simon-Kucher & Partners Global Pricing Study 2012
17
The market has figured this out…and will reward you!
"The single most

important
decision in
evaluating a
business is
pricing power."
Warren Buffett
Source: Warren Buffett in an interview

with FCIC, May 2011
18
Need #2: New product pricing playbook
R&D: Pre Launch: Launch: Post Launch:

Determine the value Establish pricing Communicate value Manage pricing
of your product structure and levels to the marketplace over time
Product Product Product Handoff

Development Pricing Launch to
Approved Approved Pricing
Mgmt.
Gate/ Milestone
19
R & D: Pricing activities & methods
Process Pricing activities Key tools/ methods

Identify needs / value  ComStrat*
R&D: 1
 White space analysis (identify totally new areas for innovation)  Gap analysis
Determine the value
 Value and benefit analysis (Impact on customers)
of your product
 Gap analysis (perceived satisfaction with alternatives)
 Identify value drivers / key customer buying criteria
 Competitive analysis / competitive positioning
Pre Launch:
Establish pricing Quantify value  Conjoint (ACBC)*
structure and levels 2
 Translate value into fair price (WTP*)  ComStrat Plus*
 Determine premium to competition / alternatives
 Identify psychological thresholds (e.g. using VW*)
Launch:  Model expected uptake (indirect & direct methods)
Communicate value  Segmentation analysis (identify key segments , needs, WTP*)
to the marketplace
Build business case  Simulation
3
 Feasibility analysis (Go / No-Go)  Financial modeling
Post Launch:  Value chain analysis (share of pie)
Manage pricing  What-if analysis (Forecast / simulate outcomes (assuming
over time uncertainty)
 Financial modeling/ budgetary pricing using uptake & forecasts
Source: Simon-Kucher & Partners; *ACBC: Adaptive Choice Based Conjoint; WTP: Willingness To Pay; VW: Van Westendorp; ComStrat & ComStrat Plus are Simon-Kucher proprietary tools
20
Pricing focus in R&D stage:
Needed to prevent feature shock & undead and to
identify hidden gems
Process
R&D:
Determine the value
of your product
Pre Launch:
Establish pricing
structure and levels
Launch:
Communicate value
to the marketplace
Post Launch:
Manage pricing
over time
21
Example: Preventing feature shock
Road Navigation Running Distance

 Drivers want the  Runners want to be able to
quickest route to track their speed, distance
their destination and time
 Ability to reroute if  Compare running
driver deviates from performance over time
original route
Golf Tracking Hiking Navigation

 Golfers want to be able to  Hikers and hunters want to
find distances to the pin be able to find their way in
and hazards quickly and the wilderness
accurately  Plot where they have been
 Track shot distances to and where they want to
measure how far clubs are remember
going
22
Simon-Kucher Project Example: Internet
Example: Undoing a feature shock
Client’s packages before project: Project Outcome:

4 packages with 6 pages of features Distinct 3 package line-ups for two segments
Segment A: Removed
features and
simplified
offer and
focused only
on features
that truly
provide value
Designed
Segment B: optimal Good
/ Better / Best
packages &
pricing for
each
segment
Challenges:
Packages not aligned with needs
Needs not tied to segments
Long, unfocused and too many
features – causing a Feature
Shock!
Source: Simon-Kucher & Partners; Data anonymized
23
Pre Launch: Pricing activities & methods

Establish optimal structure  Metrics evaluation
R&D: 1
 Metrics evaluation: (identify primary / secondary metrics by  Bundling analysis
Determine the value segments)
of your product  Price structure evaluation (e.g. SaaS vs. Perpetual license)
 Customer impact analysis due to changes in models/ metrics
 Bundling analysis (selling solutions vs. individual products)
Pre Launch:
Establish pricing Refine value quantification/ segmentation  Economic analysis
structure and levels 2  Economic value analysis and total cost of ownership for alternatives  PriceStrat
 Refine premiums to competition/ alternatives by segments
 Price differentiation analysis (e.g. by region, channel, industry etc.)
 War-gaming exercises (Model expected competitor moves/
Launch: dynamics)
 Price elasticity analysis (after including portfolio effects/ competition)
Communicate value
 Product lineup analysis: Conjoint methods (DCM*, Menu- based)
to the marketplace
Perform detailed financial projections  Simulation
3
 Acquisition/ churn analysis (control for awareness, realistic growth)  Financial modeling
Post Launch:  Pilot price tests (A / B testing, multinomial price tests)
Manage pricing  Portfolio analysis (include lost sales due to cannibalization)
over time  Lifetime value analysis (from upgrades, expansions, add-ons etc.)
 Promotions analysis (including free trial period, early adopter pricing)
Source: Simon-Kucher & Partners; *DCM: Discrete Choice Methods
24
Pricing focus in pre-launch needed to prevent
Minivation
Process
R&D:
Determine the value
of your product
Pre Launch:
Establish pricing
Launch:
Communicate value
to the marketplace
Post Launch:
Manage pricing
over time
25
Simon-Kucher Project Example: Semiconductor
Example: Price not aligned with value delivered

Semiconductor company lost $$ by not applying value-based pricing for a new consumer electronics
product
Total Value (Annual)
$12M Value-to-customer ($4.00)
A rigorous
process to
? measure
customer
willingness to pay
(WTP) when
setting product
launch price
could have
captured a
Based primarily on legacy product $2.6M Launch price ($0.85) portion of this
price and cost plus strategies
$0.48 $9.4M in lost
(minimum margin goals) Legacy product price ($0.48) value
26
Simon-Kucher Project Example: Mobile
Example: Preventing a Minivation and capturing triple
the value
1 Client had little evidence to support go-to- 2 Simon-Kucher designed a live testing
market pricing for an imminent new mobile approach to evaluate key price
product launch ranges by micro-segment pre-launch
Category Test Group % of Category Product 1 vs.
“We feel like 54% of our web product pricing Product 2
could make sense, but we are really just
Group 1 20% 75%
guessing”
Category 1 Group 2 40% 100%
Group 3 40% 150%
Group 4 40% 50%
“This is a critical product launch for us… and the market
Category 2 Group 5 40% 100%
will be closely watching our performance”
Group 6 20% 125%
3 Result: Higher prices substantially outperformed initial (lower) pricing
Client ultimately settled on a price ranging Client is now building

$150k between 125% - 175% to maximize ARPU “mobile features” to
sustain the higher
$100k
pricing. Without the
$104k focus on pricing in
$50k 54% $75k $94k
pre-launch, client
? would have launched
$k
Low (75%) Medium (100%) High (150%) a Minivation!
27

Establish pricing guidelines/ policies  KPI analysis
R&D: 1
 Create channel specific pricing guides (e.g. on-line vs.  RACI analysis
Determine the value distribution)
of your product  Rebate analysis (volume rebates, design-win rebates etc.)
 Key account analysis (discounts for key/ strategic accounts)
 Create promotional guides (free trial, early adopters etc.)
 Create discount guides for sales (bundled discount vs.,
Pre Launch: standalone)
Establish pricing  Establish approval procedures (criteria and threshold for
structure and levels escalations)
 Establish KPIs* for tracking pricing performance/ value capture
 Create dashboards to track performance against KPIs
 Establish clear roles and responsibilities (e.g. using RACI)
Launch:
Communicate value
Communicate value  Customer ROI analysis
to the marketplace 2
 Conduct value selling training (for sales, marketing, PM* etc.)
 Conduct negotiation training for sales (tactics to hold line on
price)
Post Launch:  Build awareness (e.g. SEO*, roadshows, training channels etc.)
Manage pricing  Customer ROI* analysis (demonstrate customer specific value)
over time  Manage sales communication (e.g. mktg. collaterals/
whitepapers)
Source: Simon-Kucher & Partners; *SEO: Search Engine Optimization; KPI: Key Performance Indicator; *PM: Product Management; ROI; Return On Investment
28
Simon-Kucher Project Example: Infrastructure
Example: Give sales the right tools to defend value (1/2)
Matrix of
General Competitive
Information Advantage
Business
Rationale
Customer Criteria
Deal Criteria
Ramp scheme
(if relevant)
Balance of Power
Top competitive advantages for
CLIENT in this deal
Pricing
summary
Source: Simon-Kucher Project Example; Data anonymized
29
Simon-Kucher Project Example: Infrastructure
Example: Give sales the right tools to defend value (2/2)

A compact Economic Value Calculator enabled sales to quantify the ROI and justify value pricing
30

Model market dynamics  Win/ loss analysis
R&D: 1
 Create competitive info database (including reasons for  Price erosion analysis
Determine the value win/loss)
of your product  Refine premiums to competition/ alternatives by segments
 Refine price elasticity estimates based on competitive moves
 Conduct win/ loss analysis (e.g. using win/loss logistic
regression)
Pre Launch:
Establish pricing  Price erosion analysis (compare with like products / historical
rates)
 Refine portfolio analysis (after taking into account true
cannibalization)
Launch:
Communicate value
Track pricing performance  KPI analysis
to the marketplace 2
 Track performance against KPIs (compare forecast vs. actual)  Deal deep dive analysis
 Establish exception based pricing process (to dial in scope)
 Prepare for negotiations (use price achieved in similar past
Post Launch: deals)
Manage pricing
 Deal reconstructions analysis (identify opportunities to
over time
improve)
31
Simon-Kucher Project Example: Hi-Tech
Example: Use multiple KPIs* to track pricing performance

Most companies track only financial KPIs for pricing; Best in class use a balanced scorecard approach
Financial Operations
Customer Sales
Source: Simon-Kucher Project Example; *KPI: Key Performance Indicator; ; Data anonymized;
32
Simon-Kucher Project Example: Industrial
Example: win-loss regression to optimize pricing
Client has a win probability advantage Client can charge up to $100 in

that is at some price points greater premium over its competitor for being
than 20% the incumbent
Profit curve for
Win probability Profit incumbent
0.9 200
0.8
150
0.7
Win/loss curve for
0.6 incumbent 100
0.5
50
0.4
0.3 0 Profit curve for

entrant
0.2
-50
0.1 Win/loss curve for
entrant
0 -100
0 200 400 600 800 1000 1200 0 200 400 600 800 1000 1200
Price Price
33
Simon-Kucher Project Example: Electronics
Example: Define pricing based on lifecycle
Reference Price Product lifecycle

Target Price
Sales Authority New Mature Legacy
Base Price (Up to 3 years) (Continue to invest (No additional
and promote) investment and no
promotions)
Proprietary
Proprietary
Products should
(Client only; have a tighter
No competition) pricing range
Number of Sales
Enhanced
Product type
(Non-standard)
Price
Legacy products
Standard should have flat,
(Commodity) high prices with no
negotiated
discounts
Standard products should have the

Source: Simon-Kucher Project Example
widest range of negotiating room
34
Closing comment on NPP playbook: One size does not
fit all cases
 Established market / similar products  Short timeframe (less than 1 month)

 Confidence in knowledge of key value drivers by  Low risk, level of validation required “Quick & Dirty”
segment  Minimal portfolio effects
 Confidentiality required: don’t want to share with
Approach
 Relatively low financial/ strategic impact
customers before launch (< 30 days)
 “Feature” rather than product
 Uncertain benefits and use cases by segment  Key account-based business

 Psychological price thresholds likely exist in  Heavily reliant on partners / channel “Moderate”
market  High complex phone sale
 Moderate turnaround required (1-3 months)
Approach
 Moderate risk
 Moderate financial / strategic impact
(1 - 3 months)
 Innovative new product/ new technology/ trends  Significant portfolio effects

 New segments  Turnaround 3-5 months “Exhaustive”
 High economic value add (customer ROI)  Strong differential potential by segment
Approach
 Uncertain feature set, value of features, line-up  High level of traffic / potential customers
differentiation  High financial / strategic impact
(3 - 6 months)
 High risk
35
Summary

guiding principles
innovation

36
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Cologne
Copenhagen
Dubai
Frankfurt
Istanbul
London
Luxembourg
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Thank You !
Milan
Munich
New York
Paris
San
Francisco 100 View Street
Mountain View, CA
Santiago 94041
de Chile (650) 691-3315
São Paolo
Singapore
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www.simon-kucher.com

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Extracting Full Value From New Product

Silicon Valley Office

Situation Key Question? Profit effect?

Source: Simon-Kucher & Partners

R&D: Pre Launch: Launch: Post Launch:

Wrong products Wrong price structure/ Un-deserved Matching comp prices

Product Product Product Handoff

2. Success starts with a cultural shift driven by three counterintuitive

4. Successful implementation depends primarily on senior management

Source: Simon-Kucher & Partners

2. Success starts with a cultural shift driven by three counterintuitive

4. Successful implementation depends primarily on senior management

Source: Simon-Kucher & Partners

What you hear

 “But we can also add this …”

 “We want to be on the safe side”

 “One size should fit; our market is not segmented”

 “Let’s build it, then position it”

 “Let’s get something out there”

How to solve? “Discipline”

Source: Simon-Kucher & Partners

What you hear

 “It’s good enough”

 “We checked all the boxes”

 “It hit the targets”

 “I don’t want to sign up for a big number”

 “I don’t want to over price. I would rather be conservative”

 “With our margins, we don’t need to worry about price”

 “We need to penetrate the market”

How to solve? “Ambition”

Source: Simon-Kucher & Partners

What you hear

 “We don’t know what to do with this”

 “This isn’t business as usual for us”

 “We don’t have a process for that”

 “We’ll throw that into the deal”

 “It’s not in our DNA…”

 “This goes against our culture”

How to solve? “Recognition”

Source: Simon-Kucher & Partners

What you hear

 “I’m not going to be the one who says ‘no’”

 “Personally, I’d never buy this myself, but …”

 “Screw what the research says; I know this will work!”

 “Let’s wait for more evidence before we pull the plug”

 “The train has left the station”

 “We’ve come too far. If we kill this now …”

How to solve? “Objectivity”

Source: Simon-Kucher & Partners

2. Success starts with a cultural shift driven by three counterintuitive

4. Successful implementation depends primarily on senior management

Source: Simon-Kucher & Partners

1 “outside-in” not “inside-out”

2 “value first, build second” not

3 “no-maybe-yes” not “yes-maybe-no”

Source: Simon-Kucher & Partners

2. Success starts with a cultural shift driven by three counterintuitive

4. Successful implementation depends primarily on senior management

Source: Simon-Kucher & Partners

Old paradigm New paradigm

Source: Simon-Kucher & Partners

2. Success starts with a cultural shift driven by three counterintuitive

4. Successful implementation depends primarily on senior management