- A disciplined approach to pricing can maximize the value of innovation
- One key is to understand how the innovation relates to a customer's value drivers
Having developed a new solution that was significantly more efficient than the next-best product available, a pharma services company was on the verge of doing what companies do all too often: apply a conventional pricing approach to a new innovation, thus missing a golden opportunity to realize more value.
We worked with the company to redress that situation by applying our comprehensive six-step approach to value pricing innovation. As a result, PharmaCo* was able to identify opportunities to increase launch revenue by 50% over three years.
Commercial team members got the necessary training to communicate the differentiated value the new solution offers to different customer sets. Most notable was the shift in company leadership’s mindset as to how pricing can strategically communicate and capture the value created by the new innovation, across the entire portfolio.
Six Steps to Optimal Innovation Pricing
This framework ensures that you price innovations appropriately and achieve all your strategic goals
We began our work with PharmaCo by conducting in-depth customer and influencer research, enabling us to segment customers on two dimensions: by type and business model, and by expected production needs and scale. Insights generated through segmentation research indicated a significant differential in the new solution's economic value across three segments.
We also helped the company understand how its innovation translates into customers’ value drivers. PharmaCo’s new solution allows faster time to market for sponsors' drug candidates and significant cost savings. We determined the revenue upside due to faster time to market and calculated the value for the operational cost savings and efficiency cost savings. Finally, we also calculated the added cost to customers for using PharmaCo’s new solution, i.e., the switching costs that customers will incur for trying a new solution.
A six-step approach to setting an effective value-pricing strategy for new innovations
Once we determined the total value, the next step was to decide on an optimal price position. We used a three-screen process to determine how much of the perceived value should be retained in the price. This requires analysis of a number of factors, including customer and competitive landscape, company strategy and cost structure. For PharmaCo, one key goal was to ensure that a broader set of the patient population has access to the solutions, so the pricing strategy for the new launch accounted for that stated mission.
Optimal price positioning must also take into account the product portfolio, i.e., the impact on current and future products. PharmaCo’s launch was the first of many innovations to be introduced as part of a new technology platform, so pricing had to be viewed not as an opportunistic strategy but as a portfolio maximization strategy.
Using our proprietary six-step approach to innovation pricing, PharmaCo* was able to identify opportunities to increase launch revenue by 50% over three years.
Properly pricing PharmaCo’s new innovation also required the right price model and discount guidance, to maximize value and minimize leakage. Because the company planned to launch multiple SKUs for its innovative product in different pack sizes, the global list price for the anchor SKU was set by triangulating across:
- Customer concept testing: We tested customers’ willingness to pay for the new product through in-depth customer interviews and a targeted survey
- Salesforce interviews: We vetted price recommendations with the salesforce to understand the feasibility and required enablers
- Competitive benchmarking: We ensured that the recommended pricing did not exceed the highest priced alternatives
- Value modeling: We tested the implications for customer value capture of recommended price points
Finally, knowing that most of the value pricing efforts failed in commercial execution, we focused on building value-selling capabilities with PharmaCo’s sales team. We armed the team with carefully tailored value-selling training and a supporting playbook, which included value communication messages and tactics for customer value dialogues. We also introduced the right tools from our partners to build the sales team’s confidence as they transitioned from a technical selling to a value-selling approach.
As cited above, the impact of the six-step value pricing approach produced significant value for PharmaCo, and underscores the importance of taking a different—and rigorous-- approach to pricing the innovative products and services that companies may spend years developing.
* We take our clients' confidentiality seriously. While we've changed their names, the results are real.