Decision makers need a clear roadmap for integrating pricing into the New Product Development (NPD) process. This paper provides a roadmap for how best to integrate pricing in the new product development process, including timing of execution and methodologies and resources to deploy. Tim J. Smith, PhD (tsmith@wiglafpricing.com), is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, Academic Advisor for the CPP designation, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012).

The Journal of Professional Pricing, January 2020

Challenge

Decision makers need a clear roadmap for integrating pricing into the New Product Development (NPD) process.

Directives to conduct pricing research early in the NPD process often go unheeded, due to a lack of specificity in the recommendation. Moreover, expending resources on a full pricing research effort long before launch is hard to justify given expected market environment changes between NPD initiation and NPD launch.

The common result is to delay price research until shortly before launch, reducing the usefulness of the pricing research for decisions regarding target market selection, financial forecast expectations, and offering definition, distribution, and positioning. Decision makers can do better.

Instead of a blasé directive, decision makers require a clear roadmap for integrating pricing research into NPD. This roadmap should provide criteria for guiding decisions regarding the timing of execution, methodologies to deploy, and resources deployed. It should reflect an orderly and logical integration of pricing research into the NPD process.

Clayton Christensen of Harvard Business School reports that: Poorly developed price expectations and decisions during the new product development effort are a significant underlying cause of this failure.

Recommendation

Decision Criteria

The rigor of pricing research required at individual phases of the NPD process is contingent upon:

1. The NPD investment requirements
2. The expected revenue of the future NPD offering
3. The suitability of the methodology for the market
4. Time constraints

NPD efforts that have high investment requirements and high revenue expectations deserve greater attention. High customer concentration limits the range of potential pricing methodologies to apply. Time constraints can drive risk-mitigation strategies which tradeoff accuracy for timeliness.

Methodologies and Resource Requirements

Three methodologies have proven appropriate and effective across a variety of industries for pricing NPD offerings. In increasing order of resource requirements, these are:

1. An analysis of the Economic Value to Customer (denoted as EVC in the NPD Pricing Roadmap) using internal information
2. Primary qualitative market research to measure price expectations and augment internal information in the analysis of the Economic Value to Customer with the voice of the customer
3. Conjoint analysis, a specialized form of primary quantitative market research that is well suited to reveal a priori price optimization

These three pricing methodologies are not needed for every NPD process, much less are they required for all specific phases within a specific NPD effort.

Integration Timing

Early in the NPD process, when decision makers are considering an NPD investment, a price estimate is required to define the business case. If the NPD investment is large, an analysis of the Economic Value to Customer is recommended. If the NPD investment is small, managerial consensus alone may suffice.

Late in the NPD process, when decision makers are preparing for launch, price clarification is required. As the first step to price clarification, we recommend either updating the previously-conducted analysis of the Economic Value to Customer to reflect changes in management insights and market environments, or conducting the Economic Value to Customer research if this has not already been done.

Revenue Expectations

Deciding whether to take additional price clarification steps to provide greater accuracy and reliability in pricing is primarily contingent upon the expected revenue and secondarily contingent upon market suitability and time constraints.

• For NPD offerings with low revenue expectations, the analysis of the Economic Value to Customer suffices for launch price decisions.
• For NPD offerings with moderate revenue expectations, qualitative research to augment information of the Economic Value to Customer and measure price expectations is recommended as well.
• For NPD offerings with high revenue expectations, the decision criteria to execute pricing research beyond the analysis of the Economic Value to Customer is contingent upon market suitability and timing constraints.

Customer Count

If the market density is low, meaning there are few customers in the potential market, qualitative research to inform the Economic Value to Customer and measures of price expectations is recommended.

If the market density is high, meaning there are many customers in the potential market, both qualitative research and conjoint analysis are recommended in general.

If the market has many customers but the launch timing is too soon to allow for both pricing methodologies to be applied, we recommend forgoing the qualitative research and proceeding directly to conjoint analysis. Here, decision makers are trading off the risk of the conjoint analysis yielding inaccurate results (due to insufficient foundational research) with the risk of being unprepared at launch (due to running out of time).

Analysis

NPD Process: Risk Mitigation and NPD

An NPD effort can take years to complete and require significant financial investments in some cases and far fewer resources in others.

To mitigate the risk of investing in a major NPD effort and ultimately failing to deliver a positive return on investment, decision makers have long relied on a series of sequential decisions to determine which developments are worthy of further investment.

Beginning in the 1940s, an approach of dividing NPD into a series of phases separated by decision points began to become formalized. Today, this approach of making sequential decisions, acknowledging that past investments are sunk costs which have no bearing on further investment decisions, is well established and continues to be developed and refined. Some companies have even applied real-options analysis to guide decisions at the multiple decision points.

The Phase-Gate NPD process is a modern managerial template that separates phases of development effort with managerial decision points. Companies often customize this template to better suit their needs and many variants exist; we will stick with the most widely known Phase-Gate template.

Phase-Gate NPD Process

The Phase-Gate template isolates five phases of effort prior to launch with five decision screens that act as gates which the effort must pass through before entering the next phase. The phases and decision screens are:

• Ideation followed by the Idea Screen
• Offering Scoping followed by the Feasibility Screen
• Opportunity Definition followed by the Business Case Screen
• Offering Development followed by the Execution Screen
• Testing and Validation followed by the Launch Screen

Each screen is an opportunity to adjust or cancel further developments.

In the Ideation phase, offering development opportunities are identified for potential company pursuit. Brainstorming, market feedback, and design thinking are common approaches to development ideation. Following the Ideation effort, ideas are screened for their merits. This is the first gate an NPD offering must pass through.

In the Offering Scoping phase, the scope of the required NPD effort to bring the idea to fruition is defined. This is followed by a screen of the offering concept based on its technical and practical feasibility. This is the second gate an NPD offering must pass through.

In the Opportunity Definition phase, the business opportunity of bringing the offering to market is clarified. Defining the business opportunity of the NPD offering requires estimating the anticipated cost and timing of development, variable costs once launched, and revenue impact after launch over a reasonable market-relevant time period. Revenue estimates require estimates of price and selling quantities. This phase prepares the offering to be screened according to the business case for executing the NPD effort. This is the third gate an NPD offering must pass through.

In the Offering Development phase, proper product development gets underway. This phase also includes the development of marketing, sales, and production plans. These sales and marketing plans will require definitive pricing information and estimates of sales expectations. Before moving on, the NPD offering and associated business plans are screened for completion of execution. This is the fourth gate the NPD offering must pass through.

Finally, in the Testing and Validation phase, the offering as well as its marketing, sales, and production plans are verified for market readiness at launch. This is followed by a launch screen for market preparedness. This is the fifth gate the NPD offering must pass through.

NPD offerings passing through all gates are then launched. Post-launch, companies often conduct a review of the NPD process to identify areas for further improvement. As for the NPD offering post-launch, it now enters typical sales, marketing, production, and financial management.

Pricing and the NPD Process

In the Phase-Gate template, two specific decision points identify the need for pricing information. Gate 3, prior to actual development, calls for a Business Case screen that will require price and selling quantities estimates. Gate 4, prior to final testing and validation, calls for an Execution screen in which the business plan – and therefore the actual launch pricing and sales expectations – is required.

These two NPD decision screens requiring pricing and selling quantity information differ greatly in their timing and required accuracy.

Business Case Pricing

The Business Case screen occurs early in the NPD process, perhaps years before launch, and requires only an estimate of pricing and selling quantities. At the Business Case screen, the precise cost, timing of development, forecasted production costs, prices, and selling quantities are neither known nor required. Estimates of these factors will suffice for making the NPD investment decision.

Consider that, in the time between the Business Case screen and the actual Launch screen, the market environment should be expected to change. Changes in competition, economic conditions, technology, market composition, social and cultural orientations, and legal and regulatory environments occur unexpectedly with dramatic impacts on specific offerings. These market environment changes, as well as simultaneous production input factor changes, can make a mockery of claims to know exact prices and selling quantities of an offering early in the NPD process.

As such, only good estimates are possible at the Business Case screen. Fortunately, good estimates can be made efficiently and will suffice in informing sound decision making regarding investing in an NPD effort.

Pre-Launch Pricing

The Execution screen occurs late in the NPD process in preparation for launch. This decision point requires more accurate and definitive pricing information. Pricing NPD offerings pre-launch must be more accurate because

it will be the actual price which determines financial performance and market acceptance, and a small pricing error will have an oversized impact on profitability and selling quantities. Also, pre-launch pricing must be more definitive as it will be the actual prices used for customer engagement, including marketing material and sales communication.

As such, decision makers should require greater precision and higher confidence in pricing pre-launch at the Execution screen. These heightened requirements consequently increase the appropriate effort and resources to deliver pricing accuracy.

NPD Pricing Requirements

Thus, the Phase-Gate NPD process identifies two distinct decision points requiring pricing information. These two distinct decision points differ greatly in the accuracy required and therefore the appropriate effort and resources to apply in developing pricing information. Early in the NPD process, Business Case Price Estimation is required to inform an investment decision. Late in the NPD process, Pre-Launch Price Clarification is required to engage the market and drive financial performance.

For Business Case Price Estimation, the pricing methodology deployed should require minimal resources. For Pre- Launch Price Clarification, the pricing methodology deployed should deliver more robust results with an efficient resource allocation.

Fortunately, pricing methodologies differ in their resource requirements and accuracy. Therefore, it is possible to map the pricing methodologies into the NPD process in a rational manner.

Business Case Price Estimation

Informational Requirements and Expenditure Contingency

The Business Case for investing in the NPD effort is a description, including quantitative financial projections, of the market opportunity. Constructing the Business Case requires describing the overall target market, identifying market segments by price and offering sensitivity, and defining the customer addressable horizon.

The scope of the NPD offering in comparison to the anticipated competing alternatives has a material impact on the customer addressable horizon. Specifically, differences in the features, benefits, and resulting economic emotional impacts of the NPD offering in comparison to its competing alternatives will influence the determination of the customer addressable horizon and the price the NPD offering can capture from that market segment.

To develop the Business Case, decision makers can rely on informal or formal processes. If the NPD investment is low, a simple informal development of management consensus will likely suffice. If the NPD investment is high, a more formal methodology should be applied to deliver greater clarity, higher quality, and more accurate estimates.

Economic Value to Customer is the cost-effective methodology for building the business case, and sometimes the best approach to launch pricing itself.

Economic Value to Customer Outcomes and Resource Requirements

Economic Value to Customer requires identifying the anticipated competing alternatives and their price points. It then examines the positive and negative differential benefits between these competing alternatives and the NPD offering. Using these insights, Economic Value to Customer clarifies the market segments that would be attracted to the focal offering, the value they would gain by using the offering, and estimations of the capturable price per segment for the company. With an understanding of the capturable price per segment, managers can evaluate price segmentation strategies, price optimization, and the customer addressable horizon.

For the Business Case, the Economic Value to Customer can be informed by secondary market research sources, business intelligence, and managerial insights. By using these extant and internal informational sources, the resource requirements for executing Economic Value to Customer are minimized.

Economic Value to Customer Methodology

The Economic Value to Customer methodology using extant and internal informational sources is a nine-step process.

1. Opportunity Definition identifies the target market and market segments, competitive alternatives, points of differentiation and anticipated variable costs.
2. Value Drivers convert the verbal statements regarding differential benefits into quantitative equations to be informed by facts that result in the economic value of individual points of differentiation.
3. Fact Collection gathers secondary market research, business intelligence, and managerial insights for use as inputs into the value drivers.
4. Economic Value to Customer defines the value created with the new offering as the price of the competing alternative plus the positive differential benefits and minus the negative differential benefits. If the impact of the competition and differential benefits varies between market segments, the Economic Value to Customer is calculated for all relevant market segments. Economic Value to Customer can be described as the value-on-the-table delivered by the focal offering.
5. Capturable Value is estimated from the Economic Value to Customer in a manner which enables the company to capture the highest price possible while leaving sufficient surplus value to induce purchase.
6. Price Segmentation defines the segmentation hedges, if any, that enable the company to extract a higher price from those market segments with a higher capturable value while simultaneously providing a lower price to those market segments with a lower capturable value.
7. Price Optimization uses tradeoffs between prices and anticipated quantities to identify the most advantageous price to meet the company’s goals.
8. Socialization enables discussions regarding the market alignment, facts collected, and quantitative modeling necessary to make improvements to the analysis or otherwise create organizational alignment.
9. Pricing Decision is the outcome of the Economic Value to Customer methodology. At this step, executives decide price and selling quantity expectations.

Pre-Launch Price Clarification

Pre-Launch, decision makers require actionable pricing information for a definitive pricing decision. While the Economic Value to Customer sometimes sufficiently delivers that information, many times executives will demand greater precision and confidence. Two further market research techniques can be fruitfully deployed to deliver greater pricing clarity. These are qualitative and quantitative primary market research.

Before calling for primary market research however, we always recommend analyzing the Economic Value to Customer with extant and internal information sources. The design of primary market research for pricing is contingent upon the information delivered by an internal analysis of the Economic Value to Customer. Economic Value to Customer clarifies the hypotheses to test and the questions to be informed. Without a basic understanding of the Economic Value to Customer, managers increase the risk that the research design is flawed and therefore the research results will be useless or meaningless.

Qualitative primary market research, if appropriate, is the recommended first next step methodology to deploy after conducting Economic Value to Customer informed by extant and internal information. Qualitative market research techniques include focus groups and one-on-one executive interviews. Focus groups dominate in consumer markets while executive interviews dominate in business markets.

Though this qualitative research is so named due to its reliance on verbal discussions with informants, much useful quantitative information and reasonably accurate measurements can be efficiently gathered through such research. Moreover, qualitative research can deliver highly useful information that cannot be gathered efficiently through quantitative research.

Quantitative primary market research, if appropriate, is the recommended final methodology to deploy. Qualitative market research techniques imply market surveys. For pricing research, conjoint analysis is the recommended specific format of quantitative research to deploy.

For both qualitative and quantitative pricing research, we recommend a double-blind interview approach. “Blinding” refers to the deliberate removal of identifying information so that the informant or respondent does not know who is sponsoring the market research. This reduces potential answer bias. “Double-Blind” refers to additionally removing identifying information of the informants and respondents so that the research sponsor does not know who is providing the information. This is done to create a safe space for the informants and respondents where they feel the information they provide will not be used directly against them, and as such they provide information more honestly and thoroughly.

Qualitative Research for Pricing

Focus groups and executive interviews efficiently and effectively inform pricing of NPD offerings in many situations. The qualitative pricing research can deliver both price expectation metrics and informational inputs into pricing from the Economic Value to Customer.

Measurements of customers’ price expectations can be taken with Gabor-Granger or Van Westendorp Price Sensitivity Meter techniques. Both techniques can meaningfully and reliably produce results with small sample sizes typical of qualitative research. These price expectations techniques measure what customers instinctually desire to see once the NPD offering is in the market.

Importantly, academic research and business experience indicate that price expectation measurements are not the same as the market’s willingness to pay. Despite this shortcoming, these techniques’ brevity and simplicity make them easy to incorporate into qualitative research, and detecting price expectations does provide a data point for decision making.

Often, extant and internal informational sources fail to address specifics required in the Fact Collection step in the Economic Value to Customer, leaving the Value Drivers to be informed by management estimates alone. In these situations, qualitative research can solicit specific facts from the informants to be used as inputs into the Value Drivers of the Economic Value to Customer. This leads to a more robust estimate of the Capturable Value as well as Price Optimization.

Specific competitive facts often gathered from qualitative research include the importance and relevancy of the competing alternatives and differential benefits as well as the prices of these competing alternatives. Specific business case facts often gathered from qualitative research include a variety of input parameters used in the value drivers. Both sets of facts inform the understanding of the Economic Value to Customer.

The price generated from price expectation measurements (such as Gabor-Granger and Van Westendorp) and that from market-informed Economic Value to Customer generally disagree with each other. However, both are valid. Recall, both are developed from primary market research and provide an accurate representation of appropriate prices. However, they represent two very different facts.

Price expectation measurements reveal the intuitive price at which customers would desire to purchase. On the other hand, Economic Value to Customer measures the value created and delivered to customers and estimates the price that should be captured.

One could say Economic Value to Customer reveals what customers should pay while price expectation measurements reveal what customers want to pay. What customers will actually pay generally lies between these two data points.

Decision makers must navigate this uncertainty as pricing is a decision that should be informed by a mosaic of facts. No singular measurement, regardless of how well it is designed, will perfectly reveal the optimal price for NPD offerings. But measurements, sometimes multiple measurements, will reduce the potential of making a significant pricing error, and therefore increase the likelihood of success and profits.

Focus groups and executive interviews rely on discussions with informants to inform both specific research questions and broader, more open-ended, research questions. The value of qualitative research lies in the depth of the discussions held, and therefore the depth of the facts uncovered. Through discussions with well-informed informants, quantitative information can be gathered along with qualitative insights.

Qualitative Research for Pricing Methodology

The qualitative market research process is well documented across many sources. Here we simplify it to a six-step process:

1. Defining the Research Questions and Hypothesis to test.
2. Defining the Sampling Plan including the number and type of informants. The sample size is generally small but large enough to ensure the informants collectively hold the information being sought and enables detection of potential market segments. The informants themselves should be representative of the target market and hold the necessary information to be collected. This sampling plan is then converted into a set of screening questions to ensure the informants meet the desired criteria.
3. Developing an Interview Guide to guide the interviewer in their interaction with the informants. For pricing NPD offerings, the interview guide begins with questions to detect the relevancy and importance of various competitive alternatives and differential benefits, continues by collecting data that is used as an input parameter in the Economic Value to Customer analysis, and ends with a price expectation study. If not performed in the screening questions, general background questions useful for market segmentation are included at the end. A strong interview guide will also identify areas to probe, break points to explore, different questions to raise with informant subsets, and conversation timing to ensure all research objectives can be addressed in the allotted time.
4. Holding Informant Discussions through either focus groups or executive interviews. The discussions are transcribed, and the transcription is then rendered double-blind.
5. Developing a Research Presentation to address the research question and hypotheses. The results generally include quotations from informants as well. For pricing NPD offerings, the research results will also include the results of the price expectation measurements as well as the research- informed Economic Value to Customer.
6. Reaching a Pricing Decision. At this step, executives decide price and selling quantity expectations, now empowered by information gleaned directly from the market.

Quantitative Research with Conjoint Analysis

To move beyond estimates of the Economic Value to Customer and measurements of customers’ price expectations, academic research and business best practice call for a third research approach: conjoint analysis.

Conjoint analysis is a quantitative research approach relying on surveys that is used for pricing NPD offerings with higher precision than that provided by price estimation techniques and Economic Value to Customer.

Conjoint analysis quantifies the part-worth utility function of specific attributes and attribute levels by survey respondent. It assumes the value, as measured by utility, of an offering is the sum of the part-worth utilities of its attributes. By using price as one of the attributes, conjoint can reveal the tradeoffs customers make between price and perceived value.

From the part-worth utility functions, the tradeoffs customers make between the NPD offering and competing alternatives as a function of price can be plotted. This is known as a plot of the choice share as function of price and can be interpreted as the expected demand curve. Given a demand curve, researchers conduct price optimization.

Other outputs of the conjoint analysis include the quantification of the relative importance of different offering attributes and attribute levels, and perceptual maps of offering concepts. These findings are useful for clarifying marketing communications and sales messages as well as understanding the importance of competing ideas for potential future NPD efforts.

In construction, conjoint analysis for pricing differs greatly from other, more standard, quantitative market research surveys and simple price expectation measurements. Specifically, it requires respondents to make multiple tradeoffs between different offerings composed of different attributes at different prices. By driving respondents to select between alternative offerings, this approach better simulates an actual purchasing decision, and therefore reveals a more accurate understanding of customer priorities and willingness to pay.

Conjoint Analysis for Pricing Methodology

The conjoint analysis research process is well documented across many sources. Here we simplify it to a seven-step process:

1. Sampling Plan defines the number and type of respondents. The sample size should be large enough to ensure statistical confidence. The respondent profiles should require representation of the target market and informed insights on the value of potential benefits and features, collectively known as attributes. As before, the sampling plan is converted into a set of screening questions to ensure the respondents meet the desired criteria.
2. Attributes and Attribute Levels define the dimensions under study in the conjoint analysis. In construction, the researcher must take care to reduce the number of attributes and attribute levels to avoid survey fatigue but ensure both are sufficiently complete to address the research hypothesis and questions.
3. Survey Construction includes coding the individual attributes and attribute levels. Given modern technology, the survey construction usually requires coding on specialized software. With this software, one may include verbal, visual, auditory, or video attributes. Using orthogonalization routines, the number of tradeoffs required from the survey is greatly reduced, thus reducing the potential of survey fatigue.
4. Survey Execution requires distributing the survey to the sample.
5. Results Analysis includes attribute level utility, attribute importance, perceptual maps, and choice curves used to simulate demand and conduct price optimization.
6. Research Presentation shares the results for socialization in preparation for decision making.
7. A Pricing Decision regarding the pricing and quantity expectations is now made with a highly accurate understanding of the market’s understanding of value and tradeoffs with price.