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Thursday, July 25, 2019

Pricing Smart Products

Towards business models of smart products.

5 Questions to Consider When Pricing Smart Products
Nicolaj Siggelkow, Christian Terwiesch  in HBR

Imagine you are the CEO of an oral care company and you have been selling a product called the Power Brush 2000, a good electric toothbrush. Your revenue model was likely focused on profiting from selling the toothbrush with some creative pricing coming from the replacement heads (a typical “razor-razorblade” model perhaps with a subscription plan √† la Dollar Shave Club). Now, your R&D group has a new product ready for launch, a toothbrush for the 21st century. The toothbrush is smart (it has built-in sensors and AI to detect plaques and cavities) and is connected via Bluetooth to the Internet. So, let’s call it the Smart Connect XL3000. Your job now is to price the Smart Connect XL3000, or, more broadly speaking, to articulate a revenue model.

The revenue model is one of the most important elements of a firm’s strategy. It defines the ways in which a firm gets compensated for the value that its products or services generate. In the old days, revenue models primarily consisted of picking a “good” price. Connected, smart devices are changing this paradigm.

Companies that pursue what we call a connected strategy (ie., those that transform their connection to customers from episodic interactions to a more frequent and data-driven relationship) have a bigger set of revenue models to choose from. In other words, the price can now depend on factors that previously could not be used to influence the pricing decision. To think systematically about revenue models and to spot opportunities for improvement, we find it helpful to ask the following five questions .... ' 

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