Higher Net Price—Or Bust

Innovative companies that become irrelevant sometimes get that way by misdefining incremental innovation itself. In carelessly defining it as an improvement that leads to higher sales, they overlook a crucial measure when extending a line of products—net price per equivalent unit—that must continue to rise if a company is to avoid the slippery slope. Net price per equivalent unit is the inflation-adjusted price charged to whoever buys directly from the company—consumers, for instance, or distributors. It is an average, weighted by the number of units sold at each price, that takes into account any deals or discounts. It is expressed in relation to a standard unit (for a candy bar, the unit might be a certain weight of chocolate) so that it can be tracked over time. If that number is higher than the net price for the previous version of the product, the firm is on the right trajectory. If it is lower, the business may be headed for trouble. Lower pricing may be a viable strategy for entering a new market or launching a breakthrough technology; otherwise, it points the way toward commoditization, which inevitably undermines the firm’s prospects of achieving sustainable revenue and profit growth. Most companies think they’ve beaten commoditization if each successive generation of product brings in more total revenue than the last generation did. But they haven’t. No line extension project should take up space in the pipeline if it does not promise to yield a higher equivalent net price. A few years ago, Clorox decreased the number of projects in its innovation pipeline by 40% to focus on those that would promise to be bigger hits, and it increased the value of those projects by 50% with products like the Clorox Bleach Pen, the Toilet Wand, and Disinfecting Wipes. “Innovation is not about planting seeds,” Clorox’s former CEO, Jerry Johnston, explained at a Product Development & Management Association conference. “It’s about avoiding distractions.” But such discipline is hardly the norm. More typical is a leading packaged goods company, whose 600 active projects commanded resources up and down R&D, marketing, the supply chain, and sales. So many projects were under way, and management of them was so diffuse, that it was impractical to quantify the value they would deliver. This is when commoditization creeps in by the back door. Colgate has long been a champion at producing a constant flow of innovative products that consumers are willing to pay more for: a toothbrush that cleans the tongue as well as the teeth, another that massages the gums, and one that bends and flexes for better performance. So, too, has Dyson, the English vacuum cleaner company. “As Dyson’s share grew, we dragged the average price up…29%…and added $200 million to the value of the market, [thus changing] how much [customers] were prepared to pay,” Gordon Thom, the chairman of Dyson Japan, has been quoted as saying. The company’s machines arrived in the United States at a time when Hoover, the established brand leader in the U.S., was innovating downward with simpler, cheaper products, reducing prices so that it could maintain its share of unit sales in the face of competition from low-price imports. As a result, Dyson captured the dollar share of the U.S. market for uprights. Hoover was recently acquired from Whirlpool at a bargain price by a division of Hong Kong–based Techtronic Industries. Chris Gurreri, president of Techtronic’s new Floor Care unit, was quoted as saying that the competition had “put a big noose around Hoover’s neck.”

Higher Net Price—Or Bust

Summary.

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