Pricing an Innovation in the Automotive Industry – Putting Price Before the Innovation Pays Off

April 02, 2019

Pricing an innovation in the automotive industry – putting price before the innovation pays off

The automotive supplier industry is currently reinventing itself: An astounding 40 percent of all patent applications in Germany come from this industry, making it the most innovative in the country. Among those patents, only 30 percent are related to the conventional powertrain – a clear sign that vehicle electrification is the future. And looking at the source of this innovativeness, suppliers account for two-thirds of the patent applications related to the automotive industry.i

Two drivers fuel innovativeness for suppliers

  • Market change: (End) Customers are demanding innovations! Industry trends such as electric vehicles and autonomous driving shape the automotive industry and require innovations. Just think of the numerous components needed to achieve higher levels of autonomous driving: radar technology, sensors, and new interior concepts, to name only a few.
  • OEM purchasing: Innovations help suppliers to differentiate from competitor products. If OEM purchasing has multiple comparable offers to choose from, it is easy to make the suppliers feel like they are selling completely interchangeable commodities – leaving price as the only relevant decision criterion. However, a supplier with a valuable innovation is an opponent no OEM purchaser wants to face. This is especially important since over the last years, perceived price pressure has increased for suppliers (see graphic), making innovations even more imperative. Moreover, suppliers have identified innovations as the number one way to escape these oppressive market conditions.

automotive suppliers are experiencing increasing price pressure

Why suppliers fail to reach their innovation targets 

Innovations are extremely important for suppliers to stay in business and grow profitably. In our bi-annual Global Pricing and Sales Study, we discovered that 68 percent of innovations in the automotive supplier industry do not reach their intended targets. How can such an important business lever not be maximized? During our projects we see that this failure is most often attributed to one or a combination of the following three pitfalls: 

  • Most suppliers have profound technical knowledge. However, they often lack experience in translating technical benefits into value for customers, and more importantly in understanding (end) customers’ needs. Often products are developed because it is possible from a technical standpoint, but not because it solves a major issue the customer faces.
  • Pricing is a mere afterthought in the innovation process. Time and again we have seen years devoted to investments for new products and millions spent on planning, while pricing becomes a topic only four weeks prior to the first acquisition meeting with the first OEM.
  • Many automotive suppliers are not set up to successfully manage innovations. If R&D, application engineering, sales, etc. work as silos, an innovation will inevitably fall short of its potential.

How to avoid these pitfalls 

Take these steps to improve the profitability of innovations and avoid the outlined pitfalls:

  1. When deciding on what to innovate, start with the customer perspective and work backwards. If you develop a product without a clear focus on customer needs, your chances of failing are substantially higher. However, if you know your customers and understand their requirements and willingness to pay, you can develop a solution that provides great value, significantly improving your margins.A paradigm change is required to overcome the challenges
  2. Your customer is the OEM. But it is your responsibility to also have the end customer in mind. OEMs do not always fully understand what end customers want; plus they are often driven by their own technical departments. It is therefore crucial for you to know the end customers’ needs, and if necessary, explain them to the OEMs. 
  3. Be able to quantify benefits: It is essential that you show the OEM why they should buy your product. Step one is emphasize what makes your product unique and what benefits it offers. Ideally, it offers the OEM a direct advantage, for instance, through reduced costs; or an indirect benefit through increased utility for the end customer. Step two is to quantify the advantage. The OEM will be far more willing to pay a higher price, if you show them that your innovation will lower their costs or enable them to raise their prices.
  4. Selecting a monetization model for your product is extremely important: Conventional materials/products are priced by weight or per piece – but when software is the innovation, a cost-plus pricing model is no longer possible, and setting a price per (k) line of code makes no sense. In this case, a value-based approach is likely the most appropriate model. Understanding how your product will be used and the benefit it offers is key to determining the ideal approach.  

iInstitut der deutschen Wirtschaft Köln: IW-Report 34/18 Die Patentleistung der deutschen KFZ-Unternehmen (https://www.iwkoeln.de/fileadmin/user_upload/Studien/Report/PDF/2018/IW-Report_2018-34_Patente_der_Kraftfahrzeugindustrie.pdf)


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