Innovation management. Учебное пособие
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3. Regulations of innovation activity
Global Competitiveness Index 4.0
IMD World Digital Competitiveness Ranking Bloomberg Innovation Index
ICT Development Index (IDI) Global Cybersecurity Index Networked Readiness Index – NRI
Information Technology and Innovation Foundation ITIF United Nations E-Government Development Database Knowledge Economy Index - KEI etc.
Practical Exercise:
Opening of oil producing wells
Oil production from oil wells in Russia is usually performed by pumping it out with the help of pumping units. From the porous layers, oil seeps to a drilled vertical well about 10 cm in diameter and flows to the surface.
But with intensive pumping, liquid paraffin begin to thicken, turn into viscous lumps and clog the pores of oil-bearing formations. Gradually around the well over the entire height of the oil-bearing layer, a dense, oil-tight paraffin ring is formed. The well is closed, although up to 40% of non-pumped oil remains in the oil-bearing layer!
Questions:
1.How can state support innovation in this area?
2.What are the instruments of state innovation policy?
3.What methods for the implementation of state innovation policy can be used?
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4. PRICING OF INNOVATIONS
Factors affecting the pricing process of innovation product. Price management approach. Pricing process of an innovative product.
Pricing methods of innovation project. Economic efficiency of innovations and methods of its analysis.
Pricing for an innovative product turns out to be difficult for many organizations, since there can be no criteria that would reflect and evaluate the volume of performed work that was needed to create an innovation. In the considered general pricing methods, the price is based on the total costs of producing the goods and services on the competitive advantages of the producing company. These methods are not always applicable to innovative products and services, therefore, analysis and determination of pricing methods is required in order to bring an innovative product to the market.
There are internal and external factors affecting the pricing process. (Fig 4.1)
External pricing factors of innovation product include:
a)the size of consumer demand for innovation;
b)the solvency of the potential buyer;
c)the economic potential of the sales region.
Internal pricing factors of innovation product are:
a)cost of each of the implemented measures;
b)the required amount of profit and revenue;
c)the planned economic performance from the implementation of innovations.
In innovation management, there is a price management approach - this is the mechanism of the effect of prices on the implementation of an innovation, which consists of:
- pricing policy is a policy of education prices for innovative goods or services;
- pricing factors are factors that have an effect on the stage of development and implementation of innovations.
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4. Pricing of innovations |
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Factors affecting the pricing process |
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External |
Internal |
Market type |
Organization and marketing goals |
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Consumer price-to-product ratio |
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assessment |
Product strategy place in |
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marketing complex |
Competition |
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Economy situation of the country |
Expences |
Inflation level |
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Pricing management organization |
Sales channel participants |
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State legislation |
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Fig.4.1. Internal and external factors affecting the pricing process
The cost of innovative product and services on the market is the interaction of the total economic factors of a particular production with potential supply and demand. The cost of an innovative product is determined by the result, which gives the product in production and market.
Pricing for innovative products is affected by a number of pricing factors. The most important of them are as follows.
1. Supply and demand. The higher the demand for innovative products, the higher the price for them is established. The price of
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Innovation management
demand means the highest price. Improving the financial condition of buyers increases demand, and vice versa, so the accounting of the income of buyers is an important factor in determining the volume of demand.
2.Type of market. The innovation sphere is characterized by oligopoly markets because of small number of largest companies dominance or a pure monopoly market. In these cases, the seller of an innovative product, service or technology can significantly affect prices.
3.Expenses for the production and sales of innovative products.
Expenses determine the minimum level of prices. It is necessary that the prices to be set reimburse the costs for the production and sale of the innovative product, service or technology (break even) and ensure the desired profit.
4.Strategy of the innovative enterprise. If the goal is to maximize profits, the prices that provide the greatest mass of profit are used. If we are talking about the survival of the enterprise, then there is a policy of low prices, their reduction to the highest possible level. If the quality of the products rises, then the prices allow compensating for the achievement of this quality, the price is built on the principle: high quality is a high price.
5.Profit as major part of the pricing. Relative form of profit in the price calculation is the profitability of the corresponding products, services, technologies. When determining profit, the price includes the upcoming payments and expenses, the source of which is company’s profit. These expenses include: taxes related to the financial results of the enterprise; profit taxes to the federal and regional budgets; loans payment previously taken from banks; development funds; material incentives; dividends payment, reserve fund deductions etc.
6.Legal conditions of the innovative product contract. The more rights transferred to the buyer for the use and distribution of an innovative facility, the higher its price may be. The more risks the buyer incurs, the more justified will be his demand for price reduction.
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4.Pricing of innovations
7.Direct and indirect forms of state regulations for prices and tariffs of innovative product, service or technology. This refers to the state impact on price levels, the possible limits of their changes, the normative standards of profitability, tax rates, customs duties, the Central Bank's rates on loans, etc.
8.Specific terms of the transaction. For the urgency of the work, the availability of additional technical improvements or their absence, price discounts or mark-ups are possible.
The price of innovation should take into account:
the period of application of the innovation, limited by moral
interest;
the result of the application of innovation, expressed in the accumulation of additional profits from the production of innovation;
distribution of the result from the application of innovation between the seller and the buyer.
The pricing process of an innovative product may include a chain of 6 stages: setting pricing objectives, determining product demand, estimating production costs, evaluating competitors' prices, choosing a basic pricing model, and adjusting prices as market conditions change (Fig.4.2).
The first stage of pricing includes setting the pricing problem. Setting the pricing objective will directly depend on the overall strategy of the company due to the fact that its pricing policy must be consistent with the goals and objectives of the company. A company that sets itself the task of surviving in the market or maximizing its share in sales, it is recommended that it adhere to a low price strategy.
The second stage involves determining the demand for the product. Considering the fact that the volume of demand has a direct impact on the quantity of goods produced, the demand will also determine the amount of costs for the production of a unit of production.
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Innovation management
ISetting pricing objectives
II Determining product demand
IIIEstimating production costs
IV Evaluating competitors' prices
V Choosing a basic pricing model
VI Adjusting prices as market conditions change
Fig.4.2. Pricing process stages of an innovative product
The third stage includes an assessment of the cost of production of the product. It is required to determine the level of variable costs at different production volumes. It is also necessary to estimate the fixed costs of production. In this case, special attention should be paid to the costs of the components of the marketing complex of the product, since this can directly affect consumer demand.
The fourth stage of pricing involves assessing the quality of competing products and prices. If the company is an innovative monopolist, then when determining the price, you can either skip this stage, or carry out a price analysis of the nearest replacement products (indirect competitors), if any. In the opposite situation, when determining the price, you need to take into account what your direct and indirect competitors offer in terms of price and quality of products or services.
The fifth stage involves choosing a base pricing model for a new product or service. In theory, when determining the price, one should take into account the maximum number of factors, however, with real
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4. Pricing of innovations
pricing, most often some factor will dominate. The choice of the dominant factor depends on the general and pricing strategy of the company.
The six stage of pricing includes price adjustment depending on current market conditions. In the process of setting the price for a new product, a large number of market factors must be taken into account as consumer demand, inflation, exchange rates, changes in legislation, etc. Pricing for innovative products should be based on information obtained from market research, as well as intra-company information. The amount of information and depth of study on a particular factor depends on the choice of the basic pricing model.
The price for innovation is determined by such pricing methods
as:
-direct calculation of the cost of the innovative product, service or technology given the projected profitability;
-calculation using market valuations;
-calculation using the analysis of consumer needs by price level, taking into account consumer properties and the quality of innovation;
-comparison of the quality of innovation with the productanalogue;
-setting a conditional price, taking into account changes in the parameters and characteristics of innovation;
-applying the price of the prototype and recalculation relative to the industrial design.
Economic efficiency of innovations and methods of its analysis.
To assess the overall economic efficiency of innovation, a system of indicators can be used: integral effect; profitability index; rate of return.
The integral effect is the sum of net present value (NPV), the value of the differences in results and innovation expenses for the settlement period, reduced to one, usually the initial year, that is, taking into account the discounting of results and costs. Integral effect also has
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Innovation management
other names, namely: net discounted income, net present value or net reduced effect.
Profitability index. The method of discounting, considered by us, is a method of measuring the different costs and incomes, it helps to choose the direction of investing in innovation, when these funds are especially small. This method is useful for organizations that are in a subordinate position and receive from a higher management already a tightly budgeted budget, where the total amount of possible investments in innovation is unambiguously determined. In such situations it is recommended to rank all available variants of innovations in order of decreasing profitability. As a measure of profitability, you can use the profitability index. The profitability index is the ratio of the reduced incomes to the innovative expenses listed on the same date.
The profitability index reflects in the numerator the amount of income reduced by the time the innovation was launched, and in the denominator - the amount of investment in innovation, discounted by the time the investment process began. Or else you can say - here we compare two parts of the flow of payments: income and investment. The profitability index is closely related to the integral effect, if the integral effect is positive, then the profitability index > 1 and vice versa. With profitability index > 1 an innovative project is considered cost-effective. Otherwise, profitability index <1 is ineffective.
The rate of return represents that rate of discount at which the size of the discounted incomes for the certain number of years becomes equal to innovative investments. In this case, the revenues and expenses of the innovation project are determined to the calculated moment of time. This indicator differently characterizes the level of profitability of a particular innovation solution, expressed by the discount rate at which the future value of cash flow from innovation is reduced to the present value of investment funds. The norm of profitability has other names: the internal rate of return (IRR) or, rate of return on investment.
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4. Pricing of innovations
Abroad, the calculation of the norm of profitability is often used as a first step in the quantitative analysis of investments. For further analysis, those innovative projects are selected, the internal rate of return of which is estimated at not less than 15-20%. The rate of profitability is determined analytically, as such a threshold value of profitability, which ensures that the integral effect calculated for the economic life of innovations is equal to zero. The resulting calculated value is compared with the rate of profitability required by the investor. The issue of adopting an innovative solution can be considered if the rate of return is not less than the amount required by the investor. If the innovative project is fully financed by a loan from the bank, then the rate of return indicates the upper limit of the permissible level of the bank interest rate, the excess of which makes this project economically inefficient. In the case of funding from other sources, the lower limit of the value of rate of return corresponds to the price of the advanced capital, which can be calculated as the average arithmetic weighted amount of the payment for the use of the advanced capital.
Discussion questions:
Choose an example of innovation product, service or technology.
1.What kind of internal and external factors are affecting the pricing process of this particular innovation product, service or technology?
2.What are the pricing process stages of this particular innovative innovation product, service or technology?
3.What are the traditional pricing methods? How suitable are these methods for this particular innovation product, service or technology?
Research topic:
Think about major players on oligopoly markets (Coca-Cola & Pepsi, Boeing & Airbus. Mercedes & BMW, Microsoft & Apple etc.).
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Innovation management
Provide comparative analysis, how giant corporations were acquiring their smaller competitors? Find information about pricing for such bargains. What was the size of profit?
Giant corporations compete at the consumer market. Features oligopolies limit the entry of new companies. The main obstacle is the large investment that is required for large-scale production. The small number of companies at the market does not allow raising competition with lower prices, which is sharply reflected in profits. Therefore, more effective ways to fight for competition are used - this is quality, technical excellence, warranty periods for the product, payment terms. Based on these findings, one can identify the main features of oligopoly, including small number of companies provide all buyers; a significant barrier to the entry of new firms into the market; the interdependence of firms in one industry, the restriction in price and production volumes.
Practical Exercise:
Investment in business amounted to 5,000,000 rubles. Expected earnings (CFi) for 5 years will be:
2019 - 1,000,000 rubles.
2020 - 1,500,000 rubles.
2021 - 2000 000 rubles.
2022 - 2500 000 rubles.
2023 - 3,000,000 rubles. Discount rate is 20%.
Required to calculate:
1. Net Present Value (NPV) for 5 years,
NPV=∑CFi/(1+r)i – I, where I – investment sum.
∑CFi/(1+r)i – net cash flow sum.
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