Book 8 of 52 in the Mitch’s Notes Project
Why This Book?
The point of this book is to get you to embrace a new paradigm: Understanding if customers are willing to pay for your invention, before you commit too many resources to building and launching it, will dramatically increase your likelihood of success.
Like Play Bigger, Monetizing Innovation is a must read. It is not only a valuable framework for CEOs revisiting price or launching a new product, but it is also for an entrepreneur mulling an innovation.
As alluded to earlier, I am fan of iterative experimentation in startups. Pricing is no exception. This book will help you systematically get it right. Better yet, it will help you get it right from the outset. You do that by designing the product around the price.
You should buy the BOOK. It is written by two senior members at Simon-Kucher, the world’s largest pricing consultancy.
Category: Marketing; Pricing
What is in it for you?
- 75% of VC startups fail
- 65% of products fail at a cost of $260B per year
- 83% of companies face downward pricing pressure
- R&D is more expensive
- Increased competition from startups, globalization, and the pace of innovation is accelerating.
You can’t afford to get this wrong (at least over the long term). Survival is on the line. That is what is in it for you.
Success is defined by bringing new products to market, expanding our reach. The pace of change is accelerating worldwide. For many of us, innovation is no longer a question of prioritization or investment; it’s a question of survival. Yet the failure rate for innovation is shockingly high. Nearly three out of four new products or services miss their revenue and profit goals. Many of those crash and burn entirely, and some take their companies with them.
New products fail for many reasons. But the root of all innovation evil is the failure to put the customer’s willingness to pay for a new product at the very core of product design.
Price is more than just a dollar figure; it is an indication of what the customer wants — and how much they want it. It is the single most critical factor in determining whether a product makes money, yet it is an afterthought, a last-minute consideration made after a product is developed.
Market and price, then design, then build. In other words, design the product around the price.
Where Should You Start?
Diagnose The Problem
The 4 Pricing problems come with specific recommendations. Startups typically fall into feature shocks and minivations. Pay special attention there. Also, notice there is one thing that solves all of these problems. Make sure you talk about willingness to pay early and often.
Solve the Problem
Chapter 4: Have the Willingness to Pay Talk Early: You Can’t Prioritize Without It. Have the “willingness to pay” talk with customers early in the product development process. If you don’t do it early, you won’t be able to prioritize the product features you develop, and you won’t know whether you’re building something customers will pay for until it’s in the marketplace.
Chapter 5: Don’t Default to A One-Size-Fits-All Solution: Your Customers are Different. Don’t force a one-size-fits-all solution. Whether you like it or not, your customers are different, so customer segmentation is crucial. But segmentation based on demographics — the primary way companies group their customers — is misleading. You should build segments based on differences in your customers’ willingness to pay for your new product.
Chapter 6: When Designing Products, Configuration and Bundling is More Science Than Art. Product configuration and bundling is more science than art. You need to build them carefully and match them with your most meaningful segments.
Chapter 7: Go Beyond the Price Point: Five Powerful Monetization Models. Choose the right pricing and revenue models, because how you charge is often more important than how much you charge.
Chapter 8: Price Low for Market Share or High for Premium Branding: Pick the Winning Pricing Strategy. Develop your pricing strategy. Create a plan that looks a few steps ahead, allowing you to maximize gains in the short and long term.
Chapter 9: From Hoping to Knowing: Build an Outside-In Business Case. Draft your business case using customer willingness-to-pay data, and establish links between price, value, volume, and cost. Without this, your business case will tell you only what you want to hear, which may be far afield from market realities.
Chapter 10: The Innovation Won’t Speak for Itself: You Must Communicate the Value. Communicate the value of your offering clearly and compellingly; otherwise you will not get customers to pay full measure.
Chapter 11: Use Behavioral Pricing Tactics to Persuade and Sell: Customers are Irrational. Understand your customers’ irrational sides, because whether you sell to other businesses or to consumers, your customers are people. You should take into account their full psyches, including their emotions, in making purchase decisions.
Chapter 12: Maintain Your Price Integrity: Avoid Knee-Jerk Repricing. Maintain your pricing integrity. Control discounting tightly. If demand for your new product is below expectations, only use price cuts as a last resort, after all other measures have been exhausted.
Part I: The Monetizing Innovation Problem
Chapter 1: How Innovators Leave Billions on the Table
Why Porsche is Better than Dodge (Duh)
Porsche Situation: In the 1990s Porsche was in financial distress. They needed an innovation — a new car. Their innovation was twofold: recognizing a market opportunity for a Porsche SUV and more importantly, how to develop that innovation.
Porsche Action: Rather than guessing what the customer wanted they asked them. They surveyed and measured customers’ preferences, features, and most importantly what they were willing to pay for it. They removed features the customers did not value, even if the engineers loved them. They designed the car around the price.
Porsche Results: The Cayenne generated the highest profits per car in the entire industry. The Cayenne accounts for half of the company’s total profit and erased the Company’s financial distress and increased cash reserves.
Dodge Situation: Dodge also needed a car.
Dodge Action: Development process was exhaustive. Intense. They designed it, built it, rethought it, until in their opinion it was “perfection.” Then a price was slapped on.
Dodge Results: The Dodge Dart sold ¼ of what analysts expected and layoffs resulted.
Take away: don’t wreck yourself by designing the product without thinking about the price. Also, Dodge, bleh.
Chapter 2: The Four Flavors of Monetizing Innovation Failure
Startup companies are much more likely to possess Feature Shock and Undead pricing problems. However, some product launches are treated as Minivations and startup companies with Hidden Gem technology may not see the need for a pivot. Regardless of the problem you may encounter, there are certain things you can do to find the solution.
Feature Shock — When you Give Too Much and Get Too Little
Feature shocks happen when you try to cram too many features into one product, creating a confusing and often expensive mess. In a sincere effort to have it be “all things to all people,” you launch a product that pleases few. The result is the product’s value is less than the sum of the parts. Due to its multitude of features — none of them a standout — these products are costly to make, overengineered, hard to explain, and usually overpriced.
Amazon is a decent startup story, but they fell victim to feature shock pricing. Who remembers the Amazon Fire Phone? I only vaguely remembered it. Amazon is known for its “outside-in” and customer-first focus, but the Fire Phone is the exception.
The Amazon Fire Phone was innovative for 2014. It had a huge screen (4.7"), 32 GB of storage, bluetooth, and a new technology called Dynamic Perspective. Dynamic Perspective involved 4 cameras, facial recognition, and the ability to create 3D effects without glasses. [I’m looking at the iPhone X, huh.]
Amazon priced this device at $199 with a 2yr contract and $649 without [My phone is a rip-off!] Aside from the high price at the time the phone’s battery died quickly [wait a minute did I actually buy the Fire phone?!]
This type of scathing review was typical
The Fire’s defining features are fun, but I can’t help but feel as though they’re merely gimmicks designed by Amazon to demonstrate the company’s brilliance — and at the expense of battery life, to boot. Dynamic Perspective might be useful in a few cases (games, mainly), but it won’t provide the user with functionality they’d sorely miss if they went with an iPhone or flagship Android device.
Not only is the Fire lacking in useful new features, but its high price…guarantee[s] its irrelevance…so why come out with a smartphone that isn’t particularly convenient, and isn’t particularly cheap? By no means is the Fire a horrible phone, but it’s a forgettable one. You might want the eventual Fire Phone 2, perhaps, but for now, you’re better off sticking with what you know.
Four months after launch the price was cut to $.99 with a two-year contract, or $449 without one. Eventually the Fire Phone ended in a $170M write down “largely attributable to unsold Fire Phone inventory.” ouch.
You may have a feature shock if you say: “But we can also add this” “Customers don’t know what they want, so we need to decide what to build.” “One size should fit; our market is not segmented.” Let’s build it, then position it.” Let’s get something out there.”
Minivation — When You Ask for Too Little, That’s What You Get
No one wants to sell his or her idea short. Minivations are products that tap neither a product concept’s full market potential nor its full price potential. Companies that fall into the minivation trap underexploit the market opportunity and the price they could have charged, thereby robbing themselves of profits. Minivations go down as undermonetized products cursed with a “what might have been” tag.
A technology manufacturer built a new component and sold it for $.85 (a full $.25 more than the previous generation. Their buyer repackaged the component and sold it for $50.00 more than their previous product primarily because of the new component’s capabilities.
The component company failed to ask this question: “What value does this component bring to our customer and its customers, and what portion of that value can we capture?” Instead, it asked, “What does this component cost to make, and what minimum margin do I need to add on top of that?”
You may have a feature shock if you say: “I don’t want to sign up for a big number.” “I don’t want to over price. I would rather be conservative.” “With our margins, we don’t need to worry about price.” “It’s good enough.” “We need to penetrate the market.”
With a hidden gem product, a company has a brilliant, even revolutionary idea but fails to both recognize it and quantify the product’s value to customers. Or the company decides it lacks the capabilities to bring the unusual idea to market. Hidden gems often end up in limbo, neither launched nor killed. They often don’t make it to market, but if they do, they arrive undervalued, as freebies or deal sweeteners.
Everyone knows that Kodak owned the camera market. What people don’t know is that they originally patented the initial technology for digital cameras, but that technology was buried.
As in the Kodak case, teams become complacent about their firm’s successful, preexisting business model, and the company stagnates. The big miss here lies in failing to recognize the value and often disruptive power of the hidden gem.
You may have a hidden gem if you say: “We don’t know what to do with this.” “This isn’t business as usual for us.” We don’t have a process for that.” We’ll throw that into the deal.” “It’s not in our DNA.” “This goes against our culture.”
The term “undead” historically has been used in fiction to refer to dead people who come back to life, such as vampires and zombies. Applied to monetizing innovation, an undead product is one that still exists in the marketplace, but demand is virtually nonexistent. The product, for all intents and purposes, is dead, yet it continues to “walk around” like a zombie.
Segway scooters were going to revolutionize the market like scooters has. But at a $3,000 to $7,000 price point demand was tepid at best. The value proposition for Bird and Lime is it is a fast convenient way to get from point a to b. Segway, not so much. Same with Google Glass, New Coke, Harley perfume, etc.
It’s easy to recognize that your innovation is undead. When an undead is in the making, you become delusional and detest any evidence that goes against your beliefs. You resist objectivity and keep investing time, feeling you have come too far. Once the product is in the market, your sales teams can’t sell it, and it causes them to miss their targets — by a lot.
You may have an Undead if you say: “I’m not going to be the one who says ‘no’.” “Personally, I’d never buy this, but” “Screw what the research says; I know this will work.” Let’s wait for more evidence before we pull the plug.” “We’ve come too far. If we kill this now…”
Chapter 3: Why Good People Get it Wrong
Myth #1: If you simply build a great new product, customers will pay fair value for it. “Build it, and they will come” is the mantra. Why we believe it: because Star Wars, FedEx, Harry Potter were all rejected by directors, businessmen, and editors and were wild successes. But they are the exceptions not the rule.
Myth #2: The new product or service must be controlled entirely by the innovation team working in isolation. Why we believe it: because Henry Ford said that customers would have wanted a faster horse. Indeed, the Innovators Dilemma, Different, Play Bigger, etc. put a premium on this as well. The fine line that must be walked is that of being different in a way that we are confident will resonate with customers. Confident because you have talked, consulted, argued, and shown the product to customers and more importantly, gauged their willingness to pay.
Myth #3: High failure rate of innovation is normal and is even necessary. Why we believe it: sports analogies.
Myth #4: Customers must experience a new product before they can say how much they’ll pay for it. Why we believe it: because its safe.
Myth #5: Until the business knows precisely what it’s building, it cannot possibly assess what it is worth. Why we believe it: a cost-plus mindset that ties willingness to pay with what it cost us to build.
Part II: Nine Surprising Rules for Successful Monetization
Chapter 4: Have the Willingness to Pay Talk Early: You Can’t Prioritize Without It
The most important aspect of moving to a “design the product around the price” innovation process is finding out as early as you can whether customers value your innovation and would pay for it. You can only determine customers’ WTP by actually asking them — not by imagining what they will say.
Two pieces of information are important in this phase: customers’ overall WTP for a product (the price range they have in mind) and their WTP for each feature (so you know which features matter most and which features don’t matter at all).
Five types of research questions will help you get these answers. Best practices in having these discussions include positioning them as “value talks” (not as pricing discussions), expecting key insights to come from the simplest questions, mixing structured with unstructured questions, and not relying solely on quantitative data.
Willingness to Pay Frameworks:
- Direct, purchase probability: “what do you think could be an acceptable price?” “What do you think would be an expensive price?” “What do you think would be a prohibitively expensive price?” “Would you buy this product at $?”
- Purchase probability questions: “On a scale of 1 to 5, where 1 is, I would never buy this product and 5 is, I would most definitely buy this prdouct, how would you rate this product?” 4 or 5 you stop. Less than 3 lower the price and try again.
- Most–least: create a subset of your features and ask them to rank the features from most valuable to least. Change the subset for 5 different sets. You will end up with rich feature by feature feedback.
- Build-your-own: give them a list of features and ask them to build their “ideal product.” As they add features, the price increases. See where they stop with features and price.
- Purchase simulations: A.K.A Conjoint analysis. This is where you test the pricing of certain bundles of features. Changing bundles and prices. Definitely the most complex option and usually requires software and/or a consultant to manage. As expected, however, the results can be game changing.
CEO Self Assessment:
- Does our product development team have serious pricing discussions with customers in the early stages of the new product’s development process? If not, why not?
- What data do we have to show there’s a viable market that can and will pay for our new product?
- Do we know our market’s WTP range for our product concept? Do we know what price range the market considers acceptable? What’s considered expensive? How did we find out?
- Do we know what features customers truly value and are willing to pay for, and which ones they don’t and won’t? And have we killed or added to the features as a consequence of this data? If not, why not?
- What are our product’s differentiating features versus competitors’ features? How much do customers value our features over the competition’s features?
Chapter 5: Don’t Default to A One-Size-Fits-All Solution: Your Customers are Different
The message here is clear: You need to create segments in order to design highly attractive products for each segment. And you must base your segmentation on customers’ needs, value, and WTP. This way, segmentation becomes a driver of product design and development, not an afterthought.
Do Segmentation Right:
- Begin with WTP data — By clustering individuals according to their WTP, value, and needs data, you will discover your segments — groups of people whose needs, value, and willingness to pay differ.
- Use common sense — Practicality and common sense are as important as statistical indicators.
- Create fewer segments, not more — Serving each new segment adds significant complexity for sales, marketing, product and service development, and other functions. Smart companies start with a few segments — three to four — and then expand gradually until they reach the optimal number.
- Don’t try to serve every segment — The products and services you develop should match your company’s overall financial and commercial goals. A segment must deliver enough customers — and enough money — to make the investment worthwhile.
- Describe segments in detail in order to address them — Investigate whether each segment has observable criteria for customizing your sales and marketing messages to them.
Understanding customers’ needs and WTP will give you segmentation power. And segmentation power, in turn, is what gives you monetization power.
CEO Self Assessment
- Did we segment before we designed the product? If not, why not?
- What were the segments? How did we get to these? Which ones would we serve initially? Do they represent a sizable market?
- What criteria were they based on? How different are these segments in their WTP? Can we respond differently to each segment? If so, how?
- How did we describe the segments? What observable criteria do we have in these descriptions? Do our descriptions and observable criteria on each segment pass our sales team’s sniff test?
- How many segmentation schemes do we have in our company? Can we consolidate to one segmentation across product, marketing, and sales?
- Who in our company is responsible for segmentation? At what point in the innovation cycle does this person (or people) get involved?
Chapter 6: When Designing Products, Configuration and Bundling is More Science Than Art
Product configuration and bundling are your key building blocks for designing the right products for the right segments at the right price points. Product configuration is about putting the appropriate features and functionality — those customers need, value, and are willing to pay for — into the product; this process has to be done for each identified segment. Systematic product configuration prevents you from loading too many features into a product and producing a feature shock.
Doing product configuration right means you design a product with the right features for a segment — that is, just the features customers are willing to pay for. This is a core tenet of designing new products that will succeed in the marketplace.
Bundling means selling your products and/or services together. If done right, this will increase total profit because customers end up buying more than if the products were sold stand-alone. Also, customer satisfaction will go up because the buying decision is easier. Successful bundling benefits both you and your customer.
Do Configuration and Bundling Right
There are two key elements of the product configuration and bundling process and ten tips to remember.
- Establishing which features are leaders (must-haves), fillers (nice-to-haves), and killers (features that are deal killers), and
- Creating good/better/best options.
- Align offers with segments
- Don’t go beyond nine benefits or four products
- Create win-win bundles for you and the customer
- Don’t give away too much in the entry-level product. Look at customer distribution by product and upsell percentage to qualify a problem
- Hard bundles might not work and an a la carte bundle may be better
- Per product pricing needs to be higher than bundled pricing
- Messaging and communicating the value of the bundle is a sales opportunity depending on what product or feature they are after
- Bundle an integrated experience and charge a premium instead of a discount
- Don’t bundle for the sake of bundling
- Look for inverse correlations and exploit both by including the nice to have inverse.
CEO Self Assessment
- What are the product configuration/bundles we plan to offer? Why did we pick these offers? Do they align with our key segments? If not, why not?
- What are the leader, filler, and killer features for the new product or service our company is developing? How did we find out?
- Have we explored a good/better/best approach to product configuration and bundling? What do we expect sales to be for each product configuration? Is the share of the basic product configuration lower than 50 percent? If not, why not?
- Have we explored bundling our new product with existing products? What would be the benefits for us and the customers?
- Have we considered unbundling as an opportunity? What would be the benefits to customers and our business (if any)?
Chapter 7: Go Beyond the Price Point: Five Powerful Monetization Models
Monetization models can confer significant competitive advantage on a new product or service. How you charge trumps how much you charge.
Michelin’s new monetization model allowed the firm to fully capitalize on its new invention — that is, to monetize a tire that lasted much longer than the previous generation did.
Setting price by distance traveled delivered benefits to both Michelin and its trucking customers…Michelin took on the customer’s cost of product problems; if a tire fails early, Michelin bears the risk. On the flip side, when tires exceed quality expectations — say, when they last 20 percent longer than before — Michelin generates 20 percent more revenue per tire.
Michelin simply changed its monetization model. It was a brilliant move. Michelin soon boasted the biggest profits in the industry; by 2011, its earnings before interest and taxes were 25 percent higher than Bridgestone’s and more than three times Goodyear’s.
Pricing Models And When To Use Them
- Subscription —recurring revenue increases customer lifetime revenue, revenue predictability, cross-sell and upselling opportunities. Works well in online and offline services where the product is used continually, in competitive industries, and where it can reduce barriers to entry through large upfront payments.
- Dynamic pricing — airline industries, Uber offer dynamic pricing for peak demand times. Dynamic pricing boosts the monetization of fixed and constrained capacity. Complex model requiring extensive data analytics.
- Auctions — competition based pricing for goods and services. Google AdWords, eBay, and other two-sided marketplaces use auctions. Market determines price. If you can control inventory for an in demand product, you should consider this model.
- Alternate metric — industry per unit standard pay as you go. Customers pay when they use or benefit from the product. This can be exceptionally successful if you can align the metric directly to how customers perceive value. This can be effective if you are adept at predicting future trends. The alternative pricing model makes sense when your innovation creates significant value to end customers but you cannot capture a fair share of that value using traditional monetization models.
- Freemium — land and expand only works if you have low or no distribution costs and low fixed costs. To have a chance at converting free customers to paid customers, you need to test what benefits they will pay for and ensure a functional free experience. You also need to know exactly how many customers will actually be willing to pay. What’s more, you must avoid giving the farm away for free because it will leave your premium offering with very little value.
- Hybrid — mix-and-match from the options above
CEO Self Assessment
- What monetization model do we envision for our new product? Why is it the right one, and how did we choose it?
- Which models did we not pick, and why?
- What are the most important trends in our industry? How do they affect our choice of a monetization model? How do we plan to monetize our product if customer usage varies significantly? Which price structures have we considered and why?
- Do we have the right capabilities and infrastructure to execute the chosen monetization model and price structure?
Chapter 8: Price Low for Market Share or High for Premium Branding: Pick the Winning Pricing Strategy
A pricing strategy is your short- and long-term monetization plan. The best companies document their pricing strategies and make it a living and breathing document.
Documenting your pricing strategy will help get the executives in your company on the same page; more important, it will help keep you accountable. The price strategy document should have four building blocks.
- First, set clear goals and prioritize among conflicting goals (for instance, price to maximize revenue but ensure a 10 percent profit increase).
- Second, pick one of the three types of pricing strategies: maximization, skimming, or penetration.
- Third, set price-setting principles that define the rules of your monetization models, price differentiation, price endings, price floors, and price increases.
- Finally, define your promotional and competitive reaction principles to avoid knee-jerk price reactions.
Companies that have well-defined pricing strategies are 40 percent more likely to realize their monetizing potential than firms that don’t have them.
CEO Self Assessment
- Is there a pricing strategy document for our new product? If not, why?
- What are our pricing strategy goals? What are the relative priorities across goals (revenue, profit, share, customer lifetime value, and so on)? Is the management team aligned on these goals? How do we know?
- What pricing strategy type (maximization, penetration, or skimming) did we pick? Why did we choose it?
- What is the price elasticity of the new product? What does the pricing response (price elasticity) curve look like? What is the revenue/profit maximizing price point? How do we know all this?
- Did our team clarify the price-setting principles such as monetization models, price differentiation, and price endings? How do these principles compare with the ones we follow for existing products? Have such principles worked for us in the past?
- Do we have plans to deal with customer and competitor reactions? Who developed the plans, and how? Are those plans frequently updated?
Chapter 9: From Hoping to Knowing: Build an Outside-In Business Case
Products are almost never launched without some sort of business case. But 95 percent of the business cases we’ve seen are built from the inside out, not the outside in. Consequently, they fail to account for critical market information, particularly customer WTP and price elasticity.
If you don’t know what your customers will pay for your new product and how demand changes when you change the price, you simply don’t have a business case. Without this information, your business case will only tell you what you want to hear.
Business Case Checklist
- Make it a living, updated, strategic document
- Incorporate market size, volume, customer segments, offer structure (configurations and bundles), value, WTP, a monetization model, costs, and competing products and their pricing.
- Include price elasticity. Most companies avoid exploring price elasticity at this point, but it is the critical element in business cases.
- Use figures based on real facts.
- Attach risk assumptions to any input parameters that are inherently uncertain.
- Be realistic about goal tradeoffs between revenue, volume, margin, etc.
- Make sure your business case models your rivals’ possible reactions.
- Don’t focus the business case on just the new product.
- A strong business case will help you make decisions throughout the product development process and beyond.
CEO Self Assessment
- Does our new product business case include customer WTP data? What price elasticity is assumed in the business case? How did we come up with it?
- Are we modeling the four critical pillars in our new product business cases: price, value, volume, and cost? How are we making sure the linkages are preserved when we make changes to one of the elements?
- Are our business cases living documents that we check and update at project milestones? When was the last change, and why did we make it?
- Does the business case help us simulate different scenarios that may occur after product launch so we can make better decisions throughout the product’s life? What is a good example?
- Does the business case anticipate potential competitive responses to our launch and suggest how to react to them? How did we get to these competitive responses? What assumptions were made?
Chapter 10: The Innovation Won’t Speak for Itself: You Must Communicate the Value
Mastering the art of value communications is just as important as mastering the process of designing products that customers will pay for. If you can’t clearly communicate that value, how can you expect customers to understand why they need your new offering and why they should pay for it?
The most frequent root cause of the problem: People in functions charged with value communication are typically detached from the innovation process and thus come in too late. To fix this, integrate marketing and sales into the innovation team.
Create Compelling Messages
- Develop Benefit Statements, Not Feature Descriptions — Take each feature and ask yourself this: What does the customer achieve because of this feature? How do they measure performance? What are their priorities?
- Make Benefit Statement Segment-Specific — Your customers are different. The same value messages are not likely to work for all of your customer segments. You should tailor your value messages to the needs of each segment.
- Measure the Impact and Refine Your Value Messages — Specifically, you need to measure customer perceptions of the value you are communicating.
The book highlighted this example and I would like to take it farther.
First the consumer side of the business, their creative cloud. Here is where you start:
If you are a student and you want to learn more, here are the benefit statements you are greeted with:
If you are a business, this is what you see:
If you click in on those segmented categories you get clear benefits statements:
With the right tools, you can do the impossible. Get the world’s best desktop apps — including Adobe Photoshop CC, InDesign CC, and XD CC — plus cloud services that empower your team to work efficiently anywhere on any device. Updates are included with your membership, billing is consolidated, and you can easily manage your licenses from a centralized web portal.
You can make the argument that this works great for consumer facing products like Adobe’s creative cloud, but their enterprise Experience Cloud marketing is just as strong: LINK. Each product includes the benefits, the features, benefit comparisons, use cases, case studies, and an ROI whitepaper.
Startup companies are resource constrained in ways that Adobe is not, but Adobe’s marketing is setting an aspirational bar that startups should try and emulate.
CEO Self Assessment
- What benefits do our customers derive from our new products? Have we quantified these benefits? How did we go about it?
- Are the marketing and sales teams involved with the innovation team from the get-go, or are they plugged in toward the end of product development to create the value messages? If the latter, how do we fix the situation?
- To what extent are our value communications in tune with the benefits customers perceive? Have we tested our messages? If so, how? If not, why not? How do the messages change by customer segment?
- Did the entire innovation team (R&D, product, marketing, sales) check and approve the value communication materials we developed? How closely? Did anyone object? If so, why?
- What processes do we have to measure the effectiveness of our value messages? Have we used the matrix of competitive advantages as a framework to create our value messaging? How regularly are we planning to measure the effectiveness of our value messages?
Chapter 11: Use Behavioral Pricing Tactics to Persuade and Sell: Customers are Irrational
Both rational and irrational factors drive customer purchases, and this applies to business customers and consumers alike. Behavioral factors influence whether customers purchase your product and which configuration they choose.
Behavioral Pricing Tactics
- Compromise effect: Make decisions easier for people who can’t choose. If you are launching a new product, plan on having a compromise option.
- Anchoring: Set the context for value. Make sure you have an anchor product in your new product offering portfolio, and start every B2B sales negotiation for new products with a high anchor price.
- Price to signal quality: If it costs more, it reinforces the customer’s perception of quality. Pricing also has a psychological effect on how consumers view a product’s effectiveness. Pricing your product too low is worse than pricing it too high. If you start high you can still go down; if you start low you can hardly go up.
- Razor / razor blade pricing: Get a foot in the door. The customer’s upfront cost has a much bigger psychological impact than the total cost of ownership. Your pricing strategy should be to land a customer by showcasing the lower upfront costs and then expanding on a higher variable amount. Use this tactic only if you are 100 percent sure you can sell your downstream products to customers — your razor blades, printer ink, and so on.
- Pennies a day pricing: Reduce sticker shock and build loyalty. AWS quotes low prices to reduce the chance of sticker shock and customer resistance. Instead of displaying prices in the hundreds or thousands of dollars per server, AWS shows prices in dollars or even fractions of a penny for hourly prices. Put the proper thought into framing your price to make it look attractive — not just in coming up with the price.
- Psychological price thresholds: Avoid falling off the price cliffs. Identify the price thresholds for your products during your WTP conversations, graph them and price accordingly.
Before putting behavioral pricing tactics into play, you should try them out first through focus groups, controlled A/B tests, and large-scale experiments.
CEO Self Assessment
- Did we consider behavioral pricing tactics when developing the monetization strategy for our new product? If not, why not?
- Of the six new-product behavioral pricing tactics (compromise effect, anchoring, price to signal quality, razor/razor blades, pennies-a-day pricing, and psychological price thresholds), which ones work for our new products? Why?
- To be more specific: Do we have an anchor product for launch? Do we know the psychological price thresholds for our product? Have we spent time framing our pricing and not just coming up with a price point? How so?
- How did we test the effectiveness of our behavioral pricing strategy? What were the results?
Chapter 12: Maintain Your Price Integrity: Avoid Knee-Jerk Repricing
Losing price integrity with a new product means you’re cutting prices unnecessarily or too soon when sales are slower than expected. That erodes profit, customer lifetime value, and your brand. To maintain price integrity, you need to take a cross-functional approach to diagnosing the problem. It may turn out you don’t have a pricing problem at all. It may be the inability to communicate the substantial value of your product, a quality problem, a sales-force training problem, or another problem. Don’t assume first that you put the wrong price on your product.
That requires patience. Successful innovators teach their teams how to avoid confusing pricing problems with the quality and communications problems that can beset a new product. They do not approve price cuts before their team has suggested at least three nonprice actions that could be taken.
Perhaps most seriously, innovation leaders avoid price wars at nearly all costs. They realize it’s a slippery slope to counter competitors’ price reductions with more price reductions. Only the lowest-cost competitors can win that war.
CEO Self Assessment
- If sales are below target, what are the real reasons? How did we find out?
- How would the suggested measures solve the problems we identified?
- Does the way our product is perceived in the marketplace (by customers, channel partners, and so on) match the way we perceived it in our planning/business case? If not, what are we doing to correct that?
- If competitors decreased their prices, why did they do so? What could be their goals?
- What is the best possible reaction strategy? If the decision was to change our price, what nonprice measures were discussed? What competitive counterreaction do we expect? What situation will we be in after competitors react?
- How was our sales force prepared for the launch? (You should ask for the messaging strategies they were given to respond to competitors’ responses.)
Chapter 13: Learning from the Best Successful Innovations Designed Around the Price
Porsche — Veering Off the Sports Car Track to Create Winning Vehicles
In 2013 and 2014, the Stuttgart-based company’s operating margin was far above those of the three far bigger German luxury automakers Audi, BMW, and Mercedes.
No feature is sacrosanct at Porsche; even the smallest features are carefully considered. A crucial design and product configuration decision for Porsche was to determine which features should not go into the Cayenne and Panamera.
LinkedIn — Monetizing the World’s Largest Professional Network
LinkedIn has excelled in monetization because of their pricing process. Here it is:
- Hypothesis development: Innovation teams start with identifying the white space.
- Internal refinement: A cross-functional group of internal experts comes together to refine and pressure test the hypotheses.
- The gut-check: The concept must then pass an internal “smell test.” If both customers and the LinkedIn’s sales team give the concept a thumbs-up, the product team has the green light to start developing it.
- Building a precise model: After this stage, typically a larger scale quantitative study is commissioned to get more precise inputs (on product configuration, price models, and of course the WTP), in order to build a robust business case.
- Paid pilots: Instead of giving the product to beta-testers for free, LinkedIn typically goes to market and sells the beta version of the product. Why? “Our beta users have skin in the game by actually paying for the pilot tests.”
Drager — Collecting the Specs for Successful Industrial Products before Engineering
Dräger Safety has reaped the rewards of developing new products this way.
- Defining where to focus the target market in terms of geographic region, application, and industries.
- Identifying key decision makers and influencers.
- Launching qualitative research to observe and interview customers in their environments.
- Conducting a quantitative survey.
- Assessing competitive products.
Uber — Monetizing a Disruptive Innovation through Innovative Price Models
There are two levers to Uber’s pricing strategy — the dynamic pricing (Surge Pricing) and penetration pricing.
The dynamic model intentionally reduces demand and at the same time increases supply in order to maximize availability and reliability.
The lower the price point, the more types of scenarios I can get the customer to think of this as an alternative to whatever the substitute was — public transport, renting a car, borrowing a car, owning a car, etc.
Swarovski — The Payoff from Crystal-Clear Ideas on What Consumers Will Pay
Worldwide segmentation and WTP conversation sought to identify value drivers. They then created a tiered pricing system to message that value with stunning results.
Optimizely — How to Price Breakthrough Innovation
Created innovative website A/B testing technology, but didn’t know how to price it. They segmented the market had WTP conversations and developed a unique monetization model. They selected a usage based monetization model. Customers measured value based on unique visitors and so the priced based on the number of unique visitors included in a A/B sample. It lowered conversion barriers, simplified the sales process, and increased customer long term value.
Mastering the approaches laid down in this book has had two big and beneficial impacts on the company. First, the company can now determine very early in the development process which products to weed out of the pipeline for commercial reasons. It has a clear idea of which therapy their paying customers will value and which they will not. The benefit has been huge: freeing up money and people to work on the products with the best chances of clinical and commercial success.
The second big benefit is getting the market to embrace its new drugs faster. With better insights on what customers needed most and how to demonstrate that value, the company’s product messages have been much more effective.
Chapter 14: Implementing the Designing Around the Price Innovation Process
In order to implement the lessons taught in this book the authors outline four steps.
- Jump Start — Identify which products are feature shocks, minivations, hidden gems, and undeads. Answer the CEO self assessment questions at the end of each chapter. By now, you will have completed the diagnosis of your firm’s current innovation monetization process. You should have a crystalline picture of its strengths and weaknesses.
- Pilot — Select a candidate — a real, new product idea that is in your pipeline. Appoint a monetization hero to the team and putting that person in charge. Create a cross functional team. The team should be accountable for their ideas and empowered to disagree. The team should have a budget to survey and target customers.
- Scale — repeat steps one and two measuring, tracking and reporting KPIs along the way
- Stick — create a culture that embraces the monetizing innovation culture.
Avoiding the pitfalls
- Putting All Your Eggs in One Basket — cannot be dependent on one person or group. It is an organization change and process.
- Not Forming a Cross-Functional Team — diverse perspectives are must haves not nice to haves
- Banking on the Big Bang — it is a process that takes time
- Imagining One Size Fits All — make it your own
- Having Too Many Opt Outs — created automated workflows with stage gates
- Getting Blinded by Science — it can’t at won’t be perfect before you design the product. You are initially looking for a ballpark idea of an acceptable price. Iterate price as you iterate the product.
- Avoiding Messy Information — qualitative information is difficult to categorize. See the forest not the trees
- Cheaping Out — create budgets for both people and money. If you don’t you will cheap out.
- Letting the C-Suite Delegate Everything —When C-level leadership is not committed in body and soul, if monetizing innovation is not one of your top two organizational priorities, and if that is not reflected in C-level involvement, we would advise you not to embark on the journey.