Podcast Summary
Pricing before product design: Understand market's willingness to pay and select monetization model before designing product to increase chances of success and reduce failure rates.
Pricing should not be an afterthought in the product development process. Madhavan Ramanujan, the author of "Monetizing Innovations," argues that pricing should come before product design and development. He shares that many companies focus too much on creating innovative products but neglect the importance of understanding how to monetize them. This approach often leads to uncertainty and hoping that the product will find a willing market and price. Ramanujan emphasizes the importance of researching and understanding the market's willingness to pay and selecting the right monetization model before designing and building the product. This approach can increase the chances of success and reduce the risk of high failure rates in innovation.
Pricing conversations early in innovation process: Early pricing conversations save time and resources by ensuring product resonates with customers, leading to successful innovations and improved designs.
Entrepreneurs and companies should have pricing conversations with customers early in the innovation process instead of waiting until after the product is built. This approach, called monetizing innovation, allows businesses to design products around what customers need, value, and are willing to pay for. Porsche's creation of the Cayenne SUV is an excellent example of this approach in action. In the early 1990s, Porsche identified a potential need for an SUV under the Porsche brand and tested the market to see if customers would pay for it. They then designed the product based on customer feedback, even building a full-scale prototype before manufacturing. This early testing and learning led to the creation of a highly successful product that now accounts for over half of Porsche's profits. By having pricing conversations early and often, businesses can save time and resources by avoiding the production of products that may not resonate with customers. Additionally, understanding why customers may not be willing to pay for a product can provide valuable insights into how to design and improve it.
Understanding customer's willingness to pay for innovation: To validate innovation, companies need to achieve product-market-pricing fit by having conversations with potential customers to understand their needs, value, and willingness to pay.
Understanding the willingness to pay of your customers is crucial for the success of your innovation. This concept goes beyond just positive feedback and requires a deeper conversation about pricing. Companies in the tech space often aim for product-market fit, but it's not enough. To truly validate innovation, you need to achieve a product-market-pricing fit. This means having conversations with potential customers to understand if they will pay for your product and how much they value it. Price is not just a dollar figure but a measure of value. By thinking of price in this way, we can remember that it is the same thing as value, represented by the Latin word "pretium." The best companies identify the problems they're trying to solve and the unmet needs of their customers. They then segment their customer base based on what customers need, what they value, and what they're willing to pay for. By having these conversations with potential customers, you can identify clusters of customers with common needs and tailor your product to meet their specific requirements. In essence, the willingness to pay conversation is about structurally executing a pricing strategy that truly understands if customers value your innovation enough to pay for it. It's important to remember that customer needs are heterogeneous, and identifying the right customers and their needs is a critical first step in the innovation process.
Productize offerings for specific customer segments: Understand customer needs, behaviors, and pain points to productize offerings for different segments and offer the right product at the right price.
Successful companies don't just build a product and then try to sell it to different segments. Instead, they productize their offerings to specific customer segments based on their needs, values, and willingness to pay. This approach allows companies to build the right product for each segment and offer it at the right price. For example, Porsche and Apple create different versions of their products to cater to various segments, and this strategy has contributed significantly to their success. To have a conversation with a prospective customer about this, start by understanding their needs, behaviors, and pain points. Then, present the benefits of your product and how it addresses those needs. By doing so, you'll be able to identify if the customer is willing to pay for your solution and if your product is a good fit for their segment. Remember, one size does not fit all, and productizing to segments is key to offering the right product at the right price.
Determining Pricing Strategies through Customer Insights: Ask customers the right questions to identify price ceilings, use comparisons to inform decisions, and consider acceptable, expensive, and prohibitively expensive prices to set effective pricing strategies.
Companies can effectively determine pricing strategies by asking the right questions to customers, rather than relying on arbitrary numbers or guesswork. One method is to gradually increase prices until a customer objects, indicating the ceiling price. Another approach is to put customers in a relative mindset by comparing the new product to an existing product or service, allowing them to make informed decisions. Additionally, asking about acceptable, expensive, and prohibitively expensive prices can help identify psychological thresholds and validate them at scale. Ultimately, these strategies enable companies to set prices that reflect the value they bring to customers while considering market dynamics.
Determining Customer's Willingness to Pay for Effective Pricing Strategy: Understand customer's value perception and willingness to pay through various methods. Identify leader, filler, and killer products for effective product configuration. Optimize pricing and increase revenue.
Understanding the willingness to pay of buyers is crucial for effective pricing strategy. This can be achieved through various methods, from simply asking customers what they're willing to pay, to more advanced techniques such as purchase simulations. The key is to put buyers in a decision-making mindset and help them understand the value and benefits of the product. The concept of leaders, fillers, and killers is useful when it comes to product configuration. The leader product is the primary offering that customers are interested in. Filler products are complementary items that, when bundled with the leader product, can increase sales. Killer products, on the other hand, can negatively impact sales when bundled with other items. The goal is to identify these product dynamics and configure offerings accordingly. In essence, pricing strategy is a crucial aspect of business success, and understanding the willingness to pay of buyers is a key component of effective pricing. By using various methods to determine what customers are willing to pay and how to configure offerings, businesses can optimize their pricing and increase revenue.
Focusing on pricing model or monetization strategy instead of just pricing: Companies can improve revenue by shifting communication from features to benefits and carefully choosing the right pricing model.
Companies can make significant mistakes even when they have the right product and pricing conversation early. Two common pitfalls are focusing too much on pricing as the amount to charge rather than the pricing model or monetization strategy, and talking about features instead of benefits. The example of SmugMug illustrates this well, as they saw double-digit revenue improvements by shifting their communication from features to benefits. Additionally, companies should carefully consider how they will charge their customers, as different pricing models like subscription, pay-as-you-go, and dynamic pricing can greatly impact success. For instance, a burger business typically uses a simple pricing model based on the product, while a hybrid model combining subscription and usage-based pricing may be more suitable for other businesses. Effectively communicating the value of benefits and choosing the right pricing model are crucial for business success.
Understanding the right pricing model for your business: Businesses should aim to capture at least 20-25% of the economic value they bring to the table by considering time savings, money savings, and signaling value, and aligning price accordingly.
Identifying the right pricing model for your product or service is crucial for the success of your business. It's essential not to gravitate towards one model just because others are using it, but to truly understand what model aligns best with the value being generated for your customers. The key dimensions to consider include time savings, money savings, and signaling value. However, it's important to dig deeper and understand where these savings come from and what economic value they represent. As a rule of thumb, businesses should aim to capture at least 20-25% of the economic value they bring to the table. This alignment of price to value and controlling costs to maximize margin is key to long-term success. It's important to note that this is not a cost-plus pricing strategy, but rather a focus on understanding the market's willingness to pay and aligning your price accordingly.
Effective Pricing: Science or Art?: Early pricing conversations, segmentation, and avoiding feature shock and minivan failure can lead to successful pricing strategies
Entrepreneurs often underestimate the importance and science of pricing their products effectively. They tend to approach pricing as an art rather than a science, leading to suboptimal results. Surprisingly, having pricing conversations early and often, understanding segmentation and productizing to specific segments, and avoiding common pricing failures such as feature shock and minivan, can significantly improve pricing strategies. Feature shock occurs when a product has too many features, leading to customer confusion and lack of resonance. Minivan failure happens when a company fails to charge the right price for a product with strong product-market fit. By understanding these concepts and implementing them early in the product development process, entrepreneurs can create successful pricing strategies and avoid common pitfalls.
Maximizing Innovation Revenue: CEO Involvement in Monetization Decisions: CEO involvement in monetization decisions leads to 35% better performance in all KPIs, preventing minivation, discovering hidden gems, and avoiding undead innovations.
Companies often fail to maximize the potential revenue from their innovations due to various reasons. One reason is not asking the right price for a product with perfect market fit (minivation). Another reason is ignoring hidden gems, which are products that go against the company's DNA but have the potential to bring significant revenue if properly monetized. The third reason is producing "undead" innovations, which are either the wrong answer to the right question or an answer to a question no one cares about. Companies that involve their CEOs or founders in monetization decisions are 35% more successful in all kinds of KPIs compared to those that don't. Pricing, monetization, and growth are 100% CEO topics, and setting the right culture and asking the right questions can lead to profitable growth rather than growth at all costs.
Subscription vs Usage-based Pricing: Choosing the Right Model: Choose a subscription model for predictable bills, ongoing value, and similar usage. Opt for usage-based for intermittent usage, episodic value, and less commitment.
When it comes to choosing between subscription and usage-based models for pricing in businesses, there are certain heuristics or guidelines that can help leaders make informed decisions. A subscription model is more suitable when customers demand predictable bills, usage is similar month over month, or highly variable but the value delivered is ongoing. Usage-based models, on the other hand, make sense when customers want to commit less, usage is intermittent or episodic, and the value delivered is also episodic. It's important to remember that predictability and fairness are not the same as transparency and fairness, which are linked to usage and the value delivered. The choice between the two models depends on the specific business and customer needs.
Impact of Pricing on Business Operations and Customer Perception: Pricing should reflect the value delivered to customers, be clear and defensible, and consider usage patterns and cost structures when choosing a pricing strategy.
The pricing model of a business significantly impacts its operations and customer perception. A pay-as-you-go model can be beneficial when costs scale with usage, but it requires clear attribution and agreement on a metric for measuring value delivered. High-priced products often signal higher quality and may require education to justify the cost, while low-priced products should be intuitive and easy to use. Ultimately, pricing should reflect the value delivered to customers and be defended with clear communication. The discussion also touched on the importance of understanding the relationship between frequency of usage, frequency of value delivery, and cost of value delivery when considering different pricing strategies. Companies like AWS and Twilio, with high usage and low gross margins, particularly benefit from usage-based models. However, the behavior of customers and their perception of value can change based on absolute prices, and it's essential to educate customers on the value they receive at any price point.
Steve Jobs' Pricing Genius: Identify problems, unmet needs, and test willingness to pay for solutions to ensure successful launches and growth
Steve Jobs was not only a product genius but also a pricing genius, and it's a misunderstood concept that he didn't care about market validation or customer feedback. Instead, entrepreneurs should identify problems and unmet needs, then come up with solutions and test the willingness to pay and market acceptance. Jobs' pricing strategy for Apple products, such as the iPhone, involved launching at high prices and gradually reducing them for different market segments. A key question business leaders should ask is "How do you know that your customers would pay for this innovation?" to ensure a successful launch and growth. The book provides approachable strategies for understanding customer willingness to pay and testing pricing models.
The power of kindness and mentorship in career growth: Building strong relationships and being open to opportunities can lead to meaningful connections and career growth. Kindness from mentors and colleagues can have a significant impact on one's professional journey.
The importance of kindness and support from mentors and colleagues in one's career. The speaker, Madhavan, shared a personal story about how Duncan Robertson, the CFO of OpenTable at the time, introduced him to Bill Gurley, who became a big proponent of his work and a valuable connection. This introduction came out of Duncan's kindness and generosity, and it significantly impacted Madhavan's career. Madhavan expressed his deep gratitude towards Duncan and Bill, and acknowledged that he would not be where he is today without their support. This experience underscores the importance of building strong relationships in one's professional network and being open to opportunities that come from unexpected places. Additionally, it highlights the ripple effect of kindness and how it can lead to meaningful connections and career growth.
