Podcast Summary
Focus on pricing before product development: Entrepreneurs should prioritize pricing before product development to create products that customers are willing to pay for, reducing the risk of failure.
The order in which entrepreneurs approach pricing in product development is crucial. Madhavan Ramanujan, author of "Monetizing Innovations," argues against the common practice of designing a product first and then figuring out what to charge for it. Instead, he suggests that pricing should come before product development. Ramanujan spent years working as a pricing consultant and witnessed many companies' obsession with innovation but neglect of monetization. With a high failure rate in innovation, he believed that companies were merely "spraying and praying" and hoping to monetize successfully. His book, Monetizing Innovations, was written to address this issue and provide insights on how to monetize innovations effectively. By focusing on pricing first, entrepreneurs can ensure that they create products that people are willing to pay for, reducing the risk of failure.
Prioritize pricing and testing for product market fit early: Design products around customer needs and willingness to pay, gather feedback, and adjust pricing accordingly for successful product-market fit
Entrepreneurs and companies should prioritize thinking about pricing and testing for a product market fit early in the development process instead of waiting until later. This approach, which is called "inverting the mindset," allows businesses to design their products around what customers need, value, and are willing to pay for. This can be illustrated through the example of Porsche in the early 1990s, who identified a potential market for an SUV by having pricing conversations with customers before they even had a product to show. By gathering feedback and making adjustments based on customer willingness to pay, Porsche was able to create a successful SUV model, the Cayenne, which now accounts for over half of their profits. This innovative approach challenges the traditional method of building a product first and then trying to sell it, and instead emphasizes the importance of having ongoing conversations with customers to understand their needs and willingness to pay.
Testing market's willingness to pay early on: Identify customer needs and willingness to pay to tailor products to specific customer groups
Understanding the willingness to pay of your customers is crucial for the success of your product or innovation. Porsche's approach of testing the market's willingness to pay early on, before building a product, is an effective strategy. However, it's essential to distinguish between positive feedback and true willingness to pay. The conversation around pricing should be part of the product market fit validation, as people might express positive feedback but not be willing to pay for it. Price is a measure of value, and identifying the right potential customers with unmet needs is essential to understand their willingness to pay. Companies should focus on identifying problems and unmet needs instead of offering solutions. Customer needs can vary greatly, even for basic things like water, so it's essential to identify different customer segments based on their needs, values, and willingness to pay. This segmentation will help tailor your product to the specific needs and willingness to pay of different customer groups.
Productize offerings for specific customer clusters: Understand unique needs, values, and willingness to pay of each segment to tailor product offerings and build the right product for each group.
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 clusters based on their unique 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. Productizing to a segment involves more than just positioning a product to different customer groups. It requires understanding the unique needs and values of each segment and tailoring the product to meet those needs. For example, Porsche and Apple offer 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 productizing for their segment, start by asking questions to understand their needs, values, and pain points. Then, share how your product can address those specific needs and provide unique benefits that cater to their segment. By focusing on the benefits rather than the features, you can determine if the customer is willing to pay for the product and adjust your offering accordingly. Remember, the goal is to build a product that truly resonates with each customer segment and meets their unique needs.
Determining pricing strategy through relative questions: Use relative questions like comparing value to competitors or industry benchmarks and asking about acceptable and prohibitively expensive prices to validate pricing strategies and optimize for customer acceptance.
Companies need to ask the right questions to determine pricing strategy effectively. Asking open-ended questions about pricing directly may not yield accurate results. Instead, companies can use relative questions, such as comparing the value of their product to that of competitors or industry benchmarks. Another method is to ask about acceptable and prohibitively expensive prices. By understanding the psychological thresholds in the market, companies can validate pricing strategies and optimize for customer acceptance. Remember, it's the company's responsibility to set the pricing strategy, not the customer's.
Determining buyer's willingness to pay: Identify product leaders, fillers, and killers to optimize offerings and pricing strategy.
Understanding the willingness to pay of buyers is crucial for effective pricing strategy. This can be achieved through various methods, from doubling the price to conducting purchase simulations. The goal is to put buyers in a decision-making mindset and help them understand the product's benefits and value. The product configuration principle of leaders, fillers, and killers can guide the process of assembling benefits or features into a product. The leader product is the primary offering that attracts customers, fillers are additional products or benefits that can increase sales when bundled, and killers are products or features that can depreciate the bundle's value if included. By identifying and managing these elements, sellers can optimize their product offerings and pricing strategy.
Focusing on pricing model and value proposition instead of just price amount: Effectively communicating the value proposition and understanding the difference between features and benefits are crucial for pricing success.
Companies can make significant mistakes even when following best practices in pricing strategy. Two common pitfalls are focusing solely on the price amount instead of the pricing model or monetization strategy, and talking about features rather than benefits. The example of SmugMug illustrates this, as they saw double-digit revenue improvements just by changing their communication approach to focus on benefits. Another crucial aspect is selecting the appropriate pricing model, such as subscription, pay-as-you-go, or hybrid, based on the product and customer segments. Understanding the difference between features and benefits, and effectively communicating the value proposition, is essential for pricing success.
Understanding Value for Pricing: Focus on relative value, not absolute prices, and capture at least 20-25% of economic value to ensure successful pricing strategy.
Identifying the right pricing model for a product requires deep understanding of the value being generated for customers, rather than just following popular trends. The conversation around pricing should focus on relative terms, not absolute, and tie back to the value being offered. Time and money savings are common motivations, but it's important to dig deeper and understand the specific gains customers receive and the economic value generated. 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, along with controlling costs to maximize margin, is key to successful pricing strategy.
Pricing as a Science vs Art: Entrepreneurs should price innovatively, early and often, understand target segments, and charge a premium for breakthrough products to avoid common monetizing failures.
Entrepreneurs often underestimate the importance of a value-based pricing strategy and approach pricing as an art rather than a science. This can lead to common monetizing innovation failures such as feature shock (too many features with no clear target market) and minimization (undercharging for a groundbreaking product). To avoid these pitfalls, entrepreneurs should have pricing conversations early and often, understand their target segments, and be willing to charge a premium for innovative products. By doing so, they can build a successful, breakthrough business.
Reasons for Failure to Monetize Innovations: 72% of innovations fail to monetize, often due to underpricing, hidden gems, or undesirable products. Involve CEO, focus on price to increase chances of profitable growth.
Companies often fail to effectively monetize their innovations, with 72% of innovations failing to do so. There are several reasons for this, including not asking the right price, neglecting hidden gems, and producing undesirable products. The first type, underpricing, occurs when companies don't charge enough for their innovative products or services, even when they have the perfect product-market fit. The second type, hidden gems, refers to products that go against a company's DNA and are overlooked due to fears of cannibalization. The third type, undead innovations, are either the wrong answer to the right question or an answer to a question no one cares about. Companies can improve their chances of successfully monetizing innovations by involving their CEO or other C-level executives in the process and focusing on the price before product. This can lead to a culture of profitable growth, rather than growth at all costs.
Subscription vs Usage-Based Pricing: Choosing the Right Model: Subscription models offer predictability for customers with consistent usage, while usage-based models align pricing with actual usage for intermittent or episodic customers.
Choosing between subscription and usage-based models for pricing in businesses depends on various factors. Subscription models are ideal when customers demand predictable bills, usage is similar month over month, or intermittent 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. Transparency and fairness, which are crucial for customer satisfaction, should not be confused with predictability. Subscription models can simplify conversations and make onboarding easier, while usage-based models offer transparency and fairness by aligning pricing with actual usage. Ultimately, understanding the nature of usage and the value delivered is key to deciding which pricing model to adopt.
Factors affecting pricing model for businesses: Business pricing depends on usage frequency, value delivery frequency, cost of delivery, clear attribution, perceived value, and customer education.
The pricing model for a business depends on the frequency of usage, frequency of value delivery, and the cost of value delivery. For businesses with intermittent or episodic usage and episodic value delivery, a pay-as-you-go model can be beneficial. However, it's crucial to have a clear metric of attribution and be able to track and measure value delivery according to that metric. Additionally, the price of a product should reflect its perceived value, and high-priced products may require education to justify the cost. Conversely, low-priced products should be simple and intuitive to use. The pricing model can significantly impact customer behavior and perception of the product's quality. Companies need to consider these factors when deciding on a pricing strategy.
Understanding Customer Value and Behavior: Business leaders should ask 'How do you know customers would pay for innovation?' to ensure pricing strategies align with customer value.
Entrepreneurs must educate their customers about the value they deliver and defend their pricing strategies, rather than relying solely on customer feedback or assumptions. Steve Jobs, often seen as a product genius, was also a pricing genius who identified problems and unmet needs, then solutionized and tested the market for willingness to pay. The most effective question business leaders can ask is "How do you know that your customers would pay for this innovation?" This conversation, along with the book, emphasizes the importance of understanding customer value and behavior, and provides strategies for doing so.
The power of introductions and mentorship: Building relationships and being open to opportunities can lead to valuable mentorship and career growth. Kindness and support from others can have a significant impact on personal and professional success.
The support and kindness of others can significantly impact one's career and personal growth. The speaker shared a personal story about how Duncan Robertson, the CFO of OpenTable at the time, introduced him to Bill Gurley, who became a mentor and supporter. This introduction led to valuable opportunities and a long-lasting professional relationship. The speaker expressed his deep gratitude for Duncan and Bill's kindness and emphasized that he would not be where he is today without their support. This experience underscores the importance of building relationships and being open to opportunities, even those that come unexpectedly. It also highlights the ripple effect of kindness and how it can positively impact not only individuals but also organizations and industries.
