An excellent, detailed book about how to implement better monetization practices within companies developing new products.
Equally applicable to startups as to enterprise companies, the principles of this book are something that almost every company fails to do.
Reading the book is the first step; the principles must be implemented to have any impact. A great book for product managers, executives, founders and marketers alike.
Chapter 1: How Innovators Leave Billions on the Table
- Price: the perceived value that an innovation holds for a customer. How much they would be willing to pay and how much demand there is for that product.
- New product failure is rooted in the failure to put customer willingness to pay at the core of product design.
- Feature shock: cramming too many features into one product.
- Minivation: when something is priced too low to achieve its full revenue potential.
- Hidden gem: an amazing product that isn’t brought to market because it’s outside the core business.
- Undead: an innovation customers don’t want.
9 Rules for Innovation Success
- Talk to customers about willingness to pay early in the product development process.
- Don’t force a one-size-fits-all solution. Segment your customers by the differences in willingness to pay.
- Match your product configuration with your most meaningful customer segments.
- Carefully choose the right pricing and revenue models. How you charge is often more important than how much.
- Have a pricing strategy and plan that considers both short and long term.
- Use willingness to pay data to build a business case that links price, value, volume, and cost.
- Communicate the value of your offering in a clear and compelling way.
- Make sure to understand your customer’s emotions when they are making purchase decisions.
- Maintain pricing integrity and control discounting tightly. Use price cuts only as a last resort.
Chapter 3: Why Good People Get It Wrong
Five Myths of Product Innovation
- If you build a great new product, customers will pay fair value for it.
- An innovation team working in isolation is how to build a new product.
- High failure rate for new innovations is necessary.
- Customers must experience a new product before saying how much they’ll pay for it.
- Until a business knows what it’s building, it can’t assess how much it’s worth.
Chapter 4: Have the “Willingness-to-Pay” Talk Early; You Can't Prioritize Without It
Having the willingness to pay talk early helps you in three ways:
- It will tell you if you have an opportunity to monetize your product or not.
- It will help you prioritize the right features.
- It will help you avoid the four types of failure.
Information You Need From Early Pricing Talks
You need to know:
- The overall willingness to pay for your product. This will tell you if you can afford to develop the product at all.
- How much value customers place on each feature, and what they would be willing to pay for that value.
The simplest way is to ask direct questions about the value of your product and its features, for example:
- “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 $XYZ?”
Then follow each question with the most powerful question of all: “Why?”
- Simulating purchase scenarios
- Most/least valuable questions (from a list of features)
- Purchase probability questions
Typically you will have these conversations in:
- One-on-one conversations
- Focus groups
- Large-scale quantitative surveys
Tips for Conducting These Conversations
- Utilize internal resources first
- Position customer discussions as a talk about “value” (instead of “pricing” or “willingness to pay”)
- Make 25% of the questions “why” questions
- Make sure to look at the distributions of answers, not just the “average”; you’ll often have distinct pockets of customers
- Be precise in your language (”Would you buy this for $20?” is much better than “Would you buy this?”)
Chapter 5: Don't Default to a One-Size-Fits-All Solution; Like It or Not, Your Customers Are Different
Customers should be segmented by their needs, value, and willingness to pay.
- Begin with customer willingness to pay data.
- Use common sense when looking for different segments, and make sure they can be used in the real world (can I sell to this specific segment?)
- Fewer segments is better.
- Don’t try to serve every segment. Choose only those that make sense for you.
- Describe the segments so you can sell and market to them later.
Chapter 6: When Designing Products, Configuration and Bundling is More Science Than Art
Product configuration requires the guts to take away features.
Two Key Principles of Product Configuration
- Leaders, Fillers, and Killers: Leaders are what drive customers to buy a product (they have a high willingness to pay). Fillers are nice-to-haves. Killers blow deals if customers are forced to pay for them. Killers can be identified by being valued by less than 20% of your customers (or not valued at all by more than 20%).
- Good, Better, Best: This classic product configuration is a good starting point, but don’t be locked in to this number. Each product should appeal to a segment you’ve identified.
- Align the offers with your segments.
- Keep it to less than four products and nine benefits.
- Don’t give away too much in your entry-level product.
- Don’t forget the communication when creating your products.
Chapter 7: Go Beyond the Price Point
How you charge is more important that what you charge.
Five Monetization Models
- Dynamic pricing
- Market-based pricing: auctions
- Alternative pricing metric/pay-as-you-go
Five Questions to Choose the Right Monetization Model
- How likely are your customers to accept the model?
- How will future developments impact the model?
- What stage is your company in and does your model choice fit that?
- What are your competitors doing?
- How difficult is the monetization model to implement?
Chapter 8: Price Low for Market Share or High for Premium Branding?
Pricing strategy: your short- and long-term monetization plan. It must have clear intent, quantifiable goals, and a time frame for execution.
There are three main types of pricing strategies:
- Maximization: maximizing your goal—likely profit or revenue—in the short term.
- Penetration: pricing your product low to rapidly gain market share.
- Skimming: starting with a high price and lowering over time to reach other customer segments.
Next you need to create rules for the tactics you’ll need to execute your strategy.
- Monetization models: which one will you use, and will it be the same across all customer segments?
- Price differentiation: how will you differentiate your price? Will you maintain a maximum spread in prices?
- Price floors: will there be a floor for your lowest price and your maximum discount?
- Price endings: how will the actual price ($15.99, for example) end? (0.99? 0.95?)
- Price increases: will you increase the price over time? How much and at what frequency?
Depending on how customers and competitors behave, how will you react with your prices?
Price Optimization & Elasticity
Make sure to calculate your price elasticity curve. To do this, you need your analysis of what customers are willing to pay, and your variable and fixed costs.
Chapter 9: From Hoping to Knowing
You should create a business case right after you know the high-level willingness to pay for your product.
This document should become a living document, adding in everything you learn through your pricing and product development process.
Chapter 10: The Innovation Won't Speak for Itself
You Must Communicate the Value
To maximize the success of your new product, you need to do a few things:
- Develop clear benefit statements—not feature descriptions: what does the customer achieve because of this feature?
- Make your benefit statements specific to your target segments
- Measure the impact and refine the value messages (can use a matrix of competitive advantages (MOCA) analysis for this)
Chapter 11: Use Behavioral Pricing Tactics to Persuade and Sell
Six Behavioral Pricing Tactics That Make the Difference
- Compromise effect: make decisions easier for people who can’t choose by offering a middle option between the extremes.
- Anchoring tactics: set the context for value by making sure you have high anchor product prices.
- Use price to signal quality: price your product high to indicate quality. It’s much easier to lower a price than raise it.
- Razor/razor blades: land customers by having a lower up-front cost, and then expanding on a higher variable amount later.
- Pennies-a-day pricing: break the cost down into a smaller segment of time to reduce sticker shock and make it look more affordable.
- Psychological price thresholds: avoid falling off price cliffs by knowing what the threshold prices are for your product, and staying within that “cliff.”
Chapter 12: Maintain Your Price Integrity
How to Prepare for Post-Launch
Here are some tips and tricks to keep in mind when preparing for post-launch.
- Be patient addressing post-launch problems. They typically come in only four varieties, and you can prepare for them: (1) the market doesn't understand your product's value or you didn't explain it well; (2) your competition undercuts on price; (3) the competition launches a competing product; and (4) regardless of what the competition does, sales are below plan.
- Go beyond financial KPIs and track monthly outcomes. To measure the progress of new product launches, most companies track only financial key performance indicators (KPIs)—typically volume, revenue, and profit. These measures are grossly inadequate. You must also track sales, customer metrics, and operational metrics to keep a pulse on your new product after launch. Sales KPIs such as win-loss ratio, percent deviation of final price from target price, average sales quoting time, and price as a reason for win/loss will give you crucial insights on sales team performance.
- Do deal “deconstructions” regularly. You need to dissect the reasons why you're winning and losing deals. You should bring together a cross-functional team (including sales, marketing, pricing, finance, and product) that was involved in the deal. The objective is to fully deconstruct the deal to understand whether product strategy, price strategy, and value communications were applied correctly.
- Advocate pricing patience: Make your team come up with three non-pricing actions before you approve a price decrease. Spontaneous price reactions—usually price decreases—are a typical problem in the post-launch phase. This is an understandable but wrong response.
- Before reacting on price, war-game your competition's counter-reactions. This is another simple way of avoiding a knee-jerk price reduction. Write down how you expect your major competitors to react. Then simulate your position after that reaction: projected sales volumes, market share, profit, and so on.
- Unusually high sales could be a high-class problem. This is the hardest problem to acknowledge, and it requires the same disciplined solutions as unexpectedly low sales.
- You launch your new product and a wonderful thing happens: Sales volumes are way beyond expectations. Time to celebrate? Not so fast. You actually might have a problem—pricing lower than you needed to and leaving money on the table.
Chapter 14: Implementing the “Designing the Product around the Price” Innovation Process
The Nine Pitfalls to Implementing a New-Product Monetization Process (and How to Avoid Them)
- Putting all your eggs in one basket: the process and playbooks you build around monetization can’t live with just one person or group. You must get every group involved.
- Not forming a cross-functional team: you need to have marketing, sales, R&D and product teams involved from the beginning so they know how to position the product.
- Banking on the big bang: change takes time, and you need to pilot a couple products first to test your system. Only then should you scale.
- Imagining one size fits all: you must tailor the steps outlined to your company’s capabilities, skills, tools, existing processes, and culture.
- Having too many opt-outs: best-in-class companies automate workflows with gates to each stage to ensure a product goes through all the right stages.
- Getting blinded by science: remember that early in the process you’re only trying to get a ballpark price for willingness to pay. You will have to refine later as you design the product.
- Avoiding messy information: the information you collect won’t be perfect, and you will need to be ready for this, and draw the best conclusions you can.
- Cheaping out: make sure to allocate sufficient budget and people to achieve each step. Failing to do this will sabotage the whole thing.
- Letting the C-Suite delegate everything: C-level leadership must be completely committed, and not delegate the responsibility.