Monetizing Innovation lays out a data-driven framework for product development and pricing that goes against the traditional methods of just “trusting your gut”. Traditional product development usually follow the following path: heavy investment in R&D to figure out an innovation, fleshing out a product design, and handing over the completed product to sales to understand pricing before manufacturing. This method is fundamentally flawed, as it leads to companies developing products that are are unnecessary, aren’t priced correctly, or have unclear value propositions.
The book has an incredible amount of information, and I’d recommend everyone working at a company to read it. Here are some of my takeaways:
- Have the willingness-to-pay conversation with your customers before investing heavy resources in product development. Understand what needs customers need to be met to inform what you need to build. Most importantly, ask customers what price they would buy your solution at, before you’ve built it. Price things based off of the value they provide to customers, not based on how much it took to create.
- Segment your market properly, and create products that are appropriate for each segment. Although your product might have hundreds of features, showing those to your customers can create decision overload and cause you to lose business. Design your product around your customer segments.
- Go beyond the per-unit pricing model if necessary. Michelin’s enterprise pay-per-mile tires have been incredibly successful, as has Uber’s dynamic surge pricing model. Optimizely’s A/B testing product is priced based on unique monthly website impressions. An appropriate pricing model should reflect the value you provide customers, and inherently reward you if your product performs well for the customer.
- Your business case is a critical document. Don’t create it simply to get funds and fall back on your gut to make decisions after it gets approved. Ideally, your business case will be a living document that contains your pricing strategy, the price elasticity of your new product, moves to make based off of competitor reactions, and so on. When things get tough, referring to your business document can help you avoid making rash moves.
- Customers buy benefits, not products. Don’t explain your product’s features or how it’s made. Focus your messaging on how the customer’s life will be improved with this product. Involving sales personnel in early stages of your product development can help provide you with crafting these value statements together.
- Avoid price wars, and stick to knowing the value of your product. If sales are lower than expected, cutting the price isn’t always the right move (for instance, maybe people hate your product and won’t buy it even if it’s cheaper). Likewise, treat sales higher than expected as a failure too, since it means you might have mispriced your product. Don’t lose your price integrity.
- Utilize behavioral pricing, since consumers do not buy products rationally. A large tub of popcorn might not seem expensive at $6.99 if a small tub is $5.99. Use anchored price points (the small tub of popcorn) to create product options consumers will buy. A product priced at $39.99 and $41 has a difference in price greater than $1.01. Customers dislike high upfront costs, but are sometimes willing to pay a continual subscription fee instead (even when they total price is the same).
Thanks to Daniel Gorrie for the recommendation and to Stripe for providing a copy!