Monetizing Innovation by Madhavan Ramanujam

Key Takeaways

Design the product around the price. The key is to rigorously determine the market for a new product long before products are built, and making sure the market is willing to pay for the product before embarking on a long journey of productizing the innovation. Putting monetization front and center in the product development process spurs innovation and increases confidence before costs pile up
1. Porsche is one of the all stars at this and designed the world’s first sports SUV around price. They tested every feature and its willingness to pay (even cupholders) before producing anything costly
Monetizing failures comes in 4 categories
1. Feature shock – too much, cluttered, unclear; no clear value prop or story (segmentation clear to help avoid this)
2. Minivation – innovation is priced too low and therefore not valued highly enough
3. Hidden Gem – never brought to market properly
4. Undead – customers don’t want what you’ve built
9 Rules for Success
1. Having the Willingness to Pay talk with customers early in the product development cycle
2. Don’t force a one-size-fits-all solution (segment!)
3. Product configuration and bundling is more science than art
4. Choose the right pricing and revenue models, because how you charge is often more important than what you charge
5. Develop your pricing strategy – create a plan that looks a few steps ahead, allowing you to maximize gains in the short and long term. It must have clear intent, quantifiable goals, and a time frame for execution
  1. Goals – market share, total profit, profit margin, customer lifetime value…
  2. Right type of pricing strategy – maximization, penetration, skimming
  3. Price-Setting Principles – monetization model, price differentiation, price floors, price endings, price increases
  4. Develop principles for reaction – promotional, competitive,
6. Draft your business case using customer willingness to pay data and establish links between price, value, volume, and cost.
7. Communicate the value of your offering clearly and compellingly. They don’t buy products, they buy the benefits that the products offer (don’t communicate features – a feature belongs to the product; a benefit belongs to the customer)
  1. Develop crystal clear benefit statements (not feature descriptions)
  2. Make your benefit statements segment-specific
  3. Measure the impact and refine your value messages
8. Understand your customers’ irrational / emotional sides in making purchasing decisions
  1. Compromise effect (comparing)
  2. Anchoring tactics (sets the context for value)
  3. Using price to signal quality
  4. Razor / Razor blades
  5. Pennies a day pricing
  6. Psychological price thresholds
9. Maintain your pricing integrity
Myths & Misconceptions
1. If you simply build a great new product, customers will pay fair value for it
2. The new product or service must be controlled entirely by the innovation team working in isolation
3. High failure rate of innovation is normal and even necessary
4. Customers must experience a new product before they can say how they’ll pay for it
5. Until the business knows precisely what it’s building, it cannot possibly assess what it’s worth
Willingness to Pay
1. See if you have the opportunity to monetize or not – overall WTP and then how much value customers place on each feature and what they’d be willing to pay for that value. What do you think could be an acceptable price? What do you think would be an expensive price? What do you think would be prohibitively expensive price? Would you buy this product at $XYZ? Follow each of these questions with “why?”
2. Help prioritize features and design the product with the right set of features
3. Help avoid the 4 types of failure
Customer segmentation
1. There is no average customer. Segmentation should break the market down into a few different groups (~3) on which you can act differently
Configuration and Bundling
1. Configuration – making sure you have the key features that customers value and are willing to pay for. If you don’t understand this, you’ll likely end up with feature shock
2. Bundling = Your Features and Functionalities + Other products and services
3. Align with segments, don’t make your product too complicated or big, don’t give away too much in your entry level product,
How you charge trumps what you charge
1. Subscription model
2. Dynamic pricing
3. Market-based pricing (auctions)
4. Alternative metric pricing / pay as you go
5. Freemium – really have to understand what users value and ensure a functional free experience and how many will convert
5 Questions to choose the right monetization model
1. How likely are your customers to accept the model?
2. How will future developments impact the model?
3. What stage is your company in and does your model choice fit that?
4. What are your competitors doing?
5. How difficult is the monetization model to implement?
Instituting a rigorous monetization process
1. Hypothesis development – where can we create and deliver differentiated value? Which markets are underserved? (geographic regions, application, industries)
2. Internal refinement
3. Initial customer validation – PMF, perceived value, and WTP with target markets, any competitive products
4. Gut check
5. Build a pricing model – who are decision makers and influencers
6. Paid pilots

What I got out of it

Design the product around the pricing and move from hoping to knowing

Summary