Monetizing Innovation
Simon-Kucher's argument that price should be designed before the product.
Summary
Ramanujam and Tacke, both from the pricing consultancy Simon-Kucher, argue that most product failures are pricing failures, and that the standard sequence of designing a product and then setting a price is backwards. Their prescription is to have the pricing conversation with customers before the product is built.
They classify failures into four types. Feature shocks contain too many features and satisfy nobody at a price anyone accepts. Minivations are innovations priced too low to capture the value they deliver. Hidden gems are innovations the company fails to commercialise because they sit outside the core business. Undead innovations are products nobody wanted, built because the question was never asked.
Their method has nine rules, of which the first is having the willingness-to-pay conversation early. They give specific techniques for the conversation, including asking about acceptable, expensive and prohibitive price points rather than asking what a customer would pay, and using purchase probability questions with a discount applied to stated intent.
They also cover segmentation by willingness to pay rather than by demographics, product configuration and bundling built from that segmentation, choosing a monetisation model including subscription, usage-based and outcome-based pricing, and building the business case on pricing assumptions that have been tested. The book is consultancy-derived and the cases are client engagements presented favourably. It is repetitive and the nine rules overlap. The core instruction, to test willingness to pay before building, is straightforward and is not done by most companies, which is why the book exists.
Key takeaways 8
- Most product failures are pricing failures, and the standard sequence of building first and pricing afterwards is the cause.
- The willingness-to-pay conversation should occur with customers before the product is designed rather than after it is built.
- Asking a customer what they would pay produces useless answers, and asking about acceptable, expensive and prohibitive levels produces usable ones.
- Product failures fall into four types, of which the most common is a product containing too many features that satisfies nobody.
- Innovations priced below the value they deliver are a distinct and common failure that looks like success in unit terms.
- Customers should be segmented by willingness to pay rather than by demographics, since the first determines the offer and the second does not.
- Product configuration and bundling should follow from willingness-to-pay segmentation rather than from what engineering built.
- The monetisation model, meaning subscription, usage or outcome-based pricing, is a separate decision from the price level and affects adoption more.
Who should read it
Founders and product leaders about to build something, who need the pricing conversation before rather than after the development.
Who recommended it 3
Similar books 6
Chosen by shared topics, the entries that hold them, and the people who recommended both.
Why firms are moving from selling units to selling ongoing subscriptions, and how.
Retention, pricing tiers and the mechanics of renewal.
Membership as a relationship, not a payment plan.
Keeping customers, employees and investors is what drives profit and growth.
“In his seminal book, The Loyalty Effect, Fred Reichheld shows that a 5 percentage point improvement in retention rate” — Michael Mauboussin
Source: The Economics of Customer Businesses (Legg Mason Capital Management)
Recommended by: Michael Mauboussin
Price is the strongest profit lever and the least managed; how to set it well.
Recommended by: Michael Mauboussin
Where it sits in the reference 4
Topics