Monetizing Innovation

The bottom line

Learn what customers value and will pay before building, then design the product around that price. Since 72 percent of new products miss revenue or profit goals, knowing willingness to pay first lets a builder kill weak ideas early and back the right features.

Key takeaways

• Deciding price last is the main reason new products miss their goals. Teams design and build first, so they invest without knowing if anyone will pay. Ch. 1 · How Innovators Leave Billions on the Table
  • A Simon-Kucher study of 1,615 companies found that 72 percent of new products from the prior five years missed revenue and profit goals or failed outright.
  • Fiat Chrysler added a price to the Dodge Dart at the end. In 2012 it sold about 25,000 units, a quarter of analysts' forecast.
• Ask customers what they will pay before design starts, and build only the features they value. Willingness to pay ranks features and shows early whether a product can make money. Ch. 4 · Have the “Willingness-to-Pay” Talk Early
  • An Internet marketplace planned 25 features for buyers. Several hundred potential customers would pay $10 to $20 a month, but only for 10 of them, and those 10 became the roadmap.
  • A web hosting company cut its product from 27 features to eight and raised the price. Conversion and revenue rose by more than 25 percent.
• Build a few distinct offers, one for each segment grouped by needs and willingness to pay. A product made for the average customer excites no one. Ch. 6 · When Designing Products, Configuration and Bundling is More Science Than Art
  • A European retail bank replaced 30 account offerings with three, built for its Comfort, Direct and Classic segments. Annual profit in personal banking grew 30 percent.
• How you charge can matter more than how much you charge. The right model ties your revenue to the value customers get. Ch. 7 · Go beyond the Price Point
  • Michelin's new tire lasted about 20 percent longer, which would have cut demand. In 2001 it began charging trucking fleets per kilometer, and by 2011 its EBIT was 25 percent above Bridgestone's.
  • A software firm swapped a fixed perpetual license for a fee per lab report and lifted revenue 20 percent.
• A business case without willingness-to-pay data is only a guess. Price, value, volume and cost move together, so the case must model their links and keep updating. Ch. 9 · From Hoping to Knowing
  • Only about 5 percent of business cases seen across thousands of companies contained willingness-to-pay data.
  • A fast-growing SaaS firm modeled its planned free tier and found it would cannibalize its paid entry products. Executives dropped the idea.
• When early sales disappoint, find the cause before touching the price. A quick cut signals lower value, gives up margin and rarely fixes the real problem. Ch. 12 · Maintain Your Price Integrity
  • Apple kept the entry Apple Watch at $349 despite mixed reviews. Estimates put sales at about 8 million watches from April to September 2015.
  • BMW learned Europeans found its new 7 Series ugly. It lowered sales targets instead of the price and started a face-lift right away.

Don't just hope; find out!

Madhavan Ramanujam, Have the “Willingness-to-Pay” Talk Early

1Deciding price last is why most new products fail, and they fail in four predictable ways

New products miss their goals because companies guess at revenue and set price at the end, and the resulting failures sort into four types, each bred by a particular culture.

• Companies model costs in fine detail but only guess at revenue, so they bet on products without knowing anyone will pay. Foreword
  • Revenue and cost decide viability equally. Yet cost gets line-by-line analysis while revenue gets an educated guess.
  • The usual order is design, build, market, then price. It should flip to market and price first, then design and build.
  • The gap has a name. Eddie Hartman of LegalZoom calls it a wild asymmetry of precision.
  • Other studies match the failure rate. The PDMA puts it at 65 percent, costing US companies $260 billion in 2010. A Harvard Business School study of 2,000 companies from 2004 to 2010 found 75 percent of VC-funded startups fail.
  • The odds are the same for startups and large firms. Meanwhile 83 percent of companies report growing price pressure and plan to innovate their way out.
• Porsche priced the Cayenne before it existed, and Dodge priced the Dart after it was built. Ch. 1 · How Innovators Leave Billions on the Table
  • Porsche surveyed buyers on appetite and price before any concept car, and leaders said they would drop the SUV if the price failed.
  • Fiat Chrysler engineered the Dart until it seemed ready, then attached a price.
  • Porsche tested every feature. It cut the six-speed manual racing transmission and kept the sportiness and powerful engine.
  • Ten years after its 2003 launch, the Cayenne sold about 100,000 a year, almost five times its first year. It earned about half of Porsche's profit, against a third for the 911.
  • CEO Sergio Marchionne committed hundreds of millions of dollars to adapting the Alfa Romeo Giulietta. MarketWatch called the Dart 2012's second biggest flop. In the first nine months of 2015 it sold 68,319 units, while the Corolla sold 278,742 and the Civic 249,749.
• Pricing comes last because a common mindset treats it as a threat to creativity. Ch. 3 · Why Good People Get It Wrong
  • The innovator is cast as an artist and underdog, a picture fed by Apple's 1997 Think Different campaign.
  • The Dart's 2012 ad concept said "Kick out the finance guys!"
  • Underdog tales reinforce it. Harry Potter was rejected 12 times, and Fred Smith's FedEx plan got a failing grade. These are loved as exceptions, and nobody mentions the 95 percent of cases that went the other way.
  • Five myths hold the mindset up: build it and they will pay, innovate in isolation, high failure is normal, customers must experience a product before pricing it, and you must know every cost before valuing it.
• Feature shocks come from engineering cultures, and minivations come from risk-averse, cost-plus ones. Ch. 2 · Feature Shocks, Minivations, Hidden Gems, and Undeads
  • Amazon's Fire Phone crammed in 3-D lenses, Mayday and Firefly, then took a $170 million write-down.
  • A component maker priced its breakthrough part at 85 cents by cost-plus. It could have charged $5.
  • The Fire Phone launched in July 2014 at $199 with contract or $649 without. Four months later it fell to 99 cents or $449.
  • One team, asked why anyone should buy its product, answered that it had seven patents. That inside-out answer is a warning sign.
  • Audi launched the Q7 at €55,000 with demand of 80,000 against capacity of 70,000. At €58,000 it would have earned €210 million more a year. Valeo sold Park Assist to VW for about €100 a unit, and VW charged buyers €670.
  • Minivations can look like wins. Playmobil's Noah's Ark sold out in two months and resold on eBay 33 percent higher. Asus eee PC demand ran 900 percent above supply. Three even advertised that charging extra for 4G "sucks."
• Hidden gems die in cultures that protect the core, and undeads survive in top-down cultures. Ch. 2 · Feature Shocks, Minivations, Hidden Gems, and Undeads
  • Kodak invented digital photography and shelved it to protect film. A conveyor maker gave away software customers would have paid for.
  • A "yes-maybe-no" approval commits to build before testing willingness to pay, so "no" arrives too late.
  • Steven Sasson invented the technology in 1974. Kodak's first digital camera, the DC40, came in 1995, and Kodak went bankrupt in 2012. Cox Enterprises, by contrast, hedged with AutoTrader.com in 1997, and newspaper owners backed Cars.com in 1998.
  • Segway cost $100 million to develop and promised 50,000 sales in year one. By the end of 2007 it had sold about 30,000 in total, at $3,000 to $7,000.
  • Inhaled insulin needed five to ten times more insulin at three to four times the price, so patients kept injecting. Google Glass at $1,500, New Coke in 1985 and Microsoft's Zune are other undeads.

2Ask customers what they will pay before you design anything

A willingness-to-pay conversation held before design tells a team whether a product can make money and which features to build first.

• An early willingness-to-pay talk decides both whether to build and what to build. Ch. 4 · Have the “Willingness-to-Pay” Talk Early
  • It must yield two things: a price range customers find reasonable, and the value and willingness to pay for each feature.
  • The range has to work for the company too. If no profitable product fits inside it, the opportunity may not be there.
  • Features ranked by what customers will pay become the build order and the roadmap.
  • In 2009 Gillette held only 22 percent of India's razor market, where the Mach 3 cost 100 rupees ($2.24). P&G spent thousands of hours interviewing and observing buyers, then set targets of 15 rupees for the razor and 5 rupees for blades.
  • To hit that price, the Guard went from the Mach 3's 25 components to four, with a hollow handle. The team debated changes worth a thousandth of a cent. By 2012 it held more than 60 percent of India's razor category, nearly three times the share of earlier products.
  • In the marketplace case, the team's favorite feature showed Facebook connections who had used a seller. Customers ranked it seventh because they already trusted third-party reviews.
  • Fewer features creating more demand held in these cases. It is a counterintuitive result, not a universal law.
• Start with direct price questions, always ask why, then move to richer methods. Ch. 4 · Have the “Willingness-to-Pay” Talk Early
  • Ask what price is acceptable, what is expensive, what is prohibitive, and whether they would buy at a set price.
  • Purchase simulations show lineups of feature and price combinations, including buying none, then change the mix and ask again.
  • Five question types run from easy to advanced: direct, purchase probability, most-least, build-your-own, and purchase simulations.
  • An acceptable price usually leaves customers loving the product. An expensive one may still sell but leaves them neutral.
  • How you phrase a question shapes the reply. Asking "Would you buy this" is not the same as asking "Would you buy this for $20." Make sure customers answer your real, underlying question.
  • Pilot internally first. Product, sales, marketing, finance and engineering get the questions ahead and bring written answers, which keeps group dynamics from biasing them. Then the group discusses why each person answered as they did.
  • Long, complex advanced surveys overwhelm customers and produce inconsistent answers. Test only the key variables.
• Run sessions as a value talk and read the spread of answers, not the mean. Ch. 4 · Have the “Willingness-to-Pay” Talk Early
  • Open with pain points. Pitch the features and ask whether and why they matter. Only then turn to price.
  • About 25 percent of the questions should be why questions.
  • Groups at $20 and $100 do not make a $60 market. That average overcharges one group and undercharges the other.
  • Qualitative talks come before any quantitative survey. Numbers alone are risky for truly new products.
  • If a product is so new that its value cannot be explained, customers cannot answer price questions well. Establish the value first.
  • A rigid script may only confirm what the team already believes. Unstructured talks help with leading-edge ideas.
  • A clear split, such as $20 and $100 buyers, can justify a separate version for each group.
• The best practitioners make every feature earn its place and watch customers where they work. Ch. 13 · Learning from the Best
  • Porsche's car clinics put new models beside rented competitor cars and ask buyers about features and willingness to pay.
  • Features nearly all customers will pay for become standard. Features only some value become options.
  • Dräger teams observed customers on site to find needs nobody voiced, then tested selling stories before engineering began.
  • Porsche assumed small hidden dashboard cup holders would do for the Panamera. Customers wanted far more, so it paid for an expensive redesign of the middle console. The process is long and sometimes cumbersome, but it avoids costly mistakes.
  • In Hamburg sewers and pipelines, Dräger saw detectors get kicked into canals. Alarms were too weak to hear from a truck in the rain.
  • The resulting X-zone 5000 was priced at $4,300, 35 percent above the next competitor. It sold 250 percent above expectations, with margins far above average.
  • Dräger's CPM phases: pick the target market, map the buying center, observe and interview customers, run a conjoint survey to form needs-based segments, review competitors, build a concept with segment variants, and test role-specific selling stories. A C-level board then says yes or no.
• Asking customers beats relying on sales anecdotes or copying competitors. Ch. 13 · Learning from the Best
  • Sales input is anecdotal, unstructured and filtered, and it pushes for lower prices with more features.
  • Matching competitors misses the needs customers never state.
  • LinkedIn validates with customers before writing code, and only then checks the idea with its sales reps.
  • LinkedIn's sequence: find white space, pressure-test it cross-functionally, and validate trade-offs, packages, unaided willingness to pay and purchase probability. Then a sales gut-check, a larger quantitative study for the business case, and paid pilots.
  • Paid pilots sell the beta instead of giving it away. Testers with money at stake give better feedback and help tune the price.
  • Before the change, Dräger built from engineer brainstorms, sales feedback and competitor features. That produced overengineered products, scope creep and mediocre margins.
  • A product need not beat rivals on every function. It only has to win on the functions that matter to its target segments.

3Build a few offers, one per segment, from what each segment will pay for

Products sell best when they are shaped as a small set of distinct offers, each built around the needs and willingness to pay of one segment.

• Segment by needs, value and willingness to pay, and do it before R&D starts. Ch. 5 · Don't Default to a One-Size-Fits-All Solution
  • Demographics mislead. Prince Charles and Ozzy Osbourne share a profile but want different clothes, cars and music.
  • About half of companies with a segmentation strategy never use it to guide product development.
  • Three pitfalls ruin segmentation: doing it too late, using only observable traits, and running too many schemes.
  • The two match exactly on paper: famous, wealthy, English, 67, married with two children, living in a castle. A demographic scheme would design one product for both.
  • The working rules: start with three or four segments, use one scheme across product, marketing and sales, and never more than three. Size each segment by customers you can win and keep, and at what price. Drop the weak ones.
  • The sales acid test asks whether reps can sort their own clients into the segments. Observable markers help them do it, such as noting that a high-price segment has many 24x7 businesses.
  • A startup that can build only one product should aim it at the segment with the biggest opportunity and plan later products for the rest.
• Needs-based segments can reveal value that a company has been treating as a cost. Ch. 5 · Don't Default to a One-Size-Fits-All Solution
  • A North American packaging paper maker dropped its small, medium and large segments because sales found them unworkable.
  • Research turned up four segments that mixed all customer sizes: want price only, want it now, want product only, want the best.
  • Garmin, Mettler Toledo and the iPhone lineup each take one technology and shape it differently for each segment.
  • The firm surveyed about 200 customers with most-least questions and conjoint analysis. On average, price ranked first and technical service last. Yet some customers would pay for service programs that made their operations more efficient.
  • It built four offers. Core was standard and very affordable. Product Plus added product features. Logistics Plus promised next-day delivery of stock items, seven-day delivery of custom items, and priority during shortages. Best combined both at a significant premium.
  • Mettler Toledo, a $2.5 billion scale maker, uses the same weighing technology for three kinds of buyer. Industrial users get rugged scales, labs get full accuracy, and retailers get cheap, easy scales that print.
• Configure each offer by sorting features into leaders, fillers and killers. Ch. 6 · When Designing Products, Configuration and Bundling is More Science Than Art
  • Leaders drive purchase, fillers are nice to have, and killers sink the deal if customers must pay for them.
  • Cut killers and sell them à la carte to the few who want them.
  • Good, better and best tiers work if the mix holds. If over 50 percent pick the entry tier, strip features from it.
  • Flag a feature as a killer when fewer than 20 percent value it and more than 20 percent do not value it at all. Sort features per segment. Heated seats lead in the cold north and fail in the tropics.
  • Target mix: about 30 percent in good, 70 percent in better and best, and at least 10 percent in best. An overloaded entry tier lets a firm land customers but not expand.
  • Optimizely sorted 15 Personalization features this way in 2014 to build its packages. Product configuration requires the guts to take away features.
• Mixed bundling often beats both separate prices and a single bundle. Ch. 6 · When Designing Products, Configuration and Bundling is More Science Than Art
  • McDonald's Value Meals sell fries and soda to people who would have skipped them.
  • Microsoft Office priced a suite below the separate apps and beat focused rivals.
  • A nine-question checklist screens each bundle, covering goals, killers, synergies, thresholds and competitor reaction.
  • The pizzeria puzzle has four segments of 100 people. Stand-alone prices of $8 for pizza and $8.50 for breadsticks earn $3,300. A single $10.50 bundle earns $4,200. A $13 bundle plus each item alone at $9 earns $4,400, which is 33 percent above stand-alone. Fewer than 10 percent of executives find it.
  • In mixed bundling, stand-alone prices must sit above their unbundled optimum. In the puzzle, pizza goes to $9 instead of $8.
  • By 2013 Office was Microsoft's biggest division, about a third of revenue and more than 40 percent of operating profit. Hard bundling suits mainly dominant players.
• Sometimes unbundling or value-driver tiers beat any bundle. Ch. 13 · Learning from the Best
  • Ryanair sold one seat price and charged for everything else separately.
  • Optimizely kept Personalization out of a bundle because buyers' needs and purchase timing differed.
  • Swarovski had too many products to research one by one, so it researched what drives value instead.
  • Ryanair paired a £9.99 Bristol to Barcelona fare with a £6 admin fee, £10 to reserve a seat and £15 to check a bag. The average customer paid four times the fare. Travelers are about twice as sensitive to the base fare as to surcharges. Net profit rose from €15 million in 1995 to €522 million in 2014.
  • Optimizely found too few prospects needed both products. It sold Personalization on its own, on a shared platform, with mix-and-match packages.
  • Swarovski's 2013 survey covered more than 20 countries. Some segments would pay five to six times more for sophisticated cuts, and brilliance raised willingness to pay. It set five tiers, Essential, Classic, Advanced, Sophisticated and Outstanding, spanning 650 percent. Form and color do not change the price. Steep discounting stopped, and margins rose.

4How you charge can matter more than how much you charge

The monetization model is a design decision of its own, and the best ones make revenue grow as the customer's value grows.

• A wrong model can cost more than a wrong price, so no team should inherit one by default. Ch. 7 · Go beyond the Price Point
  • Most companies keep their old model without testing it, which wastes a major lever.
  • A fixed per-unit fee turns into losses when the unit's cost drivers shift.
  • Sensors and data can wipe out old revenue streams, such as on-site repair fees.
  • A European distributor signed a three-year deal at a fixed price per TV delivered. TVs grew much larger, so fewer fit on each truck and more runs were needed. Costs rose sharply, revenue stayed flat, and the deal lost money.
  • Backhoes and tractors now send data before they break, so customers fix problems early. Hourly charges for an engineer's repair visit could vanish. Bundling proactive maintenance into a higher machine price may be the better model.
  • Monetarily, a bad monetization model can be worse than a bad price.
• The strongest models charge on a metric that tracks what the customer gains. Ch. 7 · Go beyond the Price Point
  • Xerox charges some customers by equipment use, and Enercon charges by the electricity its turbines generate.
  • Metromile prices auto insurance per mile using telematics.
  • Outcome pricing only works if the seller can deliver the promised performance and controls how the product is used.
  • In 2011 GE began putting sensors in medical equipment, aircraft engines and turbines. It charges by hours of use or miles flown, so savings from less downtime flow to GE. These outcomes-based services bring in $1 billion a year.
  • When Monsanto is paid by yield per acre, it must make sure its herbicides are applied as prescribed. That control is what makes the metric workable.
  • Good metrics follow perceived value, such as charging per surgery instead of an upfront equipment price.
• Products in one suite can need different metrics, because each delivers value differently. Ch. 13 · Learning from the Best
  • Optimizely charged Testing by monthly unique visitors placed in experiments, not per user.
  • Personalization is priced on total site traffic.
  • Optimizely's founders rejected standard per-user SaaS pricing because seat counts had nothing to do with value. Testing launched in 2010, grew at triple digits a year, served Dell, Netflix and Disney, and passed 30 billion optimized visitor experiences.
  • Personalization runs all the time for every visitor, not just those in an experiment. Total traffic therefore matched its use better than the Testing metric.
• Five models suit new launches, and each fits only under specific conditions. Ch. 7 · Go beyond the Price Point
  • Subscription fits continual use and products that once needed a big upfront purchase.
  • Dynamic pricing needs volatile demand, constrained supply and a clear benefit for paying more. An auction needs scarce inventory and power with the seller.
  • The other two are alternative metric pricing and freemium. Freemium needs near-zero production cost.
  • In 1999 Netflix swapped per-disk fees for a flat monthly fee. Streaming subscribers grew from 33 million in 2012 to 69 million in the third quarter of 2015.
  • Uber's surge pricing draws more drivers at peaks, so it schedules no one. It began when Uber tested extra pay to get drivers to Boston bar patrons at 2 a.m. Coca-Cola's 1999 test of a vending machine that raised prices in warm weather angered customers and was dropped.
  • Auction ads made up 70 percent of Google's $35 billion revenue in the first half of 2015. eBay runs an $18 billion-a-year auction business.
  • Freemium fails for 90 percent of companies, and free-to-paid conversion is usually below 10 percent. Free games lose 75 percent of users after one day. Evernote reached 150 million registered users but has been slow to earn revenue.
• Pick the model with five questions, then layer structures and rules that fit the company's stage. Ch. 7 · Go beyond the Price Point
  • Ask about customer acceptance, future trends, company stage, competitors and ease of implementation.
  • Volume tiers or two-way matrices sit on top of a model when usage varies widely.
  • LinkedIn InMail shows price can add value, and that rules must match the business's size. Ch. 13 · Learning from the Best
  • To test acceptance, offer models that cost the same total and ask which one people prefer. They almost always pick one. Start-ups should keep it simple, like Square's flat 2.5 percent with no hidden fees.
  • A volume tier might charge 3 percent per transaction at 100,000 to 500,000 transactions a month and 2 percent at 500,000 to 1.5 million.
  • InMail launched at $10 a message. The premium kept spam out and added legitimacy, and members paid only if they got a reply. In January 2015 LinkedIn flipped the rule: a reply within 90 days credits the InMail back. That only worked once the network had hundreds of millions of members.

5Write a pricing strategy and a living business case built on willingness to pay

A short written pricing strategy and an outside-in business case turn willingness-to-pay research into a launch price a team can defend with numbers.

• A pricing strategy should fit in a few lines, with ranked goals and a "because" behind every choice. Ch. 8 · Price Low for Market Share or High for Premium Branding?
  • It states intent, quantified goals and a time frame, for both the short and the long term.
  • Goals come first and must be ranked, since market share and total profit push price in opposite directions.
  • Firms that have a clear pricing strategy are 40 percent more likely to reach their full earning potential.
  • The sample strategy in Figure 8.1 aims for revenue growth over two years. It sets a premium price in core segments and grows the customer base in growth segments. It follows most of the market leader's price moves because the leader sets customer price expectations. Growth segments get a slight discount and loyal customers a slight premium, matching the value each segment gets.
  • In a Goal Allocation Exercise, five leaders each divide 100 points among goals like revenue, share, total profit, margin and customer lifetime value. The five are the CEO, the CMO, the head of sales, the CFO and the head of procurement. Their point splits were very different. This came as a shock to a team that thought it was on the same page. After some debate, they agreed to aim for the most share possible while raising overall profit by at least 10 percent.
  • At $10 a product wins 100 customers. At $15 it wins 80, which means 20 percent fewer customers for 20 percent more revenue. With a $7 unit cost, the margin moves from 30 percent to over 50 percent. The goal ranked first decides which price wins.
• Pick one strategy type on purpose, and treat penetration as the riskiest. Ch. 8 · Price Low for Market Share or High for Premium Branding?
  • Maximization fits most launches, because early adopters rarely pay much more, so short- and long-term optimal prices barely differ.
  • Penetration fits network effects, strong first-brand loyalty, planned price hikes or falling unit costs.
  • Skimming fits breakthroughs, early capacity limits and early adopters who pay far more.
  • Ariba launched free for sellers and charged buyers. Sellers pulled buyers onto the system, and Ariba later charged sellers too. Today it earns as much from sellers as from buyers. Lexus entered the U.S. with low prices and raised them more than 40 percent five years later.
  • LivingSocial raised more than $900 million to email coupons for local businesses. By 2015 it had four years of losses totaling more than $1 billion. It had justified low prices with future revenue that never came.
  • Rider price sensitivity forced Uber to become the low-cost provider. Higher utilization lowered cost and price further, which Bill Gurley calls the Uber virtuous cycle. He estimates the low prices opened a market 20 times larger.
  • Porsche launched the Panamera with only the eight-cylinder model and added the cheaper six-cylinder a year later. Buyers who wanted to be first had to take the higher-margin car.
• Set price-setting and reaction rules before launch, not in the heat of the moment. Ch. 8 · Price Low for Market Share or High for Premium Branding?
  • Price-setting rules cover monetization models, differentiation, floors, endings and increases.
  • Promotion rules follow the brand. Walmart's Every Day Low Price builds a low-entry image, while Apple skimps on promotions to stay premium.
  • Competitor moves get war-gamed early and written down as rules.
  • Sample limits: keep all prices within 200 percent of the average, and cap discounts at 50 percent. Price endings like 0.99 or 0.95 matter more in B2C. In B2B, whole numbers are usually better.
  • Promotion rules also name the types a company will never use, such as cash-back offers.
  • War-gaming asks four questions. How might rivals react, and why? Will they react only once? What would matching their price do to revenue and profit? What counterreactions will your own reaction trigger?
• Set the price from your own product's elasticity curve, never from an industry average. Ch. 8 · Price Low for Market Share or High for Premium Branding?
  • Build the curve from WTP research and costs, then compute revenue and profit at each price.
  • Profit and revenue peak at different prices, so the ranked goal picks the point.
  • The curve settles internal price debates with numbers instead of instinct.
  • In Figure 8.5, $100 sells 1 million units, $70 sells 1.35 million, and $130 sells 600,000. Variable cost is $50 per unit and fixed cost is $25 million. Revenue peaks at $100. Profit peaks at $110, on 10 percent less volume. A $20 pricing error can easily cost 20 percent of total profit.
  • When a CFO asks for $110 instead of the team's $100, the curve shows how much volume the raise gives up. The team can then ask whether that risk is worth it.
  • Elasticity is the percent change in sales divided by the percent change in price. A 5 percent rise that cuts volume 10 percent gives -2. A steep curve means a relatively low optimal margin. The thinner the unit margin, the harder mispricing hits profit.
• Build the business case from outside data and keep updating it long after it wins funding. Ch. 9 · From Hoping to Knowing
  • Write the first version as soon as high-level WTP is known. Refine it as segments, bundles, model and strategy are set.
  • Unlinked cases break. R&D raises cost, finance raises price to protect margin, and nobody checks whether demand holds.
  • Nine steps add verified inputs, risk scenarios, competitor moves and company-wide cannibalization.
  • The nine steps: drop the static funding document; gather market size, segments, offers, value, WTP, model, costs and rival prices; include elasticity; verify market size, ramp-up, churn and cannibalization; attach risks and run best, worst or Monte Carlo cases (for example with Oracle's Crystal Ball plug-in for Excel); rank goal trade-offs; model competitor responses; assess impact on the whole company; check in at every decision point.
  • Porsche approves a new model only if total company revenue rises after cannibalization. It revisits the case after launch to check the forecast.
  • In 2011 Manheim, an Atlanta auctioneer of about 7 million used vehicles a year, split over a no-questions return option. Some executives wanted to launch on gut feel. Vishaal Jayaswal commissioned value research in 2012. Risk-averse dealers would pay more for a 21-day window, and price-sensitive ones only for a short guarantee. DealShield launched in 2012 with returns within 21 days and 500 miles, priced by transaction risk. By 2015 it had protected billions of dollars in purchases.
  • Skipping WTP data has a known cost: Without this information, your business case will only tell you what you want to hear.

6Sell the customer's benefit and frame the price for how people really decide

A right-priced product still needs a sharp benefit story from people who helped shape it, and a price framed for how buyers actually choose.

• Marketing and sales belong on the innovation team from day one, or the value story gets lost at the handoff. Ch. 10 · The Innovation Won't Speak for Itself
  • Buyers give little time. A salesperson may get 10 minutes, a website visit five minutes, an ad 15 seconds.
  • Teams called in at launch never heard what excited customers in development, so they invent a story that may not match it.
  • Even when every function meets, the loudest or most senior voice tends to pick the message.
  • The fix is not a fancy ad agency. Key marketing and sales people join early, absorb what resonated, and help shape the design.
  • Early involvement also lets salespeople talk about value instead of price.
  • The handoff from R&D to sales is usually treated as routine. It needs special effort, because even companies with strong sales and marketing teams get value messaging wrong.
  • Passion hurts. Product and marketing people want to cram in every feature and benefit, so the team must show restraint.
• Messages should state what the customer gains, differ by segment, and be measured and revised. Ch. 10 · The Innovation Won't Speak for Itself
  • Edison tested over a thousand filaments. People bought the bulb so they would not trip over their kids' toys in the dark.
  • Carbonite swapped "20 gigabytes" for "unlimited storage." Most users still stored less than 20 gigabytes, but conversion rose strongly.
  • LinkedIn led Talent Solutions with a short, customer-tested line about finding and engaging the best passive talent.
  • Adobe Creative Cloud pitches individuals and enterprises differently, and Mini gives each of its eight models its own benefit message.
  • SmugMug had four plans listing more than 100 features, and buyers were confused despite praise from the Wall Street Journal and Forbes. Chris and Don MacAskill cut the copy to fewer than 10 benefit statements and moved feature comparisons to an optional section. Each plan then matched one need: storage, personalization, selling online, or marketing. Revenue and conversion rose by a double-digit percentage.
  • To write a benefit statement, ask what the customer achieves because of each feature. Probe pain points, learn how customers measure their own performance, and quantify value against current alternatives. Keep headlines to a few words and test them. Drop R&D spend and patent counts.
  • The MOCA grid plots each benefit's importance to customers against performance versus competitors, as customers rate it. Lead with important benefits where you win. Push less important ones only if you can prove they matter. Prepare defenses where rivals win. Rerun it regularly.
  • A feature belongs to the product; a benefit belongs to the customer.
• Putting the customer's own numbers in front of them justifies a price that feature talk cannot. Ch. 10 · The Innovation Won't Speak for Itself
  • A warehouse SaaS firm built a value-selling spreadsheet that turned each customer's data into a total return.
  • Sales ended up many times higher than per-user pricing would have produced.
  • Peers charged per user, for example $50 per month per user. The firm saw that as a minivation, since its software forecast demand, cut excess inventory, automated picking and removed paper.
  • Salespeople asked a few questions and entered manual picking hours, inventory carried, shipping errors and paper costs. The sheet computed savings, and sales paired the dollar figure with a crisp benefit statement while competitors were still explaining features.
  • Swarovski applies the same logic upstream. Consumers pay 120 percent more for a crystal-embellished phone case, and premiums on other products run from 30 percent to several hundred percent. That evidence lets it escape cost-plus talks and show makers their extra profit.
• Behavioral framing, layered on value pricing, makes a price easier to accept. Ch. 11 · Use Behavioral Pricing Tactics to Persuade and Sell
  • People pay about twice as much for the same beer at a fancy resort as at a run-down store.
  • Value pricing sets the number. Behavioral pricing shapes the offer so buyers can compare and decide, in B2B as well as consumer sales.
  • Six tactics apply: compromise effect, anchors, price as a quality signal, razor/blades, pennies-a-day, and price thresholds.
  • A study found more than 20 percent of customers would refuse $71. Pricing at $69.99 kept them.
  • Anchors. A theater sells a $4.99 small soda mainly so the $5.99 large looks cheap. When The Economist added a $125 print-only decoy, 84 percent chose the $125 bundle versus 32 percent without it. One B2B firm opens every negotiation with a 40 percent premium for new parts.
  • Price signals quality. Apple launched the iPhone in 2007 at $599. In a 2008 study, 85% felt relief from a $2.50 placebo, but only 61% at 10 cents. Start high, since raising a price later is hard. Never deceive.
  • Small units cut sticker shock. A $480 machine with $10 coffee and a $120 machine with $40 coffee cost the same over 12 months, yet the second sells better. Amazon EC2 quotes hourly prices, sometimes in fractions of a penny. Razor/blades fits only if downstream sales are certain.
  • Removing anxious moments helps too. Uber built no tip tool, so riders never weigh 5 versus 10 percent in a hurry.
• Behavioral tactics must be tested before rollout, because what works in one setting can fail in another. Ch. 11 · Use Behavioral Pricing Tactics to Persuade and Sell
  • Too many tactics confuse buyers. Too few leave money on the table.
  • Focus groups, A/B tests and survey experiments can each show which tactics work.
  • In 2012 an Internet start-up priced tiers at $49, $79 and $149, and close to 60 percent chose the entry tier. It cut Basic's functionality, moved the upper tiers to the $99 and $199 thresholds, and added a $299 Premium anchor. ARPU rose 36 percent and new-customer MRR rose 29 percent, about 14 points from behavioral pricing.
  • Another company's focus group rejected a four-product anchor lineup. Shoppers said four products on a display would confuse them and they would leave.
  • Large companies should expect a 1 to 3 percent sales gain. It still mostly reaches profit, since costs barely change.
  • Define control and test groups clearly and split samples so they match. Use survey experiments when prices must stay transparent. Then pick the best tactics, set the price, and stick to it.

7When early sales disappoint, find the cause before touching the price

After launch, weak sales are usually caused by something other than price, so teams that diagnose first and protect price integrity keep margin a hasty cut would lose for good.

• Prepare responses to the four common post-launch problems before launch, so no one improvises a cut. Ch. 12 · Maintain Your Price Integrity
  • The four problems: buyers misunderstand the value, a competitor undercuts on price, a rival launches a competing product, or sales lag with no competitor involved.
  • If the pricing work was sound, the real cause is usually features, awareness, distribution, quality, communication or sales training.
  • A European firm with no plan saw its pricing collapse in a single day after a Dutch competitor attack.
  • The firm held 70 percent share in the Netherlands. The Dutch sales manager alerted the European head of sales, who panicked. The CEO then let the global head of sales cut any price he wanted until year end.
  • An industrial maker blamed its new product's price for weak sales. A rival had offered large temporary discounts tied to high minimum orders before the launch. Customers stocked up and had no room for the better product.
  • Know from the business case what a 5, 10 or 20 percent cut would cost in profit. Brief the sales force on how to answer competitor responses before launch.
• When sales lag, a cross-functional task force should find the cause, using more than financial numbers. Ch. 12 · Maintain Your Price Integrity
  • Sales, marketing, finance, product development and product management sit on it.
  • Track sales, operations and customer KPIs monthly, not just volume, revenue and profit.
  • Run regular deal deconstructions that treat each won or lost deal as a lesson, never as blame.
  • Healthy escalation: at most 20 to 30 percent of deals escalated, with price changed on at least 30 to 40 percent of those. Approving requested prices unchanged is rubber-stamping.
  • Too few escalations can mean the product is too easy to sell and underpriced.
  • Sales KPIs include win-loss ratio, deviation of final price from target, quoting time and price as a reason for loss. Reps who keep blaming price may need training, not a lower price.
• Try nonprice actions first, and make any cut a trade. Ch. 12 · Maintain Your Price Integrity
  • A Latin American telecom required managers to propose three nonprice actions before any cut.
  • Options include more advertising or adding value, such as a higher-end product at the same price.
  • A cut can scar the brand, so some customers will not buy at any price.
  • A board member called the three-actions rule the highest-impact change the company had seen, because everyone understood it.
  • If price drops, ask for something back: longer commitment, more volume, introductions to other departments, references or joint press releases.
  • War-game competitor reactions first. If simulated volume, share and profit leave you worse off, do not cut. Patience means urgent diagnosis, not doing nothing.
• Sales far above plan need the same diagnosis, because they may signal underpricing. Ch. 12 · Maintain Your Price Integrity
  • Mercedes' 1970s SL was about 20 percent underpriced and could rise only 3 to 5 percent a year.
  • The SL sold out in months with a two-year waiting list. Fixing the price took several years and cost hundreds of millions of dollars in revenue.
  • Raise prices in small steps paired with small improvements. Big jumps make customers resent you and invite rivals to undercut.
  • Other moves: longer delivery terms with frequent order updates, shifting supply toward premium versions, or a faster next generation at higher prices.
• Stay out of price wars, which only the lowest-cost supplier wins. Ch. 12 · Maintain Your Price Integrity
  • In the 2014 Global Pricing Study, 58 percent of companies said they were in a price war, and 90 percent of those blamed competitors.
  • Only 5 percent admitted starting one on purpose and 5 percent by accident. It takes two to fight, so the pattern is denial.
  • 83 percent felt rising price pressure over two years. About 19 percent saw a war in their industry without being hit.
  • Never move first, learn why rivals moved, and keep elasticity forecasts current. Price wars: The only winning move is not to play.

8Making price-first innovation stick takes a leader-driven culture change

Changing the process is easy, changing the culture is hard, and the shift only holds when top executives lead it themselves.

• Start with an honest look at how recent launches really did. Ch. 14 · Implementing the “Designing the Product around the Price” Innovation Process
  • Pick a few launches that have been on sale long enough to judge, and compare results with their business plan forecasts.
  • Label each one as a feature shock, minivation, hidden gem, undead or big success.
  • Then leaders join early R&D meetings to sell the vision and test ideas against the nine rules.
  • The team can also run the online diagnostic at monetizinginnovation.com. A biased input makes the baseline useless.
  • Record any strong practices you find. Finding none is a sign of big opportunity, not a reason to despair.
  • Tell the product team ahead of time that leaders will attend, so the visits feel like support and not an ambush.
• Pilot on one real product with a single accountable owner. Ch. 14 · Implementing the “Designing the Product around the Price” Innovation Process
  • Choose one representative idea from the pipeline and staff it with R&D, product, pricing, marketing, sales and finance.
  • Name a "monetization hero" who is in charge. Optimizely did this, and it was a key factor in its success.
  • Give everyone explicit license to say no, and fund willingness-to-pay research early.
  • The hero needs product experience and broad knowledge of how the current process works.
  • Fear of saying no is what keeps the old feature-heavy habit alive. Members hold each other accountable.
  • Treat the pilot as test and learn, and document what works. No team excels at all nine rules on the first try.
• Scale one product group at a time, with a dedicated team and gates no one can skip. Ch. 14 · Implementing the “Designing the Product around the Price” Innovation Process
  • Run one product from each main group through the process. A big-bang cutover risks everything.
  • A full-time monetization team sits in every new product meeting. Dräger and Swarovski credit this setup.
  • Assign RACI roles and track sales, operations and customer KPIs, not just financial ones.
  • In the RACI chart, the monetization team member is accountable. Others are responsible, consulted or informed.
  • Swarovski drives its change with a three-person pricing board that meets six times a year and a two-person pricing office. It expects another one to two years of work.
  • Too many opt-outs slide back to the status quo, so best-in-class firms use automated stage-gate workflows.
  • Small start-ups may not need every step. Their monetization team can simply be the innovation team.
• Culture changes when leaders model the behavior and the rules for approval flip. Ch. 13 · Learning from the Best
  • Porsche executives, up to the CEO, rented and test-drove rival cars. Teams presented monetization plans to the full board.
  • Dräger proved the process with pilots before making it mandatory. One alcohol breath tester sold 10 times its predecessor.
  • Approval moves from yes/maybe/no to no/maybe/yes. At Porsche, each product must earn its way to market.
  • A disguised pharma firm faced an average cost of $2.6 billion per new drug. It spent more than five years moving value analysis for patients, prescribers and payers ahead of Phase III.
  • That firm killed several compounds for weak market prospects rather than clinical problems, placed fewer but bigger bets, and stopped defining success as regulatory approval.
  • Stick also needs training for product, marketing and sales, a per-function plan explaining why, what and how, and a kill list of the costliest undead products.
  • Resistance is normal. Leaders remember past wins, and sales-driven firms see segment focus as limiting sales. Lowballing targets or prices should be penalized because it hands profit back as discounts.
• Nine pitfalls are predictable, and the worst is executives handing the work off. Ch. 14 · Implementing the “Designing the Product around the Price” Innovation Process
  • Firms where senior executives led the effort averaged 33 percent more profit than firms that delegated it.
  • Seeking exact prices too early gives false precision. Early research needs only a ballpark.
  • Messy data is normal. Draw practical conclusions instead of starting witch hunts.
  • The other pitfalls: depending on one person, leaving out marketing and sales early, a big bang, one size fits all, too many opt-outs, and underfunding. Funding pays off fairly quickly.
  • If monetizing innovation is not a top-two priority with real C-level involvement, do not start at all.
  • Following the steps mechanically misses the point: You may get an A on your process but an F on your innovation.
  • The choice is the red pill from the 1999 film The Matrix. Gut hope is the comfortable blue pill, and even past wins built on hope rest on a shaky base.

9Put it to work

Before anyone designs the next product, the team asks customers what they will pay and shapes the product around the answer.

1. Have the willingness-to-pay talk before design starts Ask prospective customers what price feels acceptable, expensive and prohibitive, then ask why. Measure what each feature is worth to them and build in that order. Ch. 4 · Have the “Willingness-to-Pay” Talk Early
   • Gillette set a target of 15 rupees for the Guard razor and 5 rupees for blades before designing it. It cut the Mach 3's 25 components to four, and by 2012 the Guard held more than 60 percent of India's razor category.
   • The trap is reading the average. Two groups at $20 and $100 average to $60, which overcharges one and undercharges the other.
2. Segment customers by needs, value and willingness to pay Group customers by what they need and will pay for, not by size or demographics. Start with three or four segments and drop any that are not worth serving. Ch. 5 · Don't Default to a One-Size-Fits-All Solution
   • A packaging paper maker had always split customers into small, medium and large. Research found four needs-based segments, each mixing all three sizes.
   • Test the segments on salespeople. If they cannot sort their own clients into them, the segments are not usable.
3. Build each offer from features the segment will pay for Sort every feature into leaders, fillers and killers for each segment. Cut killers or sell them on their own, and arrange the rest into good, better and best tiers. Ch. 6 · When Designing Products, Configuration and Bundling is More Science Than Art
   • The common trap is packing the entry tier to win customers. Then nothing is left to upsell, so firms land customers but never expand.
   • If more than 50 percent of buyers pick the entry tier, take features out of it.
4. Choose how you charge on purpose Pick a monetization model that ties your revenue to the value customers get. Test candidate models with customers and stress-test them against trends and shifting costs. Ch. 7 · Go beyond the Price Point
   • A trucking firm signed a three-year deal at a fixed price per TV delivered. TVs grew larger, fewer fit per truck, costs rose and revenue stayed flat.
   • Freemium fails for 90 percent of companies, and free-to-paid conversion in software is usually below 10 percent.
5. Rank your goals and write a pricing strategy Agree which goal comes first, then pick one strategy type: maximization, penetration or skimming. Write it down in a few lines with a "because" for each choice, and plan reactions to competitors in advance. Ch. 8 · Price Low for Market Share or High for Premium Branding?
   • In a Goal Allocation Exercise, each executive splits 100 points across goals. One leadership team that thought it was aligned found massive differences, then agreed to maximize share while growing profit at least 10 percent.
   • Penetration is the riskiest choice. LivingSocial raised more than $900 million and piled up more than $1 billion in losses over four years.
6. Build a living business case on customer data Put willingness to pay and price elasticity into the case, and model price, value, volume and cost as linked. Update it at every milestone and after launch. Ch. 9 · From Hoping to Knowing
   • The usual failure: R&D raises its cost estimate, finance raises the price to protect margin, and nobody checks whether customers will still buy.
   • Manheim researched dealers before launching DealShield in 2012. It priced returns within 21 days and 500 miles by transaction risk, matching what different dealers would pay.
7. When early sales disappoint, diagnose before touching price Form a cross-functional team to find the real cause. Try nonprice fixes first, and if you do cut, get something back. Ch. 12 · Maintain Your Price Integrity
   • A Latin American telecom required managers to propose three nonprice actions before any price cut. A board member called it the highest-impact rule the company had seen.
   • One European firm let its global head of sales cut any price he wanted after a competitor attacked in the Netherlands. Its pricing strategy fell apart in a single day.

10The book's words

A handful of terms covers how new products fail to make money and how to price them before they are built.

• Willingness to pay (WTP) How much customers would pay for the value a product or feature gives them.
  • The simplest way to learn it is to ask what price is acceptable, expensive and prohibitively expensive, then ask why.
• Feature shock A product stuffed with features, many unwanted, that is costly, hard to explain and overpriced.
  • Amazon's Fire Phone launched in July 2014 at $199 with contract. Four months later it cost 99 cents with contract, and Amazon took a $170 million write-down.
• Minivation The right product for the right market, priced too low to reach its potential.
  • Valeo sold its Park Assist system to Volkswagen for about €100 per unit on cost plus margin. VW charged end customers €670.
• Hidden gem A strong idea the company fails to see, value or launch, often because it sits outside the core business.
  • Kodak engineer Steven Sasson invented the digital camera technology in 1974. Kodak's first digital camera, the DC40, came in 1995.
• Undead A product that gets released even though few people want it. It either gives a poor solution to a real problem or solves a problem nobody has.
  • Segway promised 50,000 sales in its first year. By the end of 2007 it had sold about 30,000 in total.
• Leaders, fillers and killers Features that drive the purchase, features that are nice to have, and features that sink the deal if customers must pay for them.
  • A feature is flagged as a killer if fewer than 20 percent value it and more than 20 percent do not value it at all. Heated seats can be a leader in the cold north and a killer in the tropics.
• Monetization model How the customer pays, as opposed to how much.
  • In 1999 Netflix charged a flat monthly fee for unlimited mail rentals instead of per-disk fees, and customers adopted it in droves.
• Skimming Launching high for early adopters who will pay more, then lowering price step by step for later segments.
  • Porsche launched the Panamera with the eight-cylinder model and released the cheaper six-cylinder version a year later.
• Price elasticity The percent change in sales divided by the percent change in price.
  • A 5 percent price rise that cuts volume 10 percent gives an elasticity of -2. Each product needs its own curve, never an industry average.
• Price integrity Holding a new product's price instead of cutting it as a reflex when early sales are lukewarm.
  • The opposite error is costly too. Mercedes priced a 1970s SL about 20 percent too low and could raise prices only 3 to 5 percent a year, leaving hundreds of millions of dollars on the table.

11Chapter by chapter

Where each idea is in the book.

• Foreword Many innovations fail because companies model costs in detail but only guess at revenue and never learn what customers value or will pay for. The fix is to know willingness to pay before building, which moves teams from hoping to knowing.
• Ch. 1 · How Innovators Leave Billions on the Table Most new products miss their goals because companies decide price last. The fix is to learn what customers value and will pay before building, then design the product around that price.
• Ch. 2 · Feature Shocks, Minivations, Hidden Gems, and Undeads New products fail to make money in four recurring ways: feature shocks, minivations, hidden gems and undeads. Each grows out of a particular company culture, and all four can be avoided by bringing price and real customer willingness to pay into development early.
• Ch. 3 · Why Good People Get It Wrong Most innovations fail to make money because a widespread mindset treats pricing as a threat to creativity and leaves it to the end. Teams that test willingness to pay at the concept stage and design the product around a price can know, not hope, that it will sell.
• Ch. 4 · Have the “Willingness-to-Pay” Talk Early Talk with customers about their willingness to pay (WTP) before designing a product, not just before launch. That talk tells you whether a product can make money and which features to build, so you can design the product around the price.
• Ch. 5 · Don't Default to a One-Size-Fits-All Solution Customers differ in needs, value, and willingness to pay, so products designed for the average customer please no one. Segment by needs, value, and WTP before designing the product, and build offerings for each segment.
• Ch. 6 · When Designing Products, Configuration and Bundling is More Science Than Art Configuration (which features go in each offer) and bundling (which products sell together) should be designed from segment needs, value and willingness to pay, not instinct. Done systematically, they lift profit and make buying easier, and sometimes the right move is to unbundle.
• Ch. 7 · Go beyond the Price Point How a company charges for a new product can matter more than the product or its price. Teams should deliberately pick, test and stress-test a monetization model instead of inheriting the one they have always used.
• Ch. 8 · Price Low for Market Share or High for Premium Branding? Before launch, a new product needs a written, living pricing strategy: a short- and long-term monetization plan with clear intent, quantified goals and a time frame. It rests on four building blocks: prioritized goals, one strategy type (maximization, penetration or skimming), price-setting principles, and planned reactions to customers and competitors.
• Ch. 9 · From Hoping to Knowing A new product's business case must be built outside-in, using customers' willingness to pay and price elasticity, and kept as a living document that links price, value, volume and cost throughout the product's life. Without WTP data there is no real business case, only guesses.
• Ch. 10 · The Innovation Won't Speak for Itself A great product priced right still won't sell itself. Teams must communicate clear, segment-specific customer benefits, and that only works when marketing and sales join the innovation team from the start.
• Ch. 11 · Use Behavioral Pricing Tactics to Persuade and Sell Customers decide with emotion as well as reason, so a new product's price should be framed with behavioral tactics on top of value-based pricing. The tactics must be tested, not guessed.
• Ch. 12 · Maintain Your Price Integrity When a new product's early sales disappoint, cutting the price is almost always the wrong move. Diagnose the real cause with a cross-functional team, try nonprice actions first, and stay out of price wars.
• Ch. 13 · Learning from the Best Seven companies across cars, software, industrial safety, crystals and pharma show that settling what customers value and will pay before building, then designing, packaging and pricing around that, produces bigger hits, higher margins and fewer failures. Making it stick takes top-level commitment and a change in culture, not just a new process.
• Ch. 14 · Implementing the “Designing the Product around the Price” Innovation Process Adopting a price-first innovation process is an organizational transformation, done in two phases, Jump-Start and Pilot, then Scale and Stick, while steering around nine predictable pitfalls. It only works if top leadership drives it personally.