Over the second half of the 1990s, Porsche hatched plans for a new car. Annual sales were a third of what they’d been the decade prior, so the company badly needed a turnaround. The car hit the market in 2003. A decade later, Porsche sold 100,000 of the model in one year — nearly five times as many as it did in its launch year — which accounted for half the company’s total profit. This enabled Porsche to eventually pay down its debt, increase its cash reserves and generate the highest profit per car in the automobile industry. What was this impactful, new product?
It wasn’t a sports car, for which Porsche is famed – not, for example, the sexy Porsche 911 that can effortlessly hit 200mph. Instead, it was the Cayenne: Porsche’s family-friendly SUV. How did the carmaker find this degree of impact with a vehicle so counterintuitive to its brand? In this case, it wasn’t Porsche’s engineering prowess or manufacturing efficiency, but how it designed the car around what customers needed, valued and were willing to pay for – in short, around its price.
Our central premise is that the bedrock of product development lies in understanding and responding to price sensitivity. It’s more than just setting a price point like $500; it’s about aligning the product with “perceived value”. Almost everything else – product features, services provided, brand perception, the size of the organisation, profitability and more – is derived from this one fundamental attribute. Price is more than just a $,€ or ₹ symbol. It is a crystal ball, revealing true customer desires and the product’s potential. Ironically, despite its pivotal role in a product’s success, price is often an afterthought, tacked on after the product is complete.
The traditional way to build products is to design, build, market, and finally price. We recommend an alternative order: start with market and price, then design, then test, and then build.
On the other hand, Fiat Chrysler in 2009 badly needed a hit in the compact cars category, and focused its development process on engineering and design, settling on a price for the car at the very end. The company even bragged in advertisements that it was ‘kicking out the finance guys’ from the development process. They worked to design, build and rethink, and repeated that cycle over and over until engineering thought the product was good to go. Money was not an issue and compromise was not an option. The ad shows the company building prototype after prototype to get it right. Market performance was a disaster. It performed so poorly it eventually forced the company to issue temporary layoffs. Even though Fiat Chrysler was six times larger than Porsche, the company failed to craft a hit. That’s because the company thought about the product first and price last.
On the other hand, Porsche’s masterstroke was thinking about monetization long before product development for the SUV was in full speed, then designing a car with the value and features customers wanted the most, around a price that made sense. The result was total corporate alignment: Porsche knew it had a winner, and had the confidence to invest accordingly.
Porsche is not an outlier. The vast majority of companies are under some kind of price pressure, and need to create new products and features — and make money off of them— in order to survive. In a 2014 study conducted by Simon–Kutcher, about 80% of respondents said they were under price pressure. About 60% even said they were in a price war. The top way companies planned to respond to price pressure was to release new products and services in order to survive, according to this study. And yet 72% of these innovations did not meet their revenue or profit targets, or even failed completely. Why?
New products fail for many reasons. But the Achilles heel of many new products is a fundamental disregard for customer willingness to pay (WTP). Far too often, pricing is an afterthought, a gamble placed after significant investment in development. To truly succeed, businesses must integrate customer valuation into the product design process from the outset. This proactive approach ensures that resources are allocated to features customers truly value and that the final product resonates with the market’s price sensitivity. Ignoring this crucial step can lead to costly missteps. Take the Keurig Kold, a $370 home soda machine, or the “personal transporter” Segway, for example. By understanding customer WTP early on, companies can significantly increase their chances of launching a profitable product. According to the book, here’s the four ways companies get tripped up, and how to avoid them:
Monetization failures come in only 4 flavours:
Cramming too many features into a product—sometimes even unwanted features—results in a product that doesn’t resonate with customers and is overpriced. Typical symptoms are: They’re over-engineered, hard to explain, nothing stands out, difficult to sell and the company cuts the price often and hopes for the best. It’s usually borne of a sincere effort to be ‘all things to all people,’ resulting in a product that pleases few. Due to its multitude of features – none of them a standout – these products are costly to make and usually overpriced.
Take Amazon’s Fire Phone. The company, already the successful maker of gadgets like the Kindle, decided to launch a feature-packed phone that had four cameras, facial recognition technology and 3D effects, as well as Firefly, a shopping feature that let you buy a product by pointing the camera at it. Reviewers panned the phone and sales struggled, leading to a $170million write-down largely attributed to the unsold inventory.
Curb your instincts to please customers by giving away too much value unless people will pay for it. This will maximize the potential of your new products. And get comfortable with the idea of giving your price-sensitive segment only basic quality and service levels, rather than giving them everything. Product Management requires the self awareness to take away, not add, features.
Take the case of Microsoft. It has different versions of its Office suite, so that different groups of customers – business, home and education – find options best suited to its needs. It’s been a highly successful approach.
It’s an innovation that is the right product for the right market, but the company or entrepreneur didn’t have the courage to charge the right price, and as a result, the product doesn’t achieve its full revenue potential. Typical symptoms include easy selling, but due to lack of ambition and low-ball targets, it doesn’t go far.
Take the computer manufacturer Asus. It unveiled a mini-notebook in 2008 priced at €299 that sold out in a few days. Demand exceeded supply by 900%. Asus couldn’t make them fast enough and lost significant revenue once its supply ran dry. The Asus product fell far short of its price potential; it was way underpriced. Asus left lots of profit on the table. They could have priced a lot higher, serviced the market that was willing to pay, and then dropped the price after building far more units to target the mass market.
If the majority of deals are going through the pipeline without any pushback on price, you may have underpriced it. Track the number of price escalations, as well as the length of the sales cycle against historical norms. It will give you more hard evidence that something new is occurring, which you can then address.
A potential blockbuster product that is never properly brought to market, generally because it goes against the grain or falls outside of the core business. Take Kodak for example. In 1974 Kodak had digital photography technology, but didn’t release it because they were concerned about cannibalizing their existing business. It didn’t introduce its first digital camera until 1995, 21 years after the fact. Kodak’s team became complacent about their firm’s successful, pre-existing business model, and the company stagnated. They declared bankruptcy in 2012.
Your company may have hidden gems lying around if you are going through any of these inflection points:
Be careful and mindful when you’re going through these big organizational changes. You don’t want a great idea to get lost in the shuffle, and you also don’t want to see great ideas killed by middle management. The key is grooming a culture where ideas are heard and taken seriously, and promising ideas are developed with expert teams.
An innovation customers don’t want, either because it’s the wrong answer to the right question, or an answer to a question no one was asking. This category of product should never be released, because it comes back to haunt you, like a ghost or zombie. Typical symptoms include sales struggles, negative press, and a lack of objectivity. Especially when they are pet projects for a senior executive. At BangDesign we have been involved in many vanity corporate projects that were the wrong answer to the right question.
Undead failures teach us that some well-intentioned, marvellously engineered new products should never be brought to life. One of the most celebrated — and then reviled — was the Segway. It was supposed to change the world. But sales underperformed in a major way, and one of the top problems with the machine was price: At $3,000-$7,000 each, there was little hope for a mass following.
Or, finding there is no acceptable price, or that the market size is too small, you have reason to scrap the product altogether before you incurred too much financial damage. A critical step in your new product development process will be making a business case for it – by getting external input. Specifically, you need to know your target customer’s Willingness To Pay (WTP). Slapping on a price just before going to market is a recipe for failure. But many commit this crime.
Here are a three key rules for avoiding the 4 types of monetization failures from the previous section:
It is essential to have the “willingness to pay” talk early in the product development process. About 80% of companies don’t do this — and instead wait until the last minute — according to Simon-Kucher’s study.
Ask at the outset whether or not people would pay for the product you intend to develop. This is the Willingness-to-Pay talk. Frontloading this question is powerful because customers won’t be in the mindset of negotiating price. Instead, they’ll give you objective feedback that you can use to prioritize what you’re building. Ask someone if they like a product. Then ask them if they like it at a price point, say $20. The whole conversation changes.
We often find ourselves forced to put an intense amount of effort into new product features without clarity on whether customers will be willing to pay for them. In 2015, we were working with a start-up that was developing custom hardware. We asked the founder to prioritize features that they were willing to pay for. It turned out that the features lower on their list were what customers were actually interested in paying for. And the product was easily reduced to a smartphone with a specific component and accessory for the product and service. Without this exercise, we would have focused their time and attention on developing complicated hardware and software that produced a mediocre product.
One of our hard learned lessons in creating, marketing, launching and distributing new products for ourselves and our customers is that it is prudent to have a “willingness to pay” (WTP) conversation with buyers as early in the process as possible. Key information you want to get from a WTP conversation:
Understanding a customer’s willingness to pay is the cornerstone of successful monetization. Rather than guessing, companies should conduct large-scale studies to map out exactly how much people are prepared to spend on a product. This involves identifying “price cliffs” – those critical points where a small price increase dramatically reduces demand. If you price at $51 as opposed to $49.99, suddenly there’s a huge portion of people who think that price is not acceptable. It’s about recognizing the psychology of pricing; a difference of a few dollars can significantly impact sales. Armed with this knowledge, businesses can accurately predict revenue potential before a product even hits the market, optimizing pricing strategy from the outset.
For all the methods above, after a customer has made some choices, always try to follow up with, “why?” Your goal is to tap into the mental models customers are using to make their choices.
Segment on willingness to pay, not demographics. Your customers are not all the same, so one-size-fits-all solutions don’t work, and you instead need to do segmentation. However, the traditional way of doing segmentation, along demographics, is not effective for most products. You should instead segment based on differences in customers’ willingness to pay for your product.
– The most common bundling is to offer 3 options (e.g., bronze/silver/gold or pro, business, enterprise): a good option that has core features, a best option that has all the bells and whistles, and a better option somewhere in between.
– Ideally, < 30% of customers go for the good option, and > 70% opt for better or best, with > 10% going for best. Note that customers often avoid extremes, so going for the middle option is very common.
– G/B/B works because instead of a single option—a yes or no decision—you can now cater to customers that are optimizing for price (the good option), quality (the best option), or somewhere in between (the better option).
Here’s how to get started: When it comes to innovation, there’s only one right way to segment: by customers’ needs, what they value and their WTP for a product or service that delivers that value. Use segmentation as a guiding influence, starting in the R&D stage – be constantly exploring customer needs, values and WTP. As a runner, cyclist, designer and engineer, I find it rum that GPS device maker Garmin has recreated the same products for drivers, golfers, runners, hikers, bikers and others, with minor technical variations. Drivers, for example, get traffic updates in their device, while golfers get data on their distance from the hole and tips on sand and water bodies to avoid.
These principles are key to segmentation
There’s not a single market where customer needs are homogeneous. Yet again and again, companies design products for the ‘average’ customer.
Investigate How You Charge As Much as What You Charge
We stress the importance of charging in a way that makes sense and is appealing to the customer — and it’s not just about the price point. For example Michelin in the early 2000s came up with an innovation that made truck tires last 20% longer. But the head of sales predicted Michelin could only charge a few percentage points more for the new tires. And given that the new tires would last longer, they would reduce customer demand by 20%. So Michelin’s executives revisited the company’s long-established monetization model. The new model they came up with turned out to be as big a breakthrough as its longer-lasting tires: Charging trucking fleets by the mileage they drove their Michelin tires, not by the number of tires bought. The result was a model that allowed fleet managers to pay for performance and flexibly manage costs. For example, they would pay less for the tires in the event of an economic slowdown, when there would be less demand for trucking. And Michelin could generate 20% more revenue per tire if they lasted 20% longer. The company wound up having the biggest profits in the industry.
Here’s how to get started: There are several ways to charge – whether that’s a subscription model, dynamic pricing that fluctuates based on factors such as season and weather or a freemium pricing. To figure out what’s best, consider how likely your customers are to accept the model.
A successful monetization model must be tailored to specific customer needs, adaptable to market changes, transparent in its operations, and fair in its practices. Businesses should anticipate future trends and competitive landscapes to differentiate their offerings. The model should be easily understood by both customers and partners, and leverage technological advancements to create innovative revenue streams. A one-size-fits-all approach is rarely optimal; sometimes, the monetization model itself is the true product innovation. Before determining pricing, businesses must first establish a core monetization strategy. Here are five of the most common monetization models:
You should define a pricing strategy in a written document. This way, you are more likely to think through pricing holistically, based on a concrete strategy, rather than random guesswork. Moreover, you’re less likely to make wild (and potentially harmful) pricing changes later if things aren’t going as expected.
The pricing strategy document consists of 4 parts:
