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How to price your product

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Flint

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In other thread, @Lyinx asked about pricing. This made me think about the topic and remained me of an interesting video (and actually a book). It's packed with insights and tested techniques to tackle the hot questions: How do you know you will monetise? and How to price your product?

The talk is by Madhavan Ramanujam, a board member and partner at Simon-Kucher & Partners, a Silicon Valley based pricing strategy consulting firm. My notes and comments are below.

View: https://www.youtube.com/watch?v=UyX8GbYuDAs


In 2014, Simon-Kutcher & Partners launched a pricing study with more than 1,600 companies across 40 countries. About 40% of respondents were CEOs.
  • 80% of respondents said they were in some sort of price pressure
  • 60% said they were in a price war
  • 90% said the others started the war
  • Innovation was voted the number one strategy to solve the problem
  • But... 72% of past innovations did not meet the revenue or profit target, or failed completely
How did the companies fail to monetise innovation? Only in 4 ways:
  • Feature shock: product over-engineered, over-featured, with unwanted features
  • Minivation: the right product for the right market but under-priced and under-monetised (a bitter success if you know you could have done better)
  • Hidden gem: product that should have been developed but wasn't (e.g. Kodak and digital technology, fear of cannibalisation of own business)
  • Undead: product that shouldn't have been developed or kept alive (either a wrong answer to the right question or an answer to a question no one is asking)
What are the success criteria for monetising innovation? What do successful companies do differently?
  1. Think Price before Product
  2. CEO / C-level involvement = 35% higher chances of success across all kinds of KPIs and metrics
#1 is what's often repeated here one way or another and where the magic happens. The price is a measure of how much people want/need/value your product. If you focus on the need (indicated by willingness to pay), you naturally start with the price (derived from the benefit/value)... and the product is just a derivative. Analysis of willingness to pay puts calibrated constraints on both the benefit that your solution should deliver and your overall cost to do so. If you start with a product/idea, you end up scratching your head thinking what price tag to slap on it.

#2 may seem given on a smaller scale and in the context of TFLF entrepreneurs, but it highlights very important qualities that make things happen: having a helicopter view, not focusing on a single aspect, bringing all elements together, integrating all efforts and metrics, taking responsibility, driving the change, thinking big and far.

The answer to knowing vs. hoping to monetise
9 steps framework for monetising innovations
  1. Have the willingness to pay (WTP) talk early
  2. Segment: One size fits all doesn't work
  3. The core: Product configuration and bundling
  4. Monetisation model: How you charge trumps what you charge
  5. Pick the winning pricing strategy: Only 3 options
  6. Outside-in business case: that includes WTP
  7. Value communication: The product will not sell itself
  8. Use behavioural pricing & tap into Psychology
  9. Maintain your price integrity
In the video, Madhavan talks only about #1, #2 and #4, but all the other ones are covered in his book, Monetizing Innovation: How Smart Companies Design the Product Around the Price.

Having the Willingness to Pay Talk Early... in $

"Do you like this feature?" vs. "Do you like it at $20?"
If you didn't put pricing in your early product-market fit questions, you're probably hearing what you want to hear.

It's easier to talk about money earlier than later. Why? Because customers are not in the negotiation mindset. It's your opportunity to receive unfiltered, uncensored feedback and prioritise what you're building accordingly.

How to have a WTP talk?

Just do it. Just talk about the price point. Like "If I had this product with these features at $50, would you pay for it?". Put a price point and see what people say. If they say it's a no-brainer, then ask them "if it was $100, would you still pay for it?". If they say "no, that's too much", ask them why not. This is where the WTP talk shines. What you hear will help you make your product better because you'll start hearing what they value.

Ask smart value questions. Break it down. Show a concept or a product and ask "what do you think is the acceptable price for this?". They'll give you a low-ball answer. That's ok. Then ask them "what's an expensive price for it?". Get an answer and follow that through with "what's a prohibitively expensive price for this?". You'll get 3 price points. If you do it with enough people, a pattern will emerge. You'll be able to plot a percentage of people that find a certain price acceptable, expensive and prohibitively expensive. You'll spot psychological thresholds and will be able to choose a sweet spot for your price (see how it aligns with @MidwestLandlord's thread The Basics Of Pricing).
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Force trade-offs aka "what would you choose?" Put your potential customers in situations where they need to make a choice based on presented options. This is indirectly asking the pricing questions without focusing on it. "Which plan would you choose?", "If you were in this situation, what would you actually do?", "Would you take any of these products or would you not?", "If we changed X, what would you do?". This is akin to real life simulations, as in this is what your customer goes through when they land on your website. This is tapping into mental models and rules that people are using to make their decisions.

Segmentation: One size fits none

Think about the water that you drink. If it's in a fountain, it's free. You put it in a bottle, it's $2. Put gas in it, it's $2.50. Put it in a minibar, it's $5. It's just water. Commodity? But there's no single market that's homogeneous. Customers are heterogeneous. They have different needs, different values and different willingness to pay.

Don't do segmentation based on demographics. Segmentation should break the market down into a few different groups on which you can act differently.

Segmentation in action, packaging and bundling: all customers vs. different segments (e.g. 30% want the best, 40% want it now, 10% want product only, 20% are price sensitive). If you don't pay attention, you're end up building the product for the average and getting it wrong for the entire market.

The key to unlocking segmentation is packaging and bundling, and providing your customers with products that meet their needs, their value and their willingness to pay.

How you charge is way more important than how much!

When Michelin released they tires, they came up with an innovation that lasts 20% longer. If they had gone and asked the market if they wanted 20% price increase, they would have never gotten that. Instead, they based the price on a per-kilometre basis for truck drivers moving things from point A to point B. They offered to charge trucking fleets by the mileage they drove Michelin tires, not by the numbers of tires they bought. This was amenable and Michelin were able to extract 20% because the tires lasted more.

How to find out which pricing model appeals to your customers?

Put your customers through break-even situations and ask them "what would you choose or would you be indifferent?"

People have inherent preferences for how they should be charged. Test different models, even if they lead to the same price point. For example, when given a choice of a fee structure for a $10 product, most people prefer $0.50 flat fee over a 5% one... although they're basically the same. For a $200 product, a percentage looks more appealing and more people choose (3.5% + $3) fee over a $10 fee.

A number of monetisation models are in use: subscription, dynamic pricing, freemium etc. Dig deeper and choose one that works for your customers.
 

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Lyinx

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I deal with technology people that use this type of pricing, and they continuously sell subscription-based models for services, when I would gladly pay 3 to 6 months subscription just to have them set it up and forget it. But I feel I'm honestly getting shafted by a monthly subscription, so I end up not going that route and finding a way to do it on my own.

One example: we paid $$,$$$ (big bucks) for a system that was supposed (or so we thought, I understand we didn't read everything) to be updated with their regular updates. Turns out, we need to pay another $3,000+ per year for a subscription to the package... which we only figure out a few years down the road as the first few years were included in the price (and at that point, we had sunk over 6 figures of labor and data into it, so we're stuck with the $3,000+/year subscription)

Then, we needed some IT work done, and asked the guys if they could set up a data backup plan. This IT company was suggested by the first company, and so I should have expected a similar price setup... They turned around and offered to back my data up for $70/month (I know, I know, not that big a deal, but I was just getting over the other company at the time) They also quoted me a bit high on some equipment, which would not have been a deal-breaker, but then they brought out the subscription model and I told them, nope, you're out.

Pushing your luck/stupidity too far will alienate some of your biggest spenders while being accommodating and having very good service will bring you those big spenders.
If the above IT company would have said, "oh, that's the price for our in-house service, we could set you up with "insert generic backup company" for $300 and then $20/month (they'll bill you directly on your card) then I probably wouldn't have blinked.

Just thought that I'd share with ya :)
 

Kid

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So a bit of cold shower:
This guys sell you the concept that is counter productive.
It puts you basically on same level as all people that do "internet marketing".
They focus on earnings and end up in scummy things (at best).

If you'll follow this path you'll find yourself calling your clients "stupid" or that they "deserve to be scammed".

That's how scammers protect their fragile mentality. Ofc, until they cross the line of illegal things and end up in prison. Prosecutors rarely listen that your client was "stupid" and that he fell for some simple "tactic" or scheme, and its all his fault.

And if you wonder why its counter productive then here it is:
If you'd listen to that "pricing" crap, you'll throw out every idea that doesn't have monetization strategy upfront. You won't be able to do something widely popular and then figure out how to get your positive ROI.

You'd just create not worthy limit on yourself.
And that's against what this forum is partly about: your own Liberty.
 

Lyinx

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These techniques (when used in moderation) can help determine how much a business can charge (let's say you're a small business, and you have no idea where your prices should be) which might be enough to take a failing business into a successful category.

I know of two businesses who are undergoing coaching because they couldn't get their pricing correct and they were losing money. But with updated pricing, they are actually becoming successful :)

And there is definitely a time/limit when you turn from "successful business person" into "just another scam artist" (see my answer above on subscription-based internet companies for businesses. Just because you can make a few bucks does not always mean it's a good idea.
 

Flint

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Interesting. As a slowlaner, I had been underpaid most of my career and didn't know better. Then I started looking at price (salary, cost, fee etc.) as something that implies, conveys and correlates to value. So when I watched the above video with my new fastlane knowledge, I didn't think "money chasing" or "milking customers with subscription-based models". I thought "ah right, this is HOW you can correlate/calibrate your value proposition with price and move from intangible to tangible, from subjective to objective".

Yes, "price before product" can be misused and misunderstood. Your examples show that any tool or knowledge can be exploited to bypass the long term wealth formula and look for instant gratification. Which I think has more to do with motivation and values than a specific tool in the toolbox.

I deal with technology people that use this type of pricing, and they continuously sell subscription-based models for services, when I would gladly pay 3 to 6 months subscription just to have them set it up and forget it. But I feel I'm honestly getting shafted by a monthly subscription, so I end up not going that route and finding a way to do it on my own.

Looks like you've developed a solution to a problem others may share with you. An opportunity? ;)

Do you think your pricing suggestion is viable though? Would they still be profitable or exist? What could they do to make working with them more valuable to you (and so worth the price) instead of letting you go with, effectively, a lower customer LTV?

I like the topic of price because it's where the need fulfilment/value meets business viability. Looking for demonstrated cashflow, finding out how valuable solving a certain problem is, understanding your cost structure vs. the willingness to pay are all important elements of the puzzle.

And to @Kid's point. People pay for more than practical functionality of products. Likewise, business owners get value out of their businesses beyond the monetary reward. I just wouldn't hope that ROI will happen on its own when you're solving a random problem. You know that not thinking about money is not a solution to chasing money.

BTW, this is another interesting angle on price (see Get Paid at 10:55 and then Stop Worrying About Getting Paid at 15:31; the whole talk is worth watching too):
View: https://www.youtube.com/watch?v=i69U0lvi89c


P.S.
Ha, @Phikey talks about pricing in his new video (great to see you taking our feedback/questions on board and addressing them in your videos, cheers!):
View: https://www.youtube.com/watch?v=ffA27wverW0
 

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