This book was co-authored by my ex-boss and mentor, Madhavan Ramanujam. It was the first ever book I read (yeah, I joined the party late) and I couldn’t have asked for a more fundamental and unique perspective to two of the things we all encounter on a daily basis: Innovations and Prices. Here is a summary:
1. Central Idea: Innovate a product to the price, to boost your chances of success.
2. It is key to deconstruct every product into a set of 7-10 key attributes/features (includes price, brand, etc.) in order to understand what combinations of these attributes is ideal for your consumers
2. Traditionally, Porsche focused on sports cars. But it decided to conduct a consumer survey and realized that consumers wanted a Porsche for their family. For them, a coffee-mug holder was important, not a really powerful engine. This revelation helped Porsche successfully innovate around these specs and launch it’s first SUV
3. Innovations fail for 5 core reasons:
a. Feature shocks: Too many features. No central theme
b. Minivations: Priced too low, not monetized enough
c. Undeads: Unnecessarily brought to market (Segway)
d. Hidden gems: Not properly brought to market or brought in late (Kodak Digital Camera)
4. Busting 3 myths:
a. Create a great product, people will buy (Instead, design the product around the price and features consumers ask for)
b. The innovation team should control new product development (Instead, it is a cross functional exercise)
c. >90% of innovations fail, so failure is acceptable. (Can be avoided by listening to prospective buyers)
Some rules for successful monetization:
1. Have the Willingness To Pay (WTP) talk early on with consumers. Gilette did that to realize that a $2.24 Mach 3 won’t sell in India. They needn’t to innovate around the $.30 price point
2. No one size fits all. Use the research data to segment consumers and select your target segments
3. Bundling is essential to create a curated offering that helps increase share of wallet and stickiness. But it should be done based on real needs of consumers
4. How you charge is as important as how much you charge. Michelin Tires decided to charge on a per mile basis and it changed the game for them and for truck drivers. There are various ways of charging: Subscriptions (Spotify), Dynamic pricing (Uber), Auctions (eBay), Pay As You Go (Electricity) or Freemium (LinkedIn)
5. Communicate the value to potential consumers. Focus on what really matters to them, not to your product team
6. Use behavioral pricing tactics such as Anchoring (for hagglers), Compromise Effect (most people opt for mid-range products), Razor or Razor blades (a cheap razor to penetrate and highly profitable razor blades to make up for the dearth) or Quality-signalling price (it’s expensive, so it must be good).
7. Don’t indulge knee-jerk pricing. Avoid a pricing war. There is always room to differentiate, re-package or tweak the price metrics to tap into the value
In essence, pricing based on cost and innovating based in the whims and fancies of your product team are not sustainable strategies in most cases. Focusing on VALUE will help to extract the same.