Lately, I've been doing a little thinking about how products should set pricing for consumers. I didn't really expect it coming in, but pricing strategy is actually pretty interesting. The more that I read on the subject, the more that Monetizing Innovation by Madhavan Ramanujam was referenced as the must-read book on the subject. So here we are.
Monetizing Innovation aims to take you on a 0 to 1 crash course in pricing for startups. The big idea in this book is that we need to embrace a new paradigm where product is designed around pricing, rather than the more traditional approach of tackling pricing at the very end. Ramanujam walks through how to diagnose common problems, solve those problems, and then optimize your solutions.
- Price isn't a number. It's the perceived value that your product holds for the customer.
- Price is both an indication of what customers value and a measure of much they are willing to pay for that value.
- How you charge is often more important than how much you charge.
- Pricing sends a signal about quality.
Price is more than just a dollar figure; it is an indication of what the customer wants—and how much they want it. It is the single most critical factor in determining whether a product makes money, yet it is an afterthought, a last-minute consideration made after a product is developed.
Designing Product Around Price
- Smart companies design the product around the price.
- Be willing to remove features that customers don't value.
- Don't default to giving away value-added functionality. Customers will pay for it.
- Don't force a one-size-fits-all solution. Customers are different, so segment them.
- Fewer features sometimes creates more demand by highlighting the things that matter.
"To maximize the monetization potential of new products, companies should curb their instincts to please customers by giving away value-added functionality—unless those customers will pay for it. These firms must get comfortable with the idea of giving their low-price segment only basic quality and service levels, rather than giving them everything. In other words, product configuration requires the guts to take away features."
Pricing Strategy in Practice
- First, understand your customers' overall willingness-to-pay for your product.
- Second, understand how much value customers place on each feature and what they would be willing to pay for that value.
- Ask direct questions about your product and its feature during interviews.
- Anchor your prices to low or high extremes.
- Maintain pricing integrity. Control discounting and avoid price cuts.
"We ask them to allocate 100 points to a series of goals. That puts each executive in a trade-off mindset. “Should I allocate 20 points to this goal, or should I allocate 60?” The more points an executive allocates to a given goal, the more important that goal is relative to the other goals."
One thing I particularly enjoyed about Monetizing Innovation was the case studies and concrete examples that are laid out really clearly. For that reason, I would recommend checking out the full book since you won't find those stories represented quite as well in summary posts like this.
I don't have a ton of other resources on pricing strategy, but if you enjoyed this book and are looking for more like it, check out The First 90 Days. The two books reminded me of each other from a style perspective.
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