Madhavan Ramanujam is a partner and board member at Simon-Kucher & Partners. He advises companies of all sizes, from startups to Fortune 500s on monetization strategy and has helped bring numerous new products to market.
His new book, Monetizing Innovation: How Smart Companies Design the Product Around the Price co-authored with Georg Tacke, Co-CEO of Simon-Kucher & Partners offers a practical, nine-step approach to improve the odds of new-product success. Through case studies – including Porsche, LinkedIn, Swarovski and Uber – the book illustrates the importance of putting the customer’s willingness to pay at the very core of product design.
You talk about the myths of product development in your new book. Can you tell us more about one that technology companies seem to believe in around new product launches.
It’s very easy for us to say the core reason why most new products actually fail from a monetization standpoint is because people postpone their pricing decisions to the very end, and slap a price on to whatever they’ve built. This stems from what we call the 5 myths of innovation.
Here’s one myth – ‘Build it and they will come’. You’d be surprised how many companies still work on building stuff and say things like, “Our customers don’t know what they want. We’re just building stuff. Once the product is really awesome, of course they’ll want it.” I think these entrepreneurs work a bit in vacuum trying to really build stuff without a true understanding of whether customers need the innovation – would they value it? More importantly, would they pay for it?
As an entrepreneur, you don’t have a choice about having this conversation with the customer. You have to talk pricing with your customer at some point. The only thing in your control is when to have the conversation. If you have it much prior to launching your products, then you design your products around this information, around what customers’ need, what they value, and what they are willing to pay. So, you know that you can actually monetize and you’re building something that is considered worthwhile. If you have this conversation after the fact, you’re just hoping for the best.
What’s your advice for subscription companies? Is there something different that we need to be thinking about pricing-wise?
There are a couple of things that people in the subscription economy definitely need to focus on, at some point in the company’s lifecycle. First, they should avoid the temptation of building a one-size fits all package. As much as it’s easier and simpler to keep things in one offering or one subscription package, often you’re probably leaving money on the table by not differentiating. And if you just have one offer, you don’t have something that your customers can grow into.
Having a “good”, “better”, “best” kind of subscription packages makes more sense. Customers can opt into an entry-level offering when they start the journey and then grow into the “better”, or “best” products over a period of time, as and when their usage or needs actually scale.
Having that view on what is that entry-level offering, and what can you actually provide them in terms of value and benefits over the lifetime of that customer is an important aspect to keep in mind. It’s like building your relationship with your customer. It’s a journey.
Any recommendations on how to proceed down the customer engagement path? How to get your customer to also buy into growing with you?
Counter-intuitively, it starts with not putting too much in your entry-level product. 90% of companies that claim to have a land and expand strategy are only landing at the moment. They are not expanding. The number one reason for that is because they gave the farm away in their entry-level product. There is no real compelling reason for customers to like grow into other products. Drawing the line between what is your entry-level product, and what are the products that you can truly monetize on at a subsequent point is important.
Another one is to look at how your customers self-select themselves into these products. If you have more than 70% of your customers in your entry-level products, you probably have a lot of benefits in your entry-level products. You’re probably attracting a lot of people, but you’re not necessarily growing them into paid products. Ideally, you’d have 70% of your customers in the “better” or “best” products and about 30% in your “good” product.