Monetizing Innovation: How Smart Companies Design the Product Around the Price

In Monetizing Innovation: How Smart Companies Design the Product Around the Price, Madhavan Ramanujam and Georg Tacke deliver a paradigm-shifting guide for leaders grappling with the high failure rate of new products. Drawing on decades of experience at Simon-Kucher & Partners, the world’s largest pricing and monetization consulting firm, the authors reveal that the conventional approach to innovation—design, build, market, then price—is fundamentally flawed. Instead, they champion an “outside-in” methodology: market and price first, then design and build the product around what customers truly value and are willing to pay for. This book promises to break down every important idea, example, and insight, showing how this radical shift can transform innovation from a hopeful gamble into a predictable path to profitability, significantly boosting a company’s chances of success in today’s fiercely competitive landscape.

Chapter 1: How Innovators Leave Billions on the Table

This introductory chapter starkly presents the core problem of innovation: why the majority of new products fail and how companies inadvertently leave billions in potential revenue on the table. It contrasts two compelling real-world examples—Porsche’s successful Cayenne SUV and Fiat Chrysler’s struggling Dodge Dart—to illustrate the book’s central thesis.

A Tale of Two Cars: Porsche vs. Fiat Chrysler

The chapter opens with the story of Porsche’s Cayenne, an SUV launched in 2002. Facing financial distress in the early 1990s and known solely for its sports cars, Porsche took a massive risk entering the SUV market. However, their success stemmed from a critical strategic choice: designing the product around the price. Long before engineering began, Porsche rigorously researched what customers wanted in an SUV and, crucially, how much they were willing to pay. This early willingness-to-pay (WTP) talk guided everything, from including large cup holders (a customer demand) to excluding its famous manual racing transmission (not valued by SUV buyers). This customer-centric, price-led design led to the Cayenne becoming Porsche’s best-selling vehicle, generating immense profits and helping the company overcome debt.

In stark contrast, Fiat Chrysler’s 2012 Dodge Dart launch exemplifies the flawed traditional approach. Despite the compact car segment being vital for the company, Fiat Chrysler’s development process was purely “inside-out,” focusing on design, build, and internal “perfection” without early customer and pricing input. Their advertising even proudly boasted “kicking the finance guys” out of the development process. The result was a disastrous market performance, with sales far below predictions, highlighting how ignoring WTP and market demand until after development leads to costly failures.

Why the Majority of New Products Fail

The core issue, the authors argue, is that most companies postpone marketing and pricing decisions to the very end of the product development cycle. They build innovations “hoping they’ll make money,” rather than “knowing if they will.” This leads to an astounding 72% failure rate for new products and services, failing to meet revenue and profit goals, or outright crashing. The authors assert that the fundamental flaw is the failure to place the customer’s willingness to pay at the heart of product design. Companies must flip the traditional sequence from “design, build, market, price” to “market and price, then design and build.”

Successful Innovation Matters More Than Ever

The stakes for successful product innovation have never been higher. The authors highlight four key reasons why companies face an uphill climb:

• Rising R&D Costs: Traditional R&D is becoming more expensive without corresponding price increases.
• Nimble Disruptors: Smaller companies with lighter capital requirements can take bigger risks and move faster.
• Global Shift in Innovation: Product innovation is no longer dominated by the Western world, with Asia rapidly increasing its R&D spending.
• Accelerating Pace of Innovation: The sheer volume of patent applications and new ideas is rapidly increasing, intensifying competition.

The Good News: Monetizing Innovation Failures Come in Only Four Varieties

Despite the high failure rate, the authors offer a comforting thought: monetizing innovation failures fall into only four distinct categories, making them easier to diagnose and avoid. These “flavors” of failure are:

• Feature Shock: Giving too much and getting too little (over-engineered, overpriced).
• Minivation: Asking for too little, and that’s what you get (under-priced, missed potential).
• Hidden Gem: Don’t look, you’re not going to find them (brilliant ideas never properly brought to market).
• Undead: Nobody wants your product (launched despite no market demand).

By understanding these archetypes, companies can proactively avoid common pitfalls.

You Can Avoid Failure—but Only If You Play by Different Rules

The chapter concludes by introducing nine surprising rules for successful monetization that will be explored throughout the book. These rules form an integrated framework, emphasizing early WTP conversations, strategic segmentation, thoughtful configuration and bundling, innovative monetization models, robust pricing strategies, data-driven business cases, clear value communication, behavioral pricing tactics, and unwavering price integrity. The promise is clear: adopting these rules shifts innovation from “hoping” to “knowing,” giving companies control over their future success.

Chapter 2: Feature Shocks, Minivations, Hidden Gems, and Undeads

This chapter delves into the four distinct “flavors” of monetizing innovation failure identified by the authors, providing detailed examples and outlining the cultural predispositions that make companies susceptible to each. Understanding these archetypes is crucial for proactively avoiding them and designing products that truly resonate with the market.

Flavor 1: Feature Shocks—When You Give Too Much and Get Too Little

Feature shocks occur when companies cram too many features into a product, resulting in a confusing, over-engineered, and often overpriced offering that fails to resonate with customers. The product’s value becomes less than the sum of its parts.

Amazon’s Fire Phone serves as a prime example. Despite Amazon’s consumer electronics success with Kindle, the Fire Phone (2014) was loaded with innovative but largely unvalued features like “Dynamic Perspective” (3D effects via multiple cameras) and “Firefly” (a shopping feature). Reviewers found these features gimmicky and battery-draining, leading to lukewarm reception and a $170 million write-down from unsold inventory. Amazon’s internal focus on demonstrating brilliance over customer needs resulted in a product that was costly to make, hard to explain, and ultimately, overpriced for its perceived value.

Signs of a feature shock in the making include:

• R&D teams constantly adding features without clearly articulating their value to customers.
• “Inside-out” thinking, where the company falls in love with the product’s internal marvels rather than its external customer appeal.
• Customers complaining about “nice-to-haves” vs. “gotta-haves”.
• Slow adoption and indifferent word-of-mouth.
• Rampant, profit-destroying discounting post-launch as a desperate attempt to move units.

Companies with strong product-driven or engineering cultures are particularly susceptible, as their drive for technical excellence can overshadow market relevance.

Flavor 2: Minivations—When You Ask for Too Little, That’s What You Get

Minivations are products that fail to exploit their full market and price potential, leaving significant profits on the table. While they aren’t outright failures, they represent a missed opportunity for higher revenue and growth. Success in this context can be a masquerade, obscuring the true extent of under-monetization.

An example is a Silicon Valley component maker that developed a breakthrough, next-generation internal part for handheld devices. They priced it at 85 cents (25 cents more than the previous version) using a traditional cost-plus method. This component enabled their key consumer electronics customer to charge a $50 premium on their new premium product line. The component maker celebrated hitting internal targets, but a later analysis revealed they had captured only a tiny fraction of the value they created, potentially leaving billions on the table by not charging closer to $5 per unit.

Signs of a minivation include:

• Comfortable lowballing on targets and a lack of ambition from management.
• Sales teams easily meeting targets with the new product, indicating low price resistance.
• Channel partners reaping maximum margins.
• Frequent sellouts and supply unable to meet demand.
• Fewer pricing problems and deal escalations than expected, suggesting prices are too low.

Companies with a culture of playing it safe and avoiding big risks, or those stuck in “business as usual” autopilot and cost-plus pricing, are prone to minivations. These failures don’t spell catastrophe but incur a systemic toll through consistently undermonetized innovations.

Flavor 3: Hidden Gems—When You Don’t Look, You’re Not Going to Find Them

Hidden gems are brilliant, potentially revolutionary ideas that a company fails to recognize, quantify their value, or develop the capabilities to bring to market effectively. They often remain in limbo, unlaunched or undervalued as freebies.

Kodak’s invention of the digital camera in 1974 by engineer Steven Sasson is the most famous example. Despite patenting the technology, Kodak, deeply invested in its film business, perceived the digital camera as a threat to its core. The idea remained hidden for too long, leading to Kodak’s eventual bankruptcy in 2012 as it failed to pivot to digital, despite having invented the foundational technology decades prior. Similarly, a warehouse conveyor belt manufacturer developed breakthrough software that dramatically improved goods flow but gave it away for free, mistakenly believing the hardware was the sole source of value.

Signs of a hidden gem include:

• Customers showing excitement about the concept but uncertainty about how the company will deliver it.
• Sales forces giving away the product or feature as a deal sweetener.
• Complacency about existing business models, hindering exploration of disruptive internal ideas.
• Mid-level executives stopping ideas due to inability to see potential or fear of political friction.

Companies that coddle the core business and lack a clear ownership for recognizing and nurturing disruptive internal ideas are most susceptible. The most painful outcome is seeing a rival launch a version of your buried idea first.

Flavor 4: Undeads—When Nobody Wants Your Product

Undeads are products that are technically alive in the marketplace but have virtually nonexistent demand, essentially functioning as commercial zombies. These products emerge when a new offering is either the wrong answer to the right question, or an answer to a question nobody was asking.

The Segway PT, launched in 2001 with immense hype, promised to revolutionize personal transportation. However, its high price ($3,000-$7,000) and impracticality for mass consumers made it an undead for its intended broad market. While fascinating from an engineering standpoint, it was the wrong answer to the question of efficient, affordable transit. Similarly, Google Glass (2012), priced at $1,500, was panned for short battery life, glitches, and privacy concerns, ultimately failing for its consumer audience because it answered a question no one was asking or created new problems for users.

Signs of an undead in the making include:

• Proponents wildly overstating customer appeal and failing to effectively segment the customer base.
• Delusional resistance to objective evidence against the product’s viability.
• Sales teams failing to sell the product, missing targets significantly, and avoiding customer conversations about it.
• Negative or sarcastic press coverage and social media posts.

Undeads are fostered in firms with top-down cultures that discourage feedback and criticism, where managers are afraid to say “no” to pet projects of senior management due to over-investment or political risks.

These Four Monetizing Innovation Failures Can Be Avoided

The authors reassure that these four types of failure are entirely avoidable. The key is to integrate pricing considerations, rooted in real customer input, early into the product development process. The subsequent chapters will detail the nine rules that enable companies to identify customer value and willingness to pay (WTP) long before products are built, transforming potential failures into “Big Successes.”

Chapter 3: Why Good People Get It Wrong

This chapter probes the underlying reasons why so many intelligent, well-intentioned individuals and organizations consistently make the mistakes that lead to product failures. It argues that the pervasive issue isn’t incompetence, but rather a deeply ingrained mindset—a prevailing paradigm about monetization and product development—that is built on five pervasive myths and misconceptions.

Myths and Misconceptions with the Prevailing Mindset

The authors contend that the widespread tendency to postpone monetization discussions stems from a dominant, yet flawed, mindset that views early pricing as detrimental to true innovation. This perspective is rooted in several appealing but ultimately harmful myths:

Myth #1: If you simply build a great new product, customers will pay fair value for it. The “Build it, and they will come” mantra.
This myth sustains innovators with the hope that product brilliance alone will guarantee market success. It romanticizes underdog stories where initial skepticism is proven wrong (e.g., Catch-22, Fred Smith’s FedEx plan, Star Wars). However, the authors argue these are exceptions, not the rule. The majority of brilliant ideas fail commercially. The book’s core aim is to move companies from “hoping your innovations will find market success to knowing they will.”

Myth #2: The new product or service must be controlled entirely by the innovation team working in isolation. “Corporate artists” need to be sealed off from outside influences like market data, customer perspectives, and financial considerations, as these might “pollute” or “ruin” ideas.
This belief posits that outside voices stifle creativity. It often dismisses customer input (e.g., Henry Ford’s “customers don’t know what they want” philosophy), arguing that innovators are the true experts. The authors highlight the Fiat Chrysler Dodge Dart ad proudly “kicking the finance guys” out of development as an embodiment of this dangerous isolationist thinking.

Myth #3: High failure rate of innovation is normal and is even necessary. To hit a home run, you need to take many swings.
This myth accepts the 72% innovation failure rate as a given, a necessary cost of doing business. It suggests that a few successful products will naturally bail out the many losers. This fatalistic view allows companies to avoid addressing the systemic flaws in their innovation process, fostering complacency.

Myth #4: Customers must experience a new product before they can say how much they’ll pay for it. It defies the law of nature to determine willingness to pay before the innovation is complete.
This misconception assumes customers cannot truly value something until it’s tangible. Companies often argue that customers can’t possibly know what they’d pay for an incomplete product. This justifies delaying WTP discussions until very late in the development cycle, when the product is already largely built and costly to change.

Myth #5: Until the business knows precisely what it’s building, it cannot possibly assess what it is worth. Especially in a cost-plus environment, all costs must be understood before deciding on a price.
This myth links pricing primarily to internal costs. Companies believe they need a complete understanding of all manufacturing and shipping expenses before setting a price. This “inside-out” cost-driven approach completely disregards what the customer actually values and is willing to pay, leading to products that are either overpriced for their perceived value or underpriced for their market potential.

Embracing a New Paradigm

The authors argue that all these arguments, while seemingly logical and attractive, are directly responsible for the high failure rate of innovation. They call for a new paradigm: Understanding if customers are willing to pay for your invention, before you commit too many resources to building and launching it, will dramatically increase your likelihood of success.

This new paradigm involves designing the product around the price. By figuring out how much customers are willing to pay during the concept stage, the innovation process becomes far more reliable. Companies will transition from “hoping” their product succeeds to “knowing” it will, because the product will be designed with features customers genuinely excited about, and at a price they accept. This rigorous assessment of market viability upfront eliminates the “nervous, nail-biting weeks” after launch.

Introduction to Part 2

The chapter concludes by stating that Part 2 will deconstruct these five myths and lay out nine surprising rules for successful monetization. These rules are counterintuitive to conventional wisdom about product innovation, representing a “completely different” approach that focuses on embedding monetization at the very beginning of the innovation cycle.

Chapter 4: Have the “Willingness-to-Pay” Talk Early

This chapter introduces the foundational concept of Willingness to Pay (WTP) as the crucial starting point for successful innovation. It argues that engaging in deep discussions with potential customers about their WTP for your product concept, long before design and development, is paramount.

How an Early Willingness-to-Pay Talk Propelled Gillette

The case of Gillette’s Guard razor for the Indian market exemplifies the power of early WTP talks. In 2009, despite dominating the U.S. market, Gillette had only a 22% share in India due to the high price of its Mach 3 razor. To penetrate the mid- to lower-income segment, Gillette reversed its process. Instead of designing and then pricing, they first identified a target price of 15 rupees (approx. $0.33) for the razor and 5 rupees for replacement blades based on extensive ethnographic research and interviews with Indian consumers. This upfront WTP knowledge directly informed product design, leading them to reduce the Mach 3’s 25 components to just four for the Guard, making it simpler and cheaper to manufacture while still delivering key benefits. The result was phenomenal: within two years, the Guard captured over 60% of the Indian razor market, demonstrating how designing around a pre-determined, customer-validated price can lead to massive market penetration and future customer lifetime value.

Why You Should Have the Talk Early: The Three Benefits

The authors argue that having the WTP talk early offers three essential benefits:

1. Monetization Opportunity Assessment: It immediately tells you whether a market exists for your product concept and if customers are willing to pay a profitable price. This prevents wasted resources on ideas with no commercial viability.
2. Feature Prioritization and Design: It helps prioritize which features customers truly value and are willing to pay for, guiding the design process to create the right set of features and avoiding costly, unvalued additions.
3. Avoidance of the Four Failure Types:
   • Feature Shocks: By restraining from overloading products with unnecessary, unvalued features.
   • Minivations: By providing critical data on true customer value, giving courage to price appropriately, not too low.
   • Hidden Gems: By offering proof of market demand for unusual or tangential ideas, encouraging investment.
   • Undeads: By revealing if customers are unwilling to pay the necessary price, saving companies from launching commercially doomed products.

An example is an Internet marketplace planning a new service for buyers. Initially, the innovation team identified 25 “cool” features. However, the CEO challenged them to validate customer value and WTP for each. Research with potential customers showed an overall WTP of $10-$20/month, but crucially, only 10 of the 25 features were truly valued and worth paying for. A highly anticipated “Facebook connections” feature, for instance, ranked seventh in WTP. This early WTP talk allowed the company to prioritize development, discard 15 unvalued features, and build a better, more focused product, preventing a feature shock and boosting conversion rates by over 25% post-launch.

The chapter highlights that 80% of companies wait until just before product introduction to determine price, and most of those don’t even have WTP conversations. This leads to the 72% new product failure rate.

The Information You Need from Those Early Pricing Talks

Early WTP talks aim to uncover two critical pieces of information:

• Overall WTP for the product: Understanding the price range customers consider reasonable, expensive, or prohibitively expensive. This helps assess if the product can be delivered profitably within this range.
• WTP for individual features: Digging deeper to understand which specific features customers value most and are willing to pay for. This informs the product roadmap, ensuring development focuses on high-value features and avoids feature shock. An Internet hosting company initially had a feature shock with 27 features. After identifying and focusing on 8 key features (based on WTP), they increased price and saw a 25%+ revenue and conversion boost.

Insights, Tips, and Tricks

The authors offer practical advice for conducting early WTP conversations:

Top Five Methods for Having the Willingness-to-Pay Conversation (from Easiest to Most Advanced):

1. Direct Questions: Simply asking “What do you think could be an acceptable price?” or “Would you buy this at $XYZ?” followed by “Why?” Provides quick ballpark ranges and early validation.
2. Purchase Probability: Asking customers to rate their likelihood of purchase at different price points.
3. Most-Least Questions (Conjoint Analysis): Presenting various product features and asking customers to identify which they’d most or least likely pay for.
4. Build-Your-Own: Allowing customers to select desired features from a list and then asking them to set a price for their customized product.
5. Purchase Simulations (Conjoint Analysis): Simulating purchase scenarios where customers choose from product lineups with varying prices and feature combinations.

Ten Important Insights for WTP Conversations:

1. Tap internal excellence: Conduct expert judgment workshops with cross-functional teams first to pressure-test questions and gather internal perspectives.
2. Position as “value talk”: Frame discussions as exploring “how we can add value” rather than “pricing” to encourage open feedback.
3. Simple questions yield valuable insights: Direct questions are highly effective for initial validation.
4. 25% “why” questions: Always ask “why?” to understand underlying motivations and uncover valuable product improvement tips.
5. Mix it up: Combine structured and unstructured conversations for richer insights, especially for cutting-edge innovations.
6. Be part of the action: Key leaders (product, sales, marketing) should observe focus groups and interviews firsthand.
7. Avoid the “average trap”: Analyze the distribution of WTP responses, not just the average, to identify distinct segments and avoid missed opportunities (e.g., pricing for a $60 average when two groups want $20 and $100).
8. Don’t rely only on quantitative numbers: Start with qualitative discussions to inform robust quantitative surveys.
9. Be precise in language: Ensure questions clearly ask about WTP (“Would you buy this for $20?”), not just general interest.
10. Garbage in is garbage out: Keep question design simple and focused on key variables to avoid overwhelming customers and generating incoherent responses.

The chapter concludes by emphasizing that armed with these methods, companies can rigorously test their product’s market viability, transitioning from hope to knowing.

Chapter 5: Don’t Default to a One-Size-Fits-All Solution

This chapter emphasizes that customer needs are never homogeneous, making a “one-size-fits-all” product design a recipe for failure. It champions customer segmentation as a critical tool, but only when done correctly: based on customers’ needs, the value they perceive, and their willingness to pay (WTP) for that value, rather than just observable characteristics like demographics or company size.

A Paper Company’s Segmentation Story

A paper company historically segmented its customers by size (small, medium, large), but this proved ineffective as large customers sometimes needed basic features, while smaller ones valued complex services. This led to a failure to meet diverse needs effectively. To address this, the company conducted extensive customer research (using methods like conjoint analysis) to understand:

• What features and services mattered most to customers.
• What customers were willing to pay for them.

The research revealed that while price was generally most important, and technical service least, customers surprisingly valued and were willing to pay for efficiency-increasing service programs – previously considered a cost center. Crucially, the research uncovered four distinct segments based on their needs and WTP, regardless of size:

1. “Want Price Only”: Cared primarily for low price, indifferent to tech service or delivery terms.
2. “Want It Now”: Highly valued speedy, just-in-time delivery and were willing to pay a premium.
3. “Want Product Only”: Prioritized product performance and quality above all else.
4. “Want the Best”: The least price-sensitive group, emphasizing both quality and service.

This new segmentation allowed the company to design tailored product-plus-service offerings for each segment (e.g., “Core,” “Product Plus,” “Logistics Plus,” and “Best”), with clear WTP-driven pricing. This approach minimized cannibalization and ensured each offering had a distinct, valued proposition.

Typical Pitfalls of Segmentation

Many companies struggle with segmentation due to:

• Segmenting too late: Using segmentation only for marketing/sales messages after product design is complete, leading to products that don’t truly fit any segment.
• Segmenting only by observable characteristics: Relying solely on demographics or company size (like the Prince Charles vs. Ozzy Osbourne analogy), which often don’t correlate with actual needs or WTP, leading to identical products for wildly different customers.
• Having too many segmentation schemes: Different methodologies for product design, marketing, and sales lead to organizational confusion and fragmented customer approaches.

What Best-in-Class Companies Do

Successful innovators adhere to the golden rule of segmentation: You can act differently. They:

• Build the right product for the right segment at the right price.
• Continuously explore how customer needs, value, and WTP differ.
• Prioritize a single segment if resources are limited, then expand.
• Avoid a “one-size-fits-none” new product.

Garmin, for instance, creates distinct GPS devices for hikers, runners, drivers, and golfers, each tailored to their specific needs and WTP. Similarly, Mettler Toledo designs different scales for industrial, laboratory, and retail customers, even though the core weighing technology is the same. This approach allows companies to serve customers better, achieve broader adoption, and increase revenue and profit by optimizing for multiple customer groups.

Insights, Tips, and Tricks

To perform effective segmentation for new product design, keep these five principles in mind:

1. Begin with customer WTP data: Cluster individuals based on their WTP, value, and needs to uncover true segments.
2. Let common sense be your guide in using statistics: Statistical accuracy is important, but practicality is key. A segmentation strategy must be actionable and make sense to salespeople. Ensure clear “fences” between segments.
3. Fewer is more: Start with 3-4 segments and gradually expand. Too many segments increase complexity and dilute homogeneity.
4. Don’t try to serve every segment: Focus on segments that offer sufficient customer numbers and revenue potential to justify investment (market sizing).
5. Describe the segments so you can address them: Use observable criteria (e.g., 24×7 operations for high-price segments) to tailor sales and marketing messages effectively.

By integrating WTP-based segmentation early in the innovation process, companies can build products that resonate deeply with specific customer groups, unlocking greater monetization power.

Chapter 6: When Designing Products, Configuration and Bundling is More Science Than Art

This chapter focuses on the crucial design decisions that follow effective customer segmentation: product configuration (which features and functionalities to include in a product, also called packaging) and bundling (combining products/services). The authors emphasize that getting these right, based on customer WTP, is essential for maximizing monetization and avoiding common pitfalls like feature shocks and minivations.

Product Configuration Done Right

Effective product configuration means designing a product with only the features customers are willing to pay for for a specific segment. Too many unvalued features lead to feature shock, while underestimating feature value can result in a minivation.

The paper company from Chapter 5, after identifying four distinct customer segments (“want price only,” “want product only,” “want it now,” and “want the best”), designed four tailored offerings:

• Core: Basic product at an affordable price, with standard tech, support, and logistics.
• Product Plus: Additional features for those prioritizing product performance.
• Logistics Plus: Features for those prioritizing speedy delivery.
• Best: Combined features of Product Plus and Logistics Plus, commanding a significant premium.

Each offering had a distinct value proposition tailored to its segment’s needs and WTP, minimizing cannibalization. The firm explicitly included product and service features into more expensive offerings because customers indicated they would pay for them. This requires the “guts to take away features” from lower-priced offerings, even if engineers love them, to prevent devaluing higher-priced options.

A European retail bank similarly reduced its 30 confusing account offerings to three (Comfort, Direct, Classic) based on customer WTP for peace of mind, online services, or branch usage. This simplification, with clear value propositions, skyrocketed sales and increased annual profit by 30%, demonstrating that fewer, clearly differentiated choices can lead to higher conversion and profitability.

Bundling Done Right

Bundling involves selling multiple products or services together, often increasing total profit by encouraging customers to buy more than they would have separately. It also enhances customer satisfaction by simplifying the purchase decision.

The classic example is McDonald’s Value Meals, which bundle a burger, fries, and soda, encouraging customers to purchase the full meal for an appetizing price.

The authors use a “Pizza and Breadsticks Puzzle” to illustrate the power of bundling. Given four customer segments with varying WTP for pizza and breadsticks as stand-alone items, selling them individually might yield $3,300 in revenue. However, by offering a mixed bundle (selling both a bundle and stand-alone items), the puzzle demonstrates how revenue can be increased to $4,400 (a 33% increase). This is achieved by pricing the bundle strategically and the stand-alone items slightly higher, making the bundle appear as a “discount” even if it’s simply optimizing for WTP across segments.

Microsoft Office is presented as a real-world “bundling blockbuster.” By bundling word processing, email, spreadsheet, and presentation software, Microsoft offered convenience and integrated experience, cementing customer loyalty and dominating the market. Different versions of the Office suite (varying functionality) further catered to diverse customer segments, making Office Microsoft’s largest business division by 2013.

Two Key Principles of Product Configuration and Bundling

Principle #1: Leaders, Fillers, and Killers

This principle guides feature selection within configurations.

• Leaders: Must-have features with high WTP that drive customers to buy.
• Fillers: Moderate importance or nice-to-have features that don’t independently drive purchase.
• Killers: Features that, if forced upon the customer (especially by adding cost), will cause them to reject the deal. These should be eliminated or sold à la carte.
  Identifying killer features is crucial: look for those valued by less than 20% of customers and actively devalued by over 20%. This classification often varies by customer segment (e.g., heated car seats are a “leader” in cold climates, a “filler” or “killer” in warm ones).

Principle #2: Creating Good, Better, and Best Options

The classic G/B/B (or Bronze, Silver, Gold) model typically has a “good” version with core features, and a “best” with all bells and whistles. Ideally, no more than a quarter of customers should opt for the “good” option, with 70% choosing “better” or “best.”
This model leverages the compromise effect (Chapter 11), where people avoid extremes, steering customers to the “better” or middle option. It also empowers sales teams to tailor their pitch based on customer priorities (price-conscious, quality-conscious, or seeking balance), maximizing deal closure and monetization potential. The number of configurations should align with the number of distinct customer segments.

Insights, Tips, and Tricks

Ten guiding tips for product configuration and bundling:

1. Align with segments: Offers must reflect each segment’s needs, value, and WTP.
2. Don’t make it too big: Avoid exceeding psychological thresholds (e.g., more than 9 benefits or 4 products) to prevent customer confusion (leading to feature shock).
3. Ensure mutual benefit: Configurations/bundles should benefit both the company (more revenue, less price transparency, higher loyalty) and customers (convenience, discounts, integrated experience).
4. Don’t give too much away in entry-level product: Packing too much into a “good” option hinders upselling (“land but don’t expand” problem). Aim for ~30% choosing “good” and 70% choosing “better/best.”
5. Hard bundling won’t always work: Mixed bundling (bundle + à la carte components) is usually better unless you have strong market power.
6. Individual prices need to be higher with mixed bundling: The à la carte price for components within a mixed bundle should be higher than their stand-alone optimal price if no bundle were offered.
7. Don’t forget bundle price communication: Strategically frame perceived “discounts” (e.g., “40% off Product A when purchased with Product B”) to make bundles more appealing.
8. Bundle with integration value (1 + 1 = 3): For some industries (like software), integrated experiences can command a premium, meaning discounting a bundle might be a mistake.
9. Don’t bundle for the sake of bundling: Avoid unnecessary discounts if customers would have purchased individual products anyway.
10. Exploit inverse correlations: If two segments have inverse preferences for two products, bundling them can serve both effectively.

When Unbundling is the Right Answer

Sometimes, the optimal strategy is to unbundle. Ryanair is a prime example. In the early 1990s, the airline unbundled its offering, charging a very low base fare for the seat while item-pricing everything else (baggage, food, seat selection). This made the initial price incredibly attractive, drawing in a new segment of budget-conscious travelers. The company made the bulk of its money from these ancillary fees, leveraging the psychological fact that customers are twice as price-sensitive to the base fare as to surcharges. This strategy enabled Ryanair’s massive growth and profitability, demonstrating that the monetization model itself can be the core innovation.

The chapter concludes by reinforcing that rigorous configuration and bundling, guided by WTP, are crucial building blocks for designing new products that achieve market success and maximize profitability.

Chapter 7: Go beyond the Price Point

This chapter argues that how a company charges for a new product or service (the monetization model) can be even more critical than the price point itself. It presents five powerful and proven monetization models, illustrating how innovative charging approaches can propel a new offering to unprecedented success.

How You Charge Trumps What You Charge

The authors contend that most companies make a critical mistake by automatically perpetuating their traditional monetization models, without strategic reflection or testing. This is a massive missed opportunity, as revolutionary monetization models have been key to the success of many leading companies.

Michelin, a 126-year-old tire manufacturer, provides a compelling case study. In the early 2000s, facing intense price pressure despite having developed a new, longer-lasting tire, Michelin realized that simply selling tires by the unit wouldn’t allow them to capture the full value of their innovation. They instead implemented the “TK” (ton-kilometer) model for trucking fleets: charging by the mileage driven on Michelin tires, rather than by the number of tires purchased. This bold move aligned Michelin’s revenue directly with the value (performance and longevity) delivered to customers. If a tire lasted longer, Michelin earned more. This transformed Michelin’s business, making them the most profitable tire company by 2011, demonstrating how the monetization model itself can be the innovation.

Other examples of innovative monetization models disrupting industries include:

• Xerox: Charging based on printer/copier usage rather than unit sales/leases.
• Enercon (wind turbines): Charging based on the amount of electricity generated.
• Adobe: Shifting popular software to a cloud-based subscription model.
• Netflix (1999): Flat monthly fee for unlimited movie rentals by mail, disrupting Blockbuster.
• Google AdWords: Auction-based pricing for online ads, driving the majority of Google’s immense profits.
• Uber: Dynamic pricing based on real-time supply and demand for rides.
• Medtech/GE: Charging hospitals based on medical equipment usage rather than sale/rental.
• Metromile: Auto insurance based on per-mile driving using telematics.

Conversely, selecting the wrong monetization model can be disastrous, as seen with a European trucking company that charged a fixed price per TV delivered, despite TV sizes (and thus trucking costs) increasing, leading to significant losses. A bad monetization model can be worse than a bad price.

Five Powerful Monetization Models

The authors highlight five widely applicable and successful monetization models for new product launches:

1. The Subscription Model:
   • What it is: Customers pay periodic, automatic fees for continued delivery/access (e.g., Wall Street Journal, Netflix, Dollar Shave Club).
   • Advantages: Lifts overall and customer lifetime revenue, provides recurring/predictable income, increases customer loyalty/stickiness by locking them in, and opens up cross-selling/upselling opportunities (e.g., Netflix using viewing habits to create hit original series).
   • Is it right for you? Suitable for products/services with continuous usage, highly competitive “land-grab” industries (to lock out competitors), and industries shifting from big upfront investments (e.g., software-as-a-service).
2. Dynamic Pricing:
   • What it is: Price fluctuates based on factors like season, time of day, demand, or supply (e.g., airline tickets, Uber’s surge pricing).
   • Advantages: Boosts monetization of fixed/constrained capacity (e.g., empty airline seats, hotel rooms), maximizes revenue during peak demand, and can increase supply (e.g., Uber attracting more drivers).
   • Is it right for you? Consider if demand/price elasticity varies significantly, or if supply is constrained/fixed. Requires significant tech investment and can irritate customers (e.g., Coca-Cola’s “warm weather” vending machine failure).
3. Market-Based Pricing: Auctions:
   • What it is: Prices are set by competition among buyers (e.g., Google AdWords, eBay, Manheim auto auctions).
   • Advantages: Allows the seller to withdraw from explicit price setting, letting the market determine value, and can influence price through auction rules (e.g., minimum bids) without direct dictation.
   • Is it right for you? Ideal for “seller markets” with constrained inventory and high demand. Requires sophisticated systems and processes. Not suitable for markets with excess inventory or low pricing power.
4. Alternative Metric Pricing/Pay As You Go:
   • What it is: Pricing transactions based on measures other than the industry standard per-unit, often tied closer to product value and customer benefits (e.g., GE charging by hours of medical equipment usage or miles flown by aircraft engines, Monsanto by yield per acre).
   • Advantages: Achieves full monetization by aligning revenue directly with customer performance/value, minimizes customer upfront investment (e.g., robotic surgery equipment priced per surgery), and allows participation in customer’s generated revenue.
   • Is it right for you? Suitable if your innovation creates significant customer value not captured by traditional models and if you have control over how customers use the product to ensure promised performance.
5. Freemium Pricing:
   • What it is: Offers free basic tiers to attract a large user base, aiming to convert a significant percentage to paid premium subscriptions (e.g., LinkedIn, Dropbox). Also known as “land and expand.”
   • Advantages: Spurs rapid adoption by lowering customer entry cost to zero, serves as a marketing tool, and reduces customer acquisition costs.
   • Is it right for you? Only works with very low (preferably zero) production costs and minimal fixed costs offset by a small percentage of paying customers. Conversion rates are typically low (<10%), so you must double down on conversion efforts and avoid giving away too much value for free.

Five Questions to Choose the Right Monetization Model

Companies should ask these questions when assessing which model to use:

1. How likely are your customers to accept the model? (Is it predictable, flexible, fair, transparent, and aligned with their preferences?)
2. How will future developments impact the model? (Does it account for industry trends, like Michelin’s durable tires, or technology shifts?)
3. What stage is your company in and does your model choice fit that? (Startups may need simple, transparent models; mature companies may seek differentiation or accommodate future product pipelines.)
4. What are your competitors doing? (Not to mimic, but to differentiate and exploit their weaknesses if they are not equipped to react.)
5. How difficult is the monetization model to implement? (Consider feasibility, customer adoption, scalability, data measurement, and the total cost of ownership vs. return, including necessary investments in infrastructure.)

A Few Price Structures That Have Stood the Test of Time

Beyond the five models, companies can also use price structures to account for different usage levels, especially with pay-per-unit, alternative metric, or subscription models.

• Tier-based pricing (volume-based): Offers better rates for higher usage (e.g., a payment processing service charging 3% for 100K-500K transactions, but 2% for 500K-1.5M transactions). This tells customers “the more you use, the better the rate.”
• Matrix model: A two-dimensional tier structure (e.g., based on volume and percent share of transactions), where the rate gets progressively better across both dimensions, offering more flexibility and optimization.

The chapter concludes by asserting that the right monetization model can help a firm leapfrog the competition, and sometimes, the best innovation is the monetization model itself.

Chapter 8: Price Low for Market Share or High for Premium Branding?

Having established customer WTP, segmented the market, configured products, and selected monetization models, this chapter stresses the crucial next step: establishing a comprehensive pricing strategy. This strategy defines the short- and long-term monetization plan, providing clear intent, quantifiable goals, and a time frame for execution, thereby preventing knee-jerk reactions and maximizing new product value.

Creating the Pricing Strategy Document: The Four Building Blocks

A robust pricing strategy document is a “living and breathing” tool that guides decisions and ensures organizational alignment. It comprises four essential building blocks:

Building Block #1: Set Clear Goals

A clear, overriding goal is paramount, as different goals (e.g., revenue, market share, total profit, profit margin, customer lifetime value) lead to contradictory strategies. Companies cannot maximize all goals simultaneously; trade-offs are essential.
The authors illustrate this with a simple example: A product can be sold at $10 (100 customers, 30% margin) or $15 (80 customers, 50%+ margin). The choice reveals whether the priority is revenue, market share, or profit.
The Goal Allocation Exercise is introduced as a workshop task where C-suite executives allocate 100 points across various goals, forcing objective trade-offs and revealing surprising misalignments (e.g., CEO, CMO, Sales, CFO, Procurement having vastly different priorities). This exercise fosters deeper discussions and eventual agreement on product priorities.

Building Block #2: Pick the Right Type of Pricing Strategy

Only three types of pricing strategies matter for new products:

1. Maximization:
   • Goal: Maximize a specific goal (e.g., profit or revenue) in the short term.
   • When to choose: When customer segments don’t have disproportionately higher WTP, or when rapid market share gain isn’t worth sacrificing short-term revenue/profit (i.e., optimal short-term price is close to optimal long-term price).
   • Execution: Requires understanding the price elasticity curve to determine the optimal price point where the profit or revenue curve peaks. This links price, volume, and profit, allowing for data-driven decisions (e.g., knowing a $10 increase costs X% volume).
2. Penetration:
   • Goal: Intentionally price lower to rapidly gain market share. This is a “land-and-expand” strategy.
   • When to choose: In markets with strong network effects, high customer loyalty to first brands, or when the goal is to quickly establish dominance and then maximize customer lifetime value (e.g., Samsung in smartphones, cloud software freemium models, Ariba, Facebook). Also suitable if rapid share gain allows for unit cost reduction and creates barriers to entry (e.g., Amazon, Uber).
   • Caution: This is the riskiest strategy from a profit/revenue standpoint, requiring intense focus on expanding revenue from acquired customers and the ability to execute future price hikes (e.g., Toyota Lexus raising prices 40% after five years). Many companies, like LivingSocial, fail to monetize after landing customers.
3. Skimming:
   • Goal: First cater to customers with a higher WTP (early adopters), then systematically decrease price to reach segments with lower WTP.
   • When to choose: When a significant number of customers have a much higher WTP than others (e.g., movies, music, online games, high-definition TVs, gaming consoles, iPhones, some automobiles). Also appropriate for breakthrough products that deliver superior value, or when there are initial production capacity constraints but mass production is planned for the future.
   • Execution: Often implemented by launching higher-end products first (e.g., Porsche Panamera debuting with an eight-cylinder model, then six-cylinder a year later).

Building Block #3: Develop Price-Setting Principles

These are the rules for executing the chosen pricing strategy, preventing deviations and ensuring overall coherence:

• Monetization models: Which specific models (from Chapter 7) will be used, and will they vary by segment or product life cycle?
• Price differentiation: How will price vary (e.g., by channel, industry vertical, region), and what are the maximum spreads allowed (e.g., all prices within 200% of average)?
• Price floors: Minimum prices or maximum discount percentages (e.g., never discounting more than 50%).
• Price endings: The actual numbers used on price tags (e.g., $X.99 for B2C, whole numbers for B2B) due to psychological effects.
• Price increases: How and how often prices will be increased over time.

Building Block #4: Develop Principles for Reaction

Planning for post-launch reactions is like playing chess: anticipating moves and preparing countermoves.

• Promotional Reactions: Principles on whether, how, and when to promote the product (e.g., low-entry price image like Walmart, or minimal promotions like Apple). Deciding what types of promotions to avoid (e.g., cash-back).
• Competitive Reactions: War-gaming sessions (pre-launch) to anticipate competitors’ moves (e.g., price reductions, service level increases), understanding their motivations, and quantifying the impact of matching/counteracting their moves. This prevents spontaneous, knee-jerk reactions that could be detrimental.

The authors conclude that companies with a well-defined pricing strategy are 40% more likely to realize their monetizing potential—a powerful statistic for driving innovation success.

Chapter 9: From Hoping to Knowing

This chapter argues that a robust business case for a new product must be built on external, customer-validated willingness-to-pay (WTP) data, rather than internal assumptions. It presents the business case as a living, breathing document that continually integrates market insights, linking the four critical elements: price, value, volume, and cost.

How Auto Auctioneer Manheim Tested a New Offering

The case of Manheim, a multi-billion dollar global auto auctioneer, illustrates the power of a data-driven business case. In 2011, Manheim considered launching a “money-back guarantee” service for car dealers, allowing them to return purchased vehicles within a certain period. Initial discussions among executives revealed both strong proponents and skeptical voices, risking decision paralysis.

To overcome this, Vishaal Jayaswal, Manheim’s head of pricing, was tasked with assessing customer WTP. Through early WTP talks (as described in Chapter 4), Manheim discovered:

• Dealers loved the idea and were willing to pay for it.
• WTP varied by dealer and situation (e.g., price-sensitive dealers only wanted short-term guarantees, risk-averse dealers paid more for longer terms).
• WTP also varied by car type and condition.

Jayaswal’s recommendations linked:

• Manheim’s business risks (e.g., probability of car failure).
• Value to customers of different guarantee services.
• Customer WTP for those services.
• Demand changes at different price points (price elasticity).

This allowed Manheim to simulate demand across price points, identify which inventory types to offer guarantees on, and quantify the revenue potential. The resulting business case, built on undeniable facts and real customer feedback, gave executive management the confidence to launch DealShield Purchase Guarantee in 2012. By 2015, it had protected billions in vehicle purchases and generated significant revenue and profit for Manheim, demonstrating how a strong, outside-in business case transforms hope into knowing.

Why WTP Is Essential For Your Business Case

The authors reveal a startling statistic: only 5% of business cases they’ve seen include essential customer WTP information. This means most revenue estimates are, at best, guesses.

• Lack of Trust: Without knowing customer WTP, how can a business case be trusted? It risks overstating market size or underestimating price resistance.
• Early Problem Identification: WTP data helps identify “undead” products early (low WTP), prevent “minivations” (underpriced due to unknown high WTP), avoid “feature shocks” (by prioritizing features customers will pay for), and uncover “hidden gems” (market for new offerings).
• Modeling Linkages: A robust business case must model the interdependencies between price, value, volume, and cost. Without this, companies make isolated adjustments (e.g., raising price due to cost increases without considering volume impact), leading to suboptimal outcomes.
• Software-as-a-Service Example: The authors cite convincing a SaaS provider to abandon a freemium model because a detailed business case, incorporating WTP and cannibalization analysis, showed it would significantly cannibalize existing profitable products without sufficient offsetting revenue from freemium conversions. This demonstrates that bad news early is good news.

Nine Steps to Build a Living Business Case

To create an “airtight” business case that maximizes new product value over time:

1. Forget the static approach: A business case must be a living document, continually updated with new data on pricing, costs, volume, and value, used throughout the product life cycle, not just for funding approval.
2. Assemble basic ingredients: Include market size, volume, customer segments, offer structure (configurations/bundles), value, WTP, monetization model, costs, and competing products/pricing.
3. Include price elasticity: Crucially, model how sales volume changes with price. This informs discussions on features vs. cost vs. demand.
4. Apply data-verified facts: Use figures based on real data, not internal overestimates, for market size, ramp-up times, churn, and cannibalization.
5. Add risk assumptions: Pressure-test the business case by calculating best- and worst-case outcomes for uncertain parameters (e.g., supplier issues) and use tools like Monte Carlo simulations.
6. Be realistic about goal tradeoffs: Acknowledge that maximizing profit, revenue, volume, and margin simultaneously is impossible. Understand “what if” scenarios for different priorities.
7. Consider competitive reactions: Model rivals’ possible responses (e.g., price cuts, service increases) and plan your counter-responses.
8. Don’t focus only on the new product: Assess the overall impact on the company, including cannibalization of existing products.
9. Keep checking in: Ensure the four pillars (value, price, cost, volume) remain integrated, consistent, and aligned with company strategy at each stage of development.

Building this kind of business case requires time, effort, and money, but the return far outweighs the investment. It transforms “hopes of launching a successful new product” into informed confidence.

Chapter 10: The Innovation Won’t Speak for Itself

This chapter highlights that even a perfectly designed and priced new product won’t succeed if its value isn’t effectively communicated. It argues that marketing and sales teams must articulate benefits, not just features, in the customer’s language, and be involved early in the product development process.

A Few Shining Examples of Value Communications

The authors present two compelling examples of effective value communication:

1. A SaaS company for warehouse operations: This company developed software that promised significant value: reduced inventory costs via better forecasting, increased warehouse efficiency by automating workflows, eliminated manual errors, and real-time workforce coordination by removing paper documents. Instead of pricing per user like competitors (which would be a minivation), they focused on value selling. Salespeople used a spreadsheet to quantify the customer’s return on investment (ROI) by inputting data like manual hours saved or shipping errors eliminated. This made the dollar-and-cents value crystal clear, justifying a higher price than per-user models and leading to skyrocketing sales. Their clear benefit statements, like “reduction in inventory carrying cost” and “greater warehouse efficiency,” resonated far more than mere feature lists.
2. SmugMug (online photo storage/sharing): Initially, SmugMug had 100+ features spread across four plans, leading to customer confusion and slow sales despite having a great product. The co-founders realized they were talking features, not benefits. They revamped their messaging, condensing over 100 features into fewer than 10 clear benefit statements (e.g., “beautiful design,” “unlimited storage,” “sell online”). This simplification allowed customers to quickly understand what they would get with each plan, leading to a double-digit percentage increase in revenue and conversion.

So Why Is Value Messaging Difficult?

The core problem is often a disconnect between the innovation team (R&D, product development) and the frontline sales and marketing teams.

• Late Involvement: Sales and marketing are often brought in at the very end of the process, tasked with selling a product they weren’t involved in designing or defining its core value proposition.
• Lost in Translation: Without being part of the early “value-to-customer” story that shaped the product, sales and marketing resort to brainstorming, leading to messages that don’t match the original, customer-validated value proposition.
• “Loudest Voice” Problem: Internal meetings to craft messages can devolve into power struggles, with the winning message often deviating from what truly excited potential customers.
• Handoff as “Standard Process”: Companies often view the R&D to sales/marketing handoff as routine, underestimating the special effort required to transfer deep value understanding.

The authors emphasize that great new products, even priced right, don’t sell themselves. The solution: add key marketing and sales people to your innovation teams from the very start, allowing them to comprehend early customer insights and contribute to product design, ensuring value-focused conversations from day one.

The Three Steps to Create Great Value Communications

Step 1: Develop Crystal-Clear Benefit Statements—Not Feature Descriptions

• Focus on Benefits: Articulate what the customer achieves because of the product, not just what the product “has.” Probe customer pain points and how your product solves them, ideally quantifiable.
• Quantify Relative Value: Show how your offering’s value compares to alternatives.
• Use the Matrix of Competitive Advantages (MOCA): This 2×2 matrix plots the relative importance of benefits to customers (y-axis) against your innovation’s performance vs. competition (x-axis, from customer perspective).
  • Top Right (Competitive Advantages): Most important to customers, where you outperform competitors – emphasize these.
  • Lower Right (Undervalued Strengths): You’re better here, but it’s less important to customers – try to convince customers this is more important, but don’t overemphasize if you can’t prove it.
  • Top Left (Competitive Disadvantages): Important to customers, where you underperform – prepare arguments to defend these.
• Avoid “Internal Fascinations”: Don’t talk about patents, R&D spend, or internal processes; customers don’t care.
• Brevity and Simplicity: Keep messages short, sweet, and to the point (e.g., Carbonite changing “20 gigabytes” to “unlimited storage”). Test messages with customers.
• Restraint: Don’t try to cram every feature and benefit into communications; focus only on what matters most.

Step 2: Make Your Benefit Statements Segment-Specific

Recognize that customers are different, and tailored messages are essential.

• Tailor to Segments: As seen with Adobe Creative Cloud, messaging should vary significantly for “Individuals” (e.g., “all creative apps”) vs. “Enterprise” (e.g., “customized provisioning”).
• Brand Examples: Mini Cooper effectively creates specific, exciting value messages for each of its diverse car models (e.g., “flexible” for Countryman).

Step 3: Measure the Impact and Refine Your Value Messages

Value communications are a “living document” that needs continuous monitoring and refinement.

• Regular MOCA Analysis: Continuously check customer perceptions of communicated value.
• Refine Based on Feedback: Be prepared to adjust messaging if customers don’t find it clear or compelling.

Mastering value communications is as critical as mastering product design. By integrating marketing and sales early and focusing on clear, segment-specific, benefit-driven messages, companies can ensure their innovations “speak for themselves” effectively in the marketplace.

Chapter 11: Use Behavioral Pricing Tactics to Persuade and Sell

This chapter introduces behavioral pricing, focusing on how irrational psychological factors influence customer WTP and purchasing decisions, even for business customers. It argues that while rational value pricing is a prerequisite, refining product offers and messages through behavioral tactics can significantly enhance sales and profitability, as these tactics exploit the predictable ways people deviate from purely logical economic choices.

The Behavioral Pricing Dilemma of an Internet Start-Up Company

An Internet start-up with a “good, better, best” product lineup found that nearly 60% of its customers chose the lowest-priced, entry-level offering. A study revealed two key insights:

1. Psychological Price Thresholds: Customers had subconscious price limits (e.g., $49, $99, $199). The company’s Standard and Advanced offerings were priced at $79 and $149, just below these thresholds, suggesting an opportunity to raise prices without hurting demand.
2. Too Much Value in Low-End: The Basic ($49) offering was too generous, making higher-priced options seem less appealing for the incremental value.

The CEO implemented changes: reduced Basic functionality (keeping price same), increased Standard and Advanced prices to $99 and $199 respectively, redistributed existing features to make Standard and Advanced more compelling, and introduced an ultra-premium Premium offering at $299.

The result was a 36% increase in Average Revenue Per User (ARPU) and a 29% increase in Monthly Recurring Revenue (MRR) from new customers. Approximately 14 percentage points of this increase were attributed to behavioral pricing tactics, with the rest from core product configuration changes. This significant, low-cost revenue boost went directly to the bottom line. The success stemmed from:

• Making higher tiers more attractive by reducing “Basic” value.
• Using the $299 “Premium” offering as an anchor to make Standard and Advanced offerings seem like better deals.
• Catering to a segment willing to pay for the highest quality.

This demonstrates that behavioral pricing, when combined with rational value pricing, can turn a “good vanilla cake into a four-tier torte with gourmet toppings.”

Six Behavioral Pricing Tactics That Make the Difference

These tactics are based on behavioral economics and work effectively for new products, often with compounding power when combined:

1. Compromise Effect:
   • Tactic: When given a choice of three options (good, better, best), people tend to avoid the extremes and choose the middle option.
   • Application: Introduce a “compromise option” for your new product. For example, in a wine store, introducing a $25 bottle alongside $10 and $40 options often leads most to choose the $25 one. In B2B sales, having a middle option allows salespeople to steer customers toward a “compromise” based on their perceived priorities.
   • Recommendation: When launching a new product, plan on having a compromise option in your lineup.
2. Anchoring Tactics:
   • Tactic: Set a high initial price or offering (the “anchor”) to influence subsequent perceptions of value and make other options appear more attractive.
   • Application: A movie theater’s $4.99 small soda makes the $5.99 large soda seem like a bargain. The Economist‘s experiment showed a $125 print-only option made a $125 print+online bundle significantly more appealing. In B2B, starting negotiations with a high anchor price (e.g., “40% premium due to superior advantages”) sets a reference point that leads to a higher net price even after concessions.
   • Recommendation: Have an anchor product in your portfolio, and in B2B, start sales negotiations with a high anchor price.
3. Using Price to Signal Quality:
   • Tactic: A higher price can intrinsically signal higher quality, influencing customer perception and even the perceived effectiveness of a product.
   • Application: Apple’s iPhone launched at $599, positioning it as a premium, high-quality product, rather than a cheap device. A study showed a $2.50 painkiller pill was perceived as more effective than a 10-cent one, even if both were placebos. Pricing too low can damage perceived quality.
   • Recommendation: Beware of a too-low price when launching a new product; it can ruin quality perception. Starting high allows for future price reductions; starting low rarely allows increases.
4. Razor/Razor Blades:
   • Tactic: Price the upfront “razor” (initial product) low to secure customer acquisition, and then monetize heavily on the recurring “razor blades” (consumables or ongoing services).
   • Application: Coffee machines sold cheaply with expensive, proprietary coffee pods. Computer printers sold cheaply with costly ink cartridges. This leverages customers’ greater sensitivity to upfront costs. In SaaS, this is “land and expand”—sell a basic version, then upsell to advanced. Retailers use “doorbusters” to draw customers in for higher-margin purchases.
   • Recommendation: Use only if you are 100% sure you can sell your downstream products and have mechanisms to upsell or ensure recurring purchases.
5. Pennies-a-Day Pricing:
   • Tactic: Break down large, daunting prices into smaller, more psychologically digestible units (e.g., daily, hourly, or fractional costs) to reduce sticker shock and build loyalty.
   • Application: Amazon Web Services (EC2) quotes server usage in dollars or even fractions of a penny per hour, making powerful computing infrastructure seem highly affordable. An annual contract of $120 can be reframed as $9.99/month to increase sign-ups.
   • Recommendation: Put proper thought into framing your price to make it look attractive, not just coming up with the price point.
6. Psychological Price Thresholds:
   • Tactic: Recognize and leverage specific price points (e.g., $9.99 vs. $10.01) where customer perception of value or willingness to buy changes disproportionately.
   • Application: Retailers often price at $9.99 instead of $10 because customers perceive $99.99 as significantly cheaper than $101. Studies show clear price cliffs (e.g., a product priced at $71 sees a 20% drop in acceptance compared to $69.99).
   • Recommendation: Identify price thresholds for your products and stay on the “cliff” (i.e., just below the threshold) to avoid losing significant customer segments.

Don’t Guess: Put Behavioral Tactics to the Test

The authors caution against blindly applying these tactics. Companies must test, track results, and choose the best tactics for their specific innovation. Too many tactics can confuse customers, too few miss opportunities.

• Focus Groups: Provide qualitative feedback on customer reactions to different tactics, revealing “why” they respond as they do.
• Controlled A/B Tests (for online offers): Assess click-through and conversion rates for different tactics with statistically significant data. Requires careful setup.
• Large-Scale Experiments (simulated in surveys): Useful when live tests are impossible or too costly, allowing for testing many ideas across hypothetical situations.

In essence, behavioral pricing adds a crucial layer of sophistication to pricing, ensuring that products are not only rationally valued but also psychologically appealing to customers.

Chapter 12: Maintain Your Price Integrity

This chapter addresses the critical challenge of maintaining price integrity after a new product launch, especially when initial sales disappoint. It argues against the common knee-jerk reaction of cutting prices, explaining its severe negative consequences and offering alternative, more strategic responses.

The Importance of Patience in Maintaining Price Integrity

When sales volumes fall below projections post-launch, the immediate and intense pressure to cut prices is a widespread and often detrimental reaction.

• Eroding Profits: Cutting prices prematurely (e.g., 5-20% drop) immediately sacrifices the targeted profit margin, which is difficult, if not impossible, to recover over the product’s lifetime. All the careful WTP and elasticity work is undone.
• Damaging Brand Perception: A quick price reduction signals to customers that the offering has less value than initially communicated, damaging brand credibility and quality perception. It implies the company made a mistake.
• Case of Apple Watch: Launched in April 2015, the Apple Watch faced mixed reviews and rumors of underwhelming sales. Despite the negative press and analyst warnings, Apple held firm on its price ($349+), demonstrating remarkable price integrity. By October, it had sold an estimated 8 million units, generating $2.8 billion in its first six months. This success underscores the importance of patience and sticking to a well-thought-out pricing strategy.

The authors note that knee-jerk price reductions are common because teams feel immense pressure to “do something—right now!” after investing heavily in a product. However, this is precisely when successful innovators must remain cool, calm, and collected, analyzing the root cause of the problem before reacting.

How to Prepare for Post-Launch

The post-launch phase is inherently chaotic, but preparation can prevent spontaneous mistakes.

1. Be patient addressing post-launch problems:
   • Problems typically fall into four categories: market misunderstanding of value, competitor price undercutting, competitor launching a competing product, or sales below plan regardless of competition.
   • Form a cross-functional task force (sales, marketing, finance, product, etc.) to pinpoint the root cause. For example, if a competitor undercuts price, it might be a temporary tactic. If sales are low, it could be a feature problem, distribution issue, awareness problem, or quality issue, not necessarily a price problem.
   • BMW’s 7 Series (2001): Faced slow sales in Europe due to perceived ugliness. BMW kept the price high, reduced sales targets, and immediately worked on a face-lift, proving that price cuts don’t fix fundamental product problems.
2. Go beyond financial KPIs and track monthly outcomes:
   • Financial KPIs (volume, revenue, profit) are insufficient. Also track:
     • Sales KPIs: Win-loss ratio, final price deviation from target, average sales quoting time, price as a reason for loss/win.
     • Operational KPIs: Number of escalated deals, price changes upon escalation, rejected escalation requests (healthy escalation implies pushback and price adjustments in 30-40% of deals).
     • Customer KPIs: Price difference achieved across segments, feature usage (indicating value perception and segmentation effectiveness).
   • Too few escalated deals might even signal that the product is underpriced, and the sales team is finding it too easy to sell.
3. Do deal “deconstructions” regularly:
   • Bring together a cross-functional team involved in specific deals (wins and losses) to dissect why they occurred.
   • Objective: Understand if product strategy, price strategy, and value communications were applied correctly. Identify weaknesses and, crucially, best practices to be applied to other deals.
   • Crucial for buy-in: Frame these as learning experiences, not finger-pointing sessions.
4. Advocate pricing patience: Make your team come up with three nonpricing actions before you approve a price decrease.
   • This simple rule prevents impulsive price cuts. The team must demonstrate why a price cut is superior to alternatives (e.g., increasing advertising, adding value to the product, bundling offers).
   • If a price cut is unavoidable, demand something in return from customers (longer commitment, greater volume, referrals, joint press releases). This preserves price integrity.
   • A Latin American telecom firm saw “highest impact ever” from instituting this rule, fostering discipline.
5. Before reacting on price, war-game your competition’s counterreactions:
   • Don’t react blindly to competitor price cuts. Anticipate their next moves and simulate your position (sales, share, profit) after their reaction and your counter-reaction.
   • If war-gaming shows you’ll be worse off, don’t cut prices. Seek other strategies. This is like playing chess: think several moves ahead.
6. Unusually high sales could be a high-class problem:
   • Excessively high sales may indicate you’ve underpriced your product (a minivation) and are leaving money on the table.
   • Mercedes SL (1970s): Sold out with a two-year waiting list, indicating the price was ~20% too low. Mercedes had to wait years for gradual price increases to reach optimal levels, costing hundreds of millions in lost revenue.
   • Action: Rigorously examine why sales exceeded expectations. If the analysis suggests a large price increase, implement it carefully and in several steps. Consider accompanying price increases with small product improvements. If a competitor has manufacturing problems, exploit that to gain share, but don’t just raise prices. Be careful about overly aggressive price hikes that might alienate customers or invite competition.

Price Wars: The Only Winning Move Is Not to Play

Price wars are about who can lower prices the most, and they are destructive. The only winner is the lowest-cost competitor.

• High Incidence: 83% of companies felt increasing price pressures in 2014, with low-price competition cited as the biggest reason.
• Denial: A shocking 90% of companies in price wars claim competitors started it, demonstrating widespread denial. It takes two to tango.
• Consequences: Price wars have deadly consequences for new products and overall profitability.
• Prevention: Avoid starting one. Understand competitor motivations, communicate clearly within your organization about the unfavorable outcomes, and have processes for updating models and forecasts (including price elasticity) to avoid surprises and knee-jerk reactions.

Maintaining price integrity requires patience, discipline, and a proactive, data-driven approach to post-launch challenges, resisting the temptation for quick fixes that erode long-term value.

Chapter 13: Learning from the Best

This chapter provides in-depth case studies of seven successful companies that have rigorously applied the “design the product around the price” approach to monetizing innovation. These examples span B2B and B2C, traditional and disruptive innovations, and diverse industries, demonstrating the universal applicability and power of the book’s nine rules.

The Porsche Story—Veering Off the Sports Car Track to Create Two Winning Vehicles

Porsche, known for sports cars, faced financial struggles in the early 1990s. Under new CEO Wendelin Wiedeking, they pursued radical innovation: the Cayenne SUV (2002) and the Panamera sedan (2009). These products, initially seen as huge gambles, became massive successes due to a meticulous “design the product around the price” approach embedded in Porsche’s culture.

• Atypically Early Customer Research: Four years before launch, Porsche conducted high-level phone surveys to confirm brand fit for an SUV/sedan and to identify early WTP ranges. They learned customers would pay a significant premium for a Porsche SUV and that a Panamera could be positioned as upper-luxury, above Mercedes CLS. This research also revealed that these cars would appeal to Porsche fans who couldn’t afford a 911 as an “everyday” car, identifying a large untapped market and showing minimal cannibalization of existing models.
• Deciding Which Features Should Be In or Out: Porsche conducted extensive value analysis in “car clinics”, comparing prototypes against competitors’ cars. They asked detailed WTP questions for specific features. No feature was sacrosanct; the burden of proof was always on why a feature should be included. For instance, customer demand led to an expensive redesign for larger cup holders in the Panamera, while less valued features were omitted or made optional. This rigorous process led to some of the industry’s longest options lists, allowing Porsche to monetize features that customers truly valued.
• Creating a “Living” Business Case with True Price Optimization: Porsche’s business cases for Cayenne and Panamera included market simulation models of the entire relevant market, incorporating WTP data, feature value analysis, and price elasticity. They rigorously assessed total company impact, approving new products only if they increased overall Porsche revenue, demonstrating a holistic view rare in the auto industry. These business cases were continually updated.
• Appealing to the Early Adopters: Porsche’s Skimming Strategy: Knowing customers had a high WTP for their new, unique offerings, Porsche initially launched only the premium eight-cylinder engine models for both Cayenne and Panamera. They waited a year to release less expensive six-cylinder models, effectively skimming the market (capturing high-WTP early adopters) and maximizing initial profits.
• Porsche’s C-Suite Task: Planting New-Product Monetization into the Company’s DNA: Top management, including the CEO and board, actively drove this approach. They participated in car clinics, spoke to customers, and relentlessly challenged teams to base decisions on market insights. All relevant functions (sales, marketing, product, finance) were involved from the start. Projects had to present monetization strategies to the full board, reinforcing its importance. This top-level commitment ensured the “design the product around the price” principle became deeply embedded in Porsche’s DNA, leading to its status as the most profitable automaker per car.

LinkedIn—Monetizing the World’s Largest Professional Network

LinkedIn transformed from a free professional networking site into a $3 billion business by rigorously applying a “members-first” philosophy and a sophisticated monetization process.

• Designing Products Based on the “Members First Principle”: LinkedIn focused on “connecting talent with opportunity at massive scale.”
  • InMail: Initially priced at $10 per message, LinkedIn’s InMail (allowing contact with non-connections) was positioned as a premium feature. Early WTP validation confirmed its value. Crucially, they introduced a response guarantee (only charged if a response received), which boosted adoption by reducing member uncertainty. Later, they flipped the policy (credited if responded), discouraging generic InMails and enhancing member experience—a subtle but powerful monetization innovation that preserved marketplace quality.
  • Talent Solutions: LinkedIn created a suite of products specifically for recruiters, recognizing them as the other side of its two-sided marketplace. By proactively identifying recruiters’ needs, values, and WTP (e.g., access to “passive” job candidates), Talent Solutions became a $1.3 billion business by 2014, demonstrating explosive growth from monetizing a distinct segment.
• Instituting a Rigorous Monetization Process: LinkedIn’s success is attributed to its “multi-step, iterative process to test new concepts with customers” (Andrew Freed) and optimize monetization.
  • Hypothesis Development & Internal Refinement: Identifying white space and refining ideas with cross-functional teams.
  • Initial Customer Validation: Before coding, conducting value trade-offs, package creation, unaided WTP, and purchase probability studies.
  • The Gut-Check: Pitching concepts to sales reps (closest to customers) for internal validation.
  • Building a Precise Model: Commissioning larger quantitative studies for precise inputs on product configuration, price models, and WTP, continually feeding findings to product teams.
  • Paid Pilots: Crucially, selling beta versions of products rather than giving them away for free. This provides an additional layer of WTP validation and generates more actionable feedback from users who have “skin in the game.”
• Looking Ahead: LinkedIn continues to launch promising products like Elevate (2015), leveraging this collaborative, parallelized, and rigorous approach to ensure continued success by designing products around value and price.

Dräger—Collecting the Specs for Successful Industrial Products before Engineering

Dräger Safety, a $1 billion unit of a German company making gas detection equipment for industrial clients (e.g., mining, sewer cleanup), transformed its product development from an “inside-out” engineering-led process to an “outside-in” customer-value driven approach.

• Limitations of the Old Innovation Process: Historically, R&D was based on anecdotal sales feedback and matching competitors’ features. This led to a “fuzzy front end” of innovation, with over-engineered, one-size-fits-all products, scope creep, unclear selling stories, and mediocre margins (classic feature shock recipe). Sales constantly pressured R&D for lower prices and higher performance.
• Bringing Innovation to the Innovation Process: Ralf Drews, then head of R&D, revolutionized the process around 2000. He insisted that engineers and product teams go into the field to observe and interview customers directly in their environments (e.g., in sewage canals). This uncovered unarticulated needs that led to “wow” features.
  • X-zone 5000 Gas Detector: This product’s development began with observing sewage workers’ pain points: detectors getting kicked into canals by pedestrians, and alarms not being visible/loud enough in rain. The $4,300 X-zone 5000 was designed with a distinct visual appearance and improved alarms, despite being priced 35% above competitors. Its concept was shown to customers before engineering. This led to 250% higher sales than expected and above-average margins, as it addressed critical, previously unarticulated problems.
  • “Test-selling”: This early customer engagement allowed Dräger to “test-sell” products before development, gaining confidence and top management approval for funding.
• Institutionalizing the Innovation Monetization Process (CPM): Dräger formalized its new “Customer Process Monitoring” (CPM) process, making it mandatory for all major new product ideas. CPM involves five phases:
  1. Defining target market focus (geo, application, industries).
  2. Identifying key decision makers and influencers (e.g., safety engineers, procurement, plant managers, each with different needs).
  3. Launching qualitative research to observe customers, identify articulated and unarticulated “wow” needs.
  4. Conducting a quantitative survey using conjoint analysis to assess WTP in absolute terms and relative to competitors, identifying needs-based segments (e.g., sewage customers valued watertight housing much more than petrochemical customers).
  5. Assessing competitive products to strategically choose battles where their product can outperform competitors in key functions for target segments.
     This process ensures product concepts are based on customer value, reducing scope creep and enabling tailored product variations (e.g., watertight X-zone for sewage).
• Creating Winning Sales and Marketing Messages: After a robust product concept, Dräger created selling stories that articulated product value to each influencer in the buying process (e.g., different presentations for procurement vs. safety engineers). These were tested with customers before manufacturing or even engineering, allowing for “failing early” and refining messages.
• Embedding Monetization into Dräger’s Innovation DNA: Successful pilots like the X-zone 5000 and a new “alcotest” (10x sales of prior version) convinced Dräger. CPM managers were hired and placed within marketing/product management, bridging R&D and commercial functions. This organizational shift from inside-out to outside-in thinking was driven from the top (Drews as CEO) and required overcoming cultural resistance (e.g., “product first, customer second” mindset) and strategic resistance (clear focus on key market segments). Dräger Safety’s product development is now spearheaded by CPM managers, ensuring monetization is deeply embedded.

Uber—Monetizing a Disruptive Innovation through Innovative Price Models

Uber, valued at $60 billion+ in 2015, revolutionized the taxi industry without owning cars, primarily through its innovative monetization approach.

• Uber Designed Its Innovation around the Price:
  • Dynamic Pricing (Surge Pricing): Uber’s core innovation. Early investor Bill Gurley noted “elasticity was off the charts” for both riders and drivers. To solve the “no cars available” problem during peak demand, Uber implemented surge pricing. This dynamically increases prices during high demand to attract more drivers (increasing supply) and reduce demand, ensuring availability and reliability. Uber passes most of the surcharge to drivers. Gurley suggests it should have been called “availability pricing” to better communicate its value to customers.
  • Penetration Pricing: Uber’s “price low on purpose” strategy was critical for gaining massive market share. Recognizing high price elasticity among riders, Uber aimed to be the low-cost provider. By minimizing driver idle time (through surge pricing and efficient matching), Uber drives down costs, creating a “virtuous cycle” that allows even lower prices. This strategy enabled Uber to reach a market 20 times larger than traditional taxis, challenging public transportation, rental cars, and even car ownership itself.
• Getting the Language Right: Uber deliberately eliminated tipping from its app. Gurley cites this as a “most keen insight”: tipping causes anxiety, and removing this burden (“not all dollars are created equal”) enhances the customer experience, fostering loyalty.
• The “Everyone” Segmentation Plan: Uber uses clever segmentation to appeal to diverse needs:
  • UberBlack: For those willing to pay a premium for convenience (SUVs, limos).
  • UberX: For no-frills privacy.
  • UberPool: Harnessing algorithms to match like-minded riders, offering significantly lower fares, challenging public transport, and potentially offering a substitute for car ownership (e.g., “My other car is an Uber”).
  • Future: Uber aims to cover all urban movement (“If something is moving… that’s our jam”) by offering services like UberASSIST (for elderly/disabled) and UberEATS (food delivery).

Uber’s success underscores that the monetization model itself can be the core innovation, driving massive scale and disruption by aligning pricing with customer value and behavioral psychology.

Swarovski—The Payoff from Crystal-Clear Ideas on What Consumers Will Pay

Swarovski, founded in 1895, successfully adopted “design the product around the price” to modernize its crystal business, moving from “internal gut feeling” to customer-value driven pricing, significantly boosting margins.

• Loose Crystals for the Fashion and Jewelry Sectors: Swarovski launches new crystal collections twice a year, with over 100,000 active products.
  • Identifying Value Drivers: In 2013, they began extensive research across 20+ countries to identify product criteria that increased customer WTP. They discovered two major drivers: cut complexity and brilliance. Customers were willing to pay 5-6x more for sophisticated cuts that enhanced brilliance.
  • Five Price Tiers: Based on this WTP data, Swarovski created five price tiers (Essential, Classic, Advanced, Sophisticated, Outstanding) with prices varying by up to 650% based on cut complexity and brilliance. Other factors like form or color had little WTP impact and didn’t affect tier pricing.
  • Benefits: This system allows designers to create products appealing to specific price layers and target segments. It also simplifies sales conversations; salespeople can now explain why one product is much more expensive, reducing price resistance and allowing them to focus on selling rather than discounting. It has significantly increased margins.
• Boosting New Product Success for Customized Solutions: The Customized Solutions unit (crystals for mobile phones, furniture) also adopted this approach. They conduct detailed end-consumer research to understand what consumers are willing to pay for products embellished with Swarovski crystals.
  • Quantifying Brand Value: They found consumers would pay an “unbelievable 120% more” for a Swarovski-embellished smartphone case. This allowed Swarovski to justify higher prices to manufacturers, showing them the additional profit they could make and capturing a larger share of that profit.
  • Strategic Focus: This data focused the Custom Solutions group on products/segments with high consumer WTP for Swarovski embellishment. They also monetize their strong brand and logo, as firms with weaker brands are willing to pay for the “spillover effect.”
• The Next Steps in Swarovski’s Monetization Journey: This multi-year transformation is guided by a pricing board (heads of marketing, sales, controller) that provides direction, resolves conflicts, and monitors progress six times a year. A dedicated pricing office (two full-time employees in marketing) supports innovation teams. This structured approach, combined with top-level commitment, is embedding “design the product around the price” into Swarovski’s core.

Optimizely—How to Price Breakthrough Innovation

Optimizely, a SaaS firm founded in 2010 by former Google product managers Dan Siroker and Pete Koomen, helps companies optimize websites through A/B and multivariate testing. It’s a prime example of a startup monetizing breakthrough innovation.

• First Up: Determining Whether Customers Would Pay: The idea came from Siroker’s work on the 2008 Obama campaign, where A/B testing boosted donations significantly. Instead of immediately building, they prioritized WTP talks with potential e-commerce customers.
  • Customer Validation: Customers instantly recognized the value (incremental revenue from better website engagement) and expressed high WTP. This validated the core concept before any code was written.
  • Monetization Task Force: Siroker and Koomen formed a cross-functional team (product, marketing, sales, finance) to determine features (product configuration), best monetization model (subscription? freemium?), and pricing strategy. They defined a freemium product and a clear land-and-expand strategy.
• Understanding How to Charge:
  • Usage-Based Pricing: The team wanted a model based on usage, aligning with value. They rejected the common SaaS per-user pricing because it didn’t correlate with their software’s value (website impact, not number of users). A per-user model would have been a minivation.
  • Monthly Unique Visitors (MUVs): They decided to charge based on the number of Monthly Unique Visitors (MUVs) bucketed into an experiment. This metric directly aligns with value (more visitors tested, more potential impact) and is easily predictable for customers. It’s analogous to Michelin’s “miles driven” model, allowing smaller companies to afford Optimizely and larger ones to pay more as their traffic (and value) grows. It also simplifies sales.
• Expanding the Product Portfolio (Personalization): In 2014, Optimizely explored a new Personalization product.
  • Bundle or Not to Bundle? WTP validation revealed that while existing Testing customers were interested, new prospects often had different sequencing preferences for Testing vs. Personalization. There was no overwhelming demand for a hard bundle. Optimizely opted to keep Personalization as a stand-alone product (but integrated on the same platform), allowing customers to mix and match (good/better/best for each). This avoided a minivation that would have resulted from bundling.
  • New Pricing Metric for Personalization: For Personalization, the team decided against MUVs. Since Personalization is “always on” for all site visitors, they chose total site traffic as the pricing metric. This aligned with how customers would use and derive value from it, and allowed Optimizely to defend the value of each product individually.

Optimizely’s success, with triple-digit annual revenue growth, is a testament to designing each product separately around value and price, guided by early customer conversations.

Innovative Pharma—How a Customer Value Driven R&D Approach Boosts Success

A large, successful pharmaceutical company (undisclosed name) faced pressure to justify its massive R&D spending ($2.6 billion per new drug). It radically shifted its drug development process from being purely clinically driven to a “customer value-driven new product” approach, aiming to reduce risk and maximize market potential.

• Adopting a New Approach to Sizing up Opportunities: Top management decided new drugs needed to prove economic value to payers (governments, insurers), physicians, and patients early, not just clinical efficacy. This required a multi-year cultural and organizational transformation.
• Change #1: Listen to the Country Teams to Get the Insights on Market Access and Price Potential: Headquarters began involving local country teams (medical, marketing, market access specialists) in early product development. These teams provided crucial insights on unmet customer needs and payer requirements, serving as surrogates for costly primary research and fostering commitment to new drugs.
• Change #2: Determine a Product’s Clinical and Economic Value Much Earlier in the Process: The company focused process changes on Phase II clinical trials. By evaluating a drug’s clinical, humanistic, and economic value by the end of Phase II, they could send fewer, but better-resourced, compounds into the expensive Phase III trials. The focus was on “what the teams needed to do differently, and why,” emphasizing that broader market insights increased the chances of clinical and commercial success.
• Change #3: Increase Cooperation between Clinical Development, Marketing, and Market Access to Encourage Constructive Challenges: Historically siloed, these groups were now closely intertwined.
  • Clinical development had to understand payer data requirements for reimbursement and market access.
  • Market access staff had to articulate payer needs to researchers to help them adjust clinical trials.
  • This linked the economic value of new drugs with their clinical value versus competing therapies (value differentiation), enabling researchers to design trials that gathered evidence for both.
  • Senior management provided ongoing support and approval for these changes, including early value analyses.
• Impact: Lower Risk, Higher Upside: The company lowered its overall risk by making bigger bets on fewer products. They became willing to kill more products in early development based on poor market prospects (e.g., insufficient differentiation, lack of payer added value), even if clinically sound. This countered conventional wisdom that spreading risk across many products is safer. Instead, a deep, incisive understanding of fewer products’ commercial prospects proved less risky and led to more focused resource allocation.
• Impact: Less Promising Candidates Killed Earlier: The firm now defines new product success not just by regulatory approval but by meeting financial minimums. This was a culture shock, as it meant it’s okay to pull the plug on a candidate drug if market analysis identified commercial risk early. This shift is crucial for optimizing R&D investments in an industry heavily reliant on new product success.

This pharma case demonstrates that even long-established companies in highly regulated, science-driven industries can successfully transition to an “outside-in,” customer value-driven R&D approach, significantly boosting long-term business success by identifying losers earlier and investing more in winners.

Chapter 14: Implementing the “Designing the Product around the Price” Innovation Process

This final chapter provides a practical roadmap for implementing the “design the product around the price” approach within any organization. It outlines a two-phase process—”Jump-Start and Pilot” and “Scale and Stick”—and crucial pitfalls to avoid during this transformative journey.

Jump-Start and Pilot

Part 1: The Jump-Start

1. Diagnose Current Performance: Choose a few recently launched products and use the provided online diagnostic tool (monetizinginnovation.com) to assess their financial performance against business plans. Determine if they were feature shocks, minivations, hidden gems, undeads, or big successes. Be brutally honest in this initial assessment.
2. Internal Discussion: Review the nine rules of monetizing innovation and the CEO checklists (from Chapters 4-12) with your team for these chosen products. Identify missing steps and areas for improvement in your current process.
3. Executive Involvement: As a leader, start participating in early-stage R&D meetings. Explain your vision and goals for monetizing innovation, educating teams on how this new process will lead to more reliable and successful products. Challenge their assumptions constructively.

Part 2: The Pilot

1. Select a Pilot Product: Choose a real, new product idea currently in your pipeline that is representative of your business.
2. Form a Cross-Functional Innovation Team: Include managers from R&D, product, pricing, marketing, sales, and finance.
3. Appoint a Monetization Hero: This individual is accountable for the initiative’s success and familiar with existing innovation processes. They will drive the new approach.
4. Establish Rules of Engagement: Foster a culture of constructive conflict, where members hold each other accountable and are empowered to say “no” to ideas or features that don’t align with WTP (counteracting the “more is better” bias).
5. Allocate Budget for WTP Research: Secure resources to conduct quantitative research on target customer WTP and market size (as per Chapter 4). This data provides concrete direction for segmentation, product configuration, and bundling.
6. Kick Off the Pilot: Begin applying all nine rules to the selected product. Embrace a “test and learn” mindset, documenting successes and challenges, as perfection isn’t expected on the first try.

Scale and Stick

Part One: Scale

Scaling involves expanding the new process to other products and business units, avoiding a “big-bang” approach.

1. Consult Process and Playbooks: Formalize the steps learned in the pilot into clear workflow diagrams and playbooks. Customize them as needed for different product groups.
2. Dedicate a Monetization Team: Based on pilot results, recruit or assign a full-time monetization team (either internal or external) whose sole responsibility is to develop and apply the new monetization process across products. This team works hand-in-hand with innovation teams (like at Dräger and Swarovski).
3. Assign Clear Roles and Responsibilities: Formally define the roles (Responsible, Accountable, Consulted, Informed – RACI) for all cross-functional innovation team members, ensuring the monetization team member is accountable for implementing the nine rules.
4. Regular Cross-Functional Meetings: Ensure teams meet regularly to ask the CEO questions from Chapters 4-12, challenging each other on market segmentation, customer value, and WTP evidence.
5. Track New-Product Performance with Comprehensive KPIs: Go beyond just financial KPIs. Track sales, customer, and operational metrics (e.g., win-loss ratio, deal escalation rates, feature usage) to continuously monitor the product’s health (as discussed in Chapter 12).
6. Implement a Review Schedule: Regularly review product performance, identifying what worked, what didn’t, and what to do differently for continuous improvement.

Part Two: Stick

Making the new process permanently embedded in the organization requires cultural change.

1. Training and Change Management: Design comprehensive training plans to develop competence in the nine rules and manage organizational resistance. Document why the change is necessary, what needs to be done, and how for each function.
2. Lead by Example: As a leader, you must continuously show up, ask tough questions, and communicate the importance of this new approach.
3. Tell Success Stories: Leverage the successful pilots to illustrate the benefits of monetizing innovation effectively.
4. Empower “No”: Cultivate a culture where it’s acceptable, even encouraged, to “pull the plug” on unworthy new-product ideas (undeads), shifting from a “yes/maybe/no” approval process to a “no/maybe/yes” mindset. This means every product must “earn its way” into the market, like at Porsche.
5. Reward Right Ambition: Provide incentives for teams that accurately assess market potential and customer WTP, designing products that deliver strong profits. Discourage “lowballing” targets or offering unnecessary discounts that return profits to customers.

The Nine Pitfalls to Implementing a New-Product Monetization Process (and How to Avoid Them)

These are common obstacles that can derail the implementation:

1. Putting All Your Eggs in One Basket: Don’t let the process depend solely on one person or one monetization team. Disengaged other teams make the organization vulnerable.
2. Not Forming a Cross-Functional Team: Without early involvement of marketing and sales, value communication will likely fail, undermining revenue and profit.
3. Banking on the Big Bang: Avoid trying to implement everything at once, especially in large companies. Incremental steps are key.
4. Imagining One Size Fits All: Customize the outlined steps to your company’s unique capabilities, tools, processes, and culture.
5. Having Too Many Opt Outs: Ensure adherence to the new process through automation (e.g., stage gates) and by reducing opportunities for teams to revert to old ways.
6. Getting Blinded by Science: Don’t chase false precision in early WTP estimates. Focus on applying the philosophy and principles first; the math refines over time.
7. Avoiding Messy Information: Accept that data won’t be perfect or clear. Draw pragmatic conclusions, and don’t conduct “witch hunts” for data that doesn’t align.
8. Cheaping Out: Allocate sufficient budget and dedicated people. Underfunding will sabotage the effort.
9. Letting the C-Suite Delegate Everything: This is the most damaging pitfall. Senior executive commitment and involvement (not just delegation) are critical. Companies with C-level leadership driving this change average 33% more profit. If monetizing innovation is not a top two organizational priority for leadership, the authors advise against embarking on this journey.

The book concludes by offering a stark choice, akin to Neo’s red pill/blue pill dilemma in The Matrix: continue with the comfortable but risky “hope-based” innovation (blue pill), or confront the difficult reality and adopt the “knowing-based” approach to fully monetize innovation (red pill). The latter, though challenging, sets a company on a fast trajectory to success.