I stumbled upon this gem of a book recently (March 2024), and its contents have left me pleasantly surprised.

It’s a comprehensive exploration of strategies and insights tailored not only to monetizing innovation but also remarkably resonant with my experiences as a B2B product manager.

Here’s a short summary:

The four flafours of monetizing innovation failure

Feature Shocks are bold, ambitious innovations that promise groundbreaking advancements but often struggle to gain traction in the market due to their disruptive nature or complexity. They represent high-risk, high-reward endeavors that challenge conventional norms and push the boundaries of possibility.

Minivations are incremental innovations that may seem modest at first glance but hold significant potential for capturing overlooked market segments or addressing niche needs. They thrive on simplicity, agility, and adaptability, offering incremental value that accumulates over time to drive sustained success.

Hidden Gems are undiscovered or underutilized aspects of a product or service that possess untapped potential for monetization. They require keen observation and strategic positioning to unearth, often hiding in plain sight amidst the noise of more prominent features or offerings.

Undeads are products or initiatives that, despite facing setbacks or being declared obsolete, refuse to fade into obscurity. They defy conventional wisdom by persisting in the market, sometimes undergoing rebranding or reinvention to adapt to changing dynamics and emerge stronger than before.

9 rules for successful monetization

1. Have the willingness-to-pay talk early

The importance of understanding customers’ perceptions of value cannot be overstated. Engaging in deep discussions regarding pricing with potential customers before diving into product design and development is emphasized as a crucial step.

To build a product around a price, you must engage in deep discussions with potential customers before you design and develop it.

2. Don’t default to a one-size-fits-all solution

Innovation demands tailored solutions. Segmenting customers based on their distinct needs, values, and willingness to pay is not just recommended but deemed essential. By designing products that cater to specific segments, one can maximize attractiveness and value delivery.

When it comes to innovation, there is only one right way to segment: by customers’ needs, value and their willingness to pay for a product or service that delivers value.

You need to design segments in order to design highly attractive products for each segment. And you must base your segmentation on customers’ needs, value and willingness-to-pay (WTP). This way, segmentation becomes a driver of product design and development, not an afterthought.

Key principles of product configuration and bundling:

1. Leaders, fillers, and killers

  • Leaders are the crown jewels of a product lineup, representing flagship features or products that set the standard. They embody innovation and excellence, commanding attention and driving customer engagement.

  • Fillers complement the leaders, providing supplementary features or products that enhance the overall offering. While not as groundbreaking as leaders, fillers fulfill niche needs and contribute to the holistic value proposition.

  • Identifying and addressing killers is crucial for optimizing product success. Killers are aspects that detract from the overall user experience or value proposition, undermining customer satisfaction and retention. Eliminating or mitigating these factors is essential for maximizing product effectiveness and market competitiveness.

2. Creating Good, Better, and Best Options

In product configuration and bundling, offering a range of options allows customers to find the perfect fit for their needs and budget. Here’s a breakdown of each tier:

  • Good options provide basic functionalities at an affordable price point. They cater to budget-conscious customers or those with minimal requirements, serving as entry-level offerings without compromising quality.

  • Better options enhance the value proposition by incorporating additional features or improvements compared to the basic offering. They strike a balance between affordability and enhanced functionality, appealing to customers seeking a step-up from the basic tier.

  • Best options represent the premium tier, offering top-of-the-line features, superior performance, and an exceptional user experience. They target discerning customers who prioritize quality and are willing to invest in the best possible solution to meet their needs.

3. Monetization Models: How you charge trumps what you charge

The book underscores the significance of the monetization model employed. Five potent monetization models are discussed:

  1. Subscription
  2. Dynamic pricing
  3. Market-based pricing (auctions)
  4. Alternative metric pricing/pay as you go
  5. Freemium pricing

Each model comes with its own set of advantages and considerations, shaping the monetization strategy in profound ways.

4. Pricing strategy - your short and long-term monetization plan

At a high level, a sound pricing strategy must have clear intent, quantifiable goals, and a time frame for execution

The Four Building Blocks of a Pricing Strategy Document

Crafting a robust pricing strategy necessitates a structured approach, encompassing key elements that guide decision-making and adaptation in the dynamic landscape of the market.

  1. Set Clear Goals Setting clear, measurable goals forms the cornerstone of an effective pricing strategy. Whether it’s maximizing revenue, gaining market share, or enhancing brand perception, articulating specific objectives provides a roadmap for aligning pricing decisions with overarching business objectives.

  2. Pick the Right Type of Pricing Strategy Selecting the appropriate pricing strategy lays the foundation for achieving desired outcomes. Whether it’s profit maximization, market penetration, or skimming, understanding the nuances of each approach empowers companies to tailor their strategies to suit the unique characteristics of their products, target markets, and competitive landscapes.

  3. Develop Price-Setting Principles Price-setting principles serve as guiding principles that inform the execution of the chosen pricing strategy. From choosing monetization models to implementing price differentiation strategies, establishing clear principles around price floors, endings, and increases ensures consistency and coherence in pricing decisions.

  4. Develop Principles for Reaction In the dynamic marketplace, reacting swiftly and effectively to internal and external stimuli is imperative for maintaining competitiveness and profitability. Developing principles for promotional reactions and competitive responses enables companies to navigate pricing challenges with agility and resilience, ensuring that their pricing strategy remains adaptive and responsive to evolving market dynamics.

The best companies document their pricing strategies and make it a living and breathing document.

By continually reviewing, refining, and updating their pricing strategy, they stay ahead of the curve, driving sustainable growth and success in the ever-changing landscape of the market.

5. Building an outside-in business case

A critical step in your new product development process will be making the business case for it inside your organization. Even though this will be for internal üurposes, you must get external input - specifically, your target customer’s willingness to pay (WTP) for your product. That doesn’t exist anywhere within the four walls of your company. You have to go out and get it.

  • Ask customers what they’d pay for it

A business case should be a living document that keeps you grounded on the true monetization potential of your innovation

Nine steps to build a living business case

5. Building an Outside-In Business Case

Constructing a compelling business case is important for garnering support within your organization. However, to ensure its accuracy and relevance, it’s imperative to seek external input, particularly from your target customers, regarding their willingness to pay (WTP) for the product. This external perspective is vital as it goes beyond the internal dynamics of your organization, providing valuable insights into the market’s perception and potential.

Ask Customers What They’d Pay For It: Engage directly with your target audience to gauge their perception of value and willingness to invest in your product. This firsthand feedback serves as a foundation for building a robust business case that aligns with market realities.

A living business case should evolve with the ever-changing market dynamics, serving as a guiding beacon that keeps you tethered to the true monetization potential of your innovation.

Nine Steps to Build a Living Business Case

  1. Forget the Way You Do Business Cases Today: Embrace a paradigm shift from static, funding-centric documents to dynamic frameworks that continuously adapt to market feedback and insights.

  2. Assemble the Basic Ingredients: Gather essential components including market research, cost projections, and revenue forecasts to form the foundation of your business case.

  3. Include Price Elasticity: Factor in price sensitivity and elasticity to anticipate how changes in pricing will impact demand and revenue generation.

  4. Apply Data-Verified Facts: Base your assumptions and projections on empirical data and market research findings to enhance the credibility and accuracy of your business case.

  5. Add Risk Assumptions: Acknowledge and account for potential risks and uncertainties inherent in the market environment, ensuring a comprehensive and realistic assessment.

  6. Be Realistic About Goal Tradeoffs: Navigate the inevitable tradeoffs between competing objectives, such as profitability, market share, and customer satisfaction, with pragmatism and foresight.

  7. Consider Competitive Reactions: Anticipate and strategize for potential responses from competitors, safeguarding your market position and mitigating competitive threats.

  8. Don’t Focus the Business Case on Just the New Product: Take a holistic approach by considering the broader implications and synergies with existing products and strategic initiatives within your portfolio.

  9. Keep Checking In: Continuously monitor and reassess your business case in light of evolving market dynamics, ensuring its relevance and alignment with strategic goals and market realities.

The best business cases are not static documents but dynamic frameworks that evolve in tandem with market insights and feedback, empowering organizations to make informed decisions and capitalize on emerging opportunities.

6. Communicate the Value

It’s not merely products that customers seek, but the tangible benefits they offer. As Peter Drucker astutely observed, customers are drawn to the value proposition presented by products and their suppliers, emphasizing the pivotal role of effective communication in conveying this value proposition succinctly and convincingly.

  • Marketing messages and sales pitches must clearly articulate the value to customers in a very short period of time: In today’s fast-paced world, attention spans are fleeting. It’s imperative to convey the value proposition of your product swiftly and compellingly to capture the interest of potential customers.

  • Articulate benefits - not features: While product features are important, it’s the benefits they confer to customers that truly resonate. Focus your communication efforts on elucidating how your product addresses customer needs and enhances their lives.

  • Speak the customer’s language: Effective communication hinges on speaking directly to the customer’s pain points, aspirations, and preferences. Tailor your messaging to resonate with your target audience, using language and imagery that they can relate to.

  • Get your marketing and sales teams involved early in the product development process: By involving marketing and sales teams from the outset of the product development journey, you ensure alignment between product capabilities and customer messaging, fostering a seamless transition from development to commercialization.

A common challenge lies in the detachment of communication functions from the innovation process, resulting in their involvement coming too late in the game. To address this, companies must integrate communication efforts early on, ensuring that value propositions are effectively communicated throughout the product lifecycle.

Conceptual Example of a Value-Selling Spreadsheet

Many companies struggle to articulate the value their products deliver in a concise and compelling manner. A value-selling spreadsheet can serve as a powerful tool for quantifying and communicating the benefits of your product to potential customers, facilitating more effective sales conversations and decision-making.

Three Steps to Create Great Value Communications

  1. Develop Crystal-Clear Benefit Statements - Not Feature Descriptions: Craft benefit statements that succinctly highlight the value your product delivers to customers, focusing on outcomes rather than functionalities.

  2. Make Your Benefit Statements Segment-Specific: Tailor your benefit statements to different customer segments, recognizing that different audiences may prioritize and value benefits differently.

  3. Measure the Impact and Refine Your Value Messages: Continuously evaluate the effectiveness of your value communication efforts, gathering feedback from customers and stakeholders to refine and optimize your messaging for maximum impact and resonance.

Behavioral Pricing Tactics for Persuading and Selling

Behavioral pricing is the magic that happens when value pricing meets irrational customer psychology.

Offers promoted to make another product look better are called anchor.

Combining rational and behavioral pricing approaches represents the pinnacle of pricing strategy, leveraging both economic principles and psychological insights to maximize effectiveness.

Six Behavioral Pricing Tactics

  1. Compromise Effect: Leveraging the tendency of customers to choose the middle option when presented with three choices, the compromise effect exploits this cognitive bias to steer customers towards a desired purchasing decision.

  2. Anchoring Tactics: Anchoring tactics capitalize on the principle that customers rely heavily on the first piece of information they receive when making decisions. By strategically setting initial prices or showcasing high-value options first, businesses can influence subsequent purchase decisions.

  3. Using Price to Signal Quality: Price is often perceived as a proxy for quality. By setting prices at premium levels, businesses can signal to customers that their products are of superior quality, thus influencing perceptions and purchase decisions.

  4. Razor/Razor Blades: This tactic involves selling a primary product at a low or even loss-leading price, while generating profits from complementary or consumable products required for its use, akin to selling razors at a low price and profiting from the sales of razor blades.

  5. Pennies-a-Day-Pricing: Breaking down prices into smaller, more digestible units, such as “only pennies a day,” makes the overall cost appear more palatable and affordable to customers, thereby reducing psychological barriers to purchase.

  6. Psychological Price Thresholds: Customers often have predefined thresholds for what they perceive as expensive or cheap. By strategically pricing products just below these thresholds, businesses can tap into customers’ psychological biases and encourage purchase behavior.

Through adept utilization of these behavioral pricing tactics, businesses can not only enhance their sales effectiveness but also forge deeper connections with their customer base by catering to their innate psychological tendencies.

Maintain Your Price Integrity

In the tumultuous landscape of product launches, maintaining price integrity is paramount for long-term success. While initial market reception may not always meet expectations, succumbing to pressure to slash prices can have detrimental consequences.

When your product hits the market and the market is less than enthusiastic, what happens is that you will feel pressure from every corner of your organization to cut the price. That’s almost always a bad idea.

Reducing prices hastily can inadvertently signal diminished value to customers, jeopardizing both profits and long-term customer relationships.

Reducing your price soon sends an unintended message: that your new offering has less value than you initially communicated.

The erosion of price integrity poses significant risks, including diminished profitability and reduced customer lifetime value. Successful innovators must maintain composure in the face of market challenges.

You don’t want to lose price integrity because it creates two large hazards: eroding profits and eroding customer lifetime value.

Showing patience in pricing decisions is paramount, prioritizing strategic foresight over short-term sales metrics in the early stages post-launch.

Successful innovators must remain cool, calm, and collected.

How to Prepare for Post-Launch

  1. Be Patient Addressing Post-Launch Problems: Exercise patience in addressing challenges post-launch, allowing sufficient time for market dynamics to unfold before implementing drastic measures.

  2. Go Beyond Financial KPIs and Track Monthly Outcomes: Look beyond financial metrics and monitor monthly outcomes comprehensively, encompassing customer feedback, market trends, and competitive dynamics.

  3. Do Deal “Deconstruction” Regularly: Regularly analyze and deconstruct deals to gain insights into customer behavior, pricing dynamics, and value perception.

  4. Advocate Pricing Patience; Make Your Team Come Up with Three Non-Pricing Actions Before You Approve a Price Decrease: Foster a culture of pricing patience within your organization, encouraging your team to explore alternative strategies before resorting to price reductions.

  5. Before Reacting on Price, War-game Your Competition’s Counterreactions: Anticipate and strategize for potential competitive responses before making pricing decisions, ensuring a proactive and informed approach.

  6. Unusually High Sales Could Be a High-Class Problem: Recognize that unusually high sales may not always necessitate immediate price adjustments, as they could indicate a strong product-market fit or strategic pricing advantage.

Remember, in the realm of pricing, engaging in price wars seldom leads to sustainable victory.

Price wars: the only winning move is not to play.