It’s Price Before Product. Period.

Yeah, hi. Thanks so much to the First Round guys for this opportunity. What a great opportunity. A lot of familiar faces, always good to see them. So if you didn't catch the walk-in song, it went something like, let's make lots of money, right? If I were the songwriter for that song, I would have said something like, let's make money aligned with the value that your products deliver. That doesn't sound sexy anymore, right? And I guess that's why I'm not a songwriter, but I'm a pricing consultant. My journey with pricing started way back when, when I was in Stanford. Like classic Silicon Valley style, you know, I had an idea, we had a team, we pitched to a VC, and there was this one question that the VC asked that, you know, I was like— he asked me, how do you know you would monetize on this idea? And then I said in classic fashion again, pulled up my spreadsheet with a lot of assumptions, showed it to him, and he looked at it quickly and he said, you've labeled them correct, they're assumptions. How do you truly know whether you will monetize on your innovation? And that question stuck with me. It haunted me. It drove me through my days at Stanford, my early days at Simon-Kucher Partners, the world's largest pricing strategy consulting firm, and through my recent years as a partner and board member at Simon-Kucher, working with close to 100 companies. But I didn't come here to tell you my life story, did I? I came here to tell you that I have the answer to that question, ladies and gentlemen. I have the answer to the question of How do you truly know that you would monetize and hope that you wouldn't? And I'm going to give it to you all in the next 18 minutes and leave you with actionable advice that you can go and implement tomorrow, like what Josh said. Before we get into the answer, let's level set on the problem. We at Simon-Kucher launch the world's largest pricing study every other year. And kind of get the State of the Union on pricing. In 2014, when we did this, we had more than 1,600 companies take part. 40% of people who took the study were CEOs, kind of like people in the audience. And we did this across 40 countries. We asked people, are you in any kind of price pressure? 80% of respondents said they were in some sort of price pressure. 80%. We asked them, are you in a price war? 60% said they are in a price war. We asked them, who started it? 90% of them said the others started it. Right? 80% in a price pressure. And then we said, okay, how do you get out of this kind of price pressure? That must suck, right? And we gave them a long list of options to choose from. And the number one way, by far, the number one way was, we are going to innovate to survive. We are going to make new products, new services. That's how we will get to glory days. Number one way. And then we asked them, to what extent was your innovation successful in the past? Stunningly, 72% of innovations did not meet their revenue or profit targets or failed completely. 72%. Staggering. And that's not just us saying it, by the way. There are a lot of other credible sources like Harvard Business Review, product management associations, etc., which come somewhere close from 65 to 80%. So if I use my triangulation approach, I end up at 72 anyways. But it's 72% of innovations fail. But I didn't come here to give you just the bad news. I have some good news too. They only fail in 4 ways when it comes to monetizing innovation. That's really good, because if it fails in too many ways, then you have too many things to worry about. I mean, you guys have a day job too, right? So in terms of 4 ways, what are they? The first way that an innovation— monetizing innovation failure, or innovation fails, is what we call a feature shock. So these are products that have Way too much going on. They are over-engineered, over-featured, often unwanted features. Nothing stands out. Everything is packed into a product, launched in the market, and the company or the entrepreneur or the innovator hopes for the best. What should they have done? Maybe versioned the products into different sort of products based on what their customers need, what they value, and what they're willing to pay for. You know, just load everything in it, let's add this and throw it out there. That's the first way innovations fail, just completely over-engineering this. The second way that innovations fail is what we call minivation. So these are products that are the right product-market fit, as in they are the right product for the right market, but the company or the entrepreneur or the innovator simply did not have the courage to charge the right price. and under-monetized. This is the worst-kept secret in the room. Everyone knows that they could have done better, but they just claim it as a success because it still just worked. We call that a mini-vation. The third way innovation fails is what we call a hidden gem. So these are products that you should have developed, but it went against your grain, your DNA, and you said, you know what? We're not going to deal with this. Think of Kodak, for instance. In 1970, they had the— technology for bringing out digital photographs. But they didn't. Why? Because they were more worried about cannibalizing their existing business. So if you don't harness your hidden gem, you're going to probably lose out on a big opportunity. The 4th way that innovations fail is what I call the undead. In classic science fiction kind of fashion, these are products you should have never released. They come back to haunt you. Right? And they come in 2 varieties. Either they are the wrong answer to the right question, or they are an answer to a question no one is asking. Either way, you should have not developed those products, but it is what it is. And I couldn't resist myself by having another picture of the undead. There are 2 undeads in this picture. One is a zombie. I'll let you guys guess the other one. So, 4 ways innovations fail. Then we try to see, okay, what are the success criteria? What do successful companies do? And there are 2 successful criteria. The first one is they think price before product. Price comes before product in the English dictionary. For most companies, it stops right there. Right? What successful companies do is think about it earlier on, from the R&D stages of innovation. But let's level set on what price means. When we talk price, most people think of a dollar figure. That is a price point. Price is really a measure. It's like, you know, liter is a measure of volume. Price is a measure of value. When you think about it that way, it's an indication of whether people want your product and how badly do they want it and are they willing to pay for the product. And companies that recognize this start with really identifying whether customers need their innovations, do they value it, is there a willingness to pay, before they go ahead and productize it. The others who are not successful build the product and then, oops, we need a price, slap it on, throw it in the market and hope for the best. Companies that know how to monetize design their product around the price, like we like to say it. The second success criteria is you need to be involved. We were able to statistically benchmark from our survey that I talked about that when CEOs or C-level people get involved in monetizing innovation, there's a 35% chance of success across all kinds of KPIs and metrics, including revenue and profit, etc. That's staggering. Most people here would probably say, yeah, that passes our gut check. I totally agree. But we could put A number and empirically prove that that actually holds true. Why is that important? Because I think you need to be involved in monetizing innovation and not just hand off to your teams completely and be, you know, in the dark. So I told you that I'll give you the answer to how to go from, you know, knowing— how to go from hoping that you will monetize to knowing that you will. How do you cross that chasm? Pun unintended. I have the answer. It's a 9-step framework to monetizing innovation, right? It starts with having the willingness-to-pay conversation early and goes all the way to maintaining your price integrity after you launch your product. Today we are going to talk about the 3 most critical ones: having the willingness-to-pay talk early, and then sort of build on to segmentation and monetization models. Let's talk about the first one: having the willingness-to-pay talk early. And why is this important? I mean, most of you here would say we do some kind of product-market fit kind of validation before we build our products. Arguably true. Great. Think about it this way. If you go and ask someone, do you like this feature? They might say, yeah, I like it. Do you like it at $20? That whole conversation is different. Right? So if you didn't put pricing in your product-market fit sort of questions, you're probably hearing what you want to hear. The real way to actually do this is to have the early willingness-to-pay talks. Would you actually pay for this product? And it's actually not that hard when you do it early. Counterintuitively, it's damn easy to do it earlier on. Why? Because your customers are not in a negotiation mindset, and they would give you some objective feedback which you can use to prioritize what you're building. Having these talks is fundamental to really prioritize your features. Here's a— story and an example. This was a CEO who had tasked, you know, the team to come up with a new product for— it was a 2-sided marketplace app between buyers and sellers, and they were trying to launch a product for the buy side. And, you know, CEO asked the team to come up with a new product and new sort of, you know, features and everything else. In classic fashion again, they went offsite, 2 days, thousands of Post-it notes, 100 ideas. Passionate debates, killed every other idea, probably, you know, left with 25 ideas, came to the CEO and said, this is what we want to productize. And the CEO asked the same question the VC asked me, how do you know you're going to monetize? And there was pin-drop silence. So they actually went and tried to validate this with the customer, and what they found out was, counterintuitively, a lot of stuff that they thought customers would pay for was way down in the list. And stuff that they thought there's not really that much, you know, there's just an easy feature to develop. But guess what? That's what people liked. There was perceived value around those things. As an example, they thought that, you know, if you're a buyer, you would actually pay for information that someone in your Facebook network actually bought a product from the same seller. When we actually validated it with their customers, their customers didn't even want to know that, first of all, that someone in their Facebook circle is actually buying that product. But more importantly, everyone has figured out their own mental models and rules when it comes to, like, reviews and stuff, and no one was really willing to pay for it. So it was way down on the list, right? If they hadn't done this sort of exercise, they would have focused their time and attention on all the features and probably produced an okay product. What they were actually able to do was take the ones that really mattered and do a kick-ass job and focus on things like user experience and sort of launch that product. So having the willingness to pay talk early is important. But how do you do it? Right? How do you do it? It sounds easy in theory, but how do you do it? There are 3 ways to do it. One, just do it. Right? What I mean by that is when you're having these conversations with your customer, put a price point. Right? Let's say it's 9 months before you launch the product. You say, okay, if I have this product with these features at $50, would you pay for it? Put a price point. See what people actually say. Why? Because if they say, oh, that's a no-brainer, then ask them, if it was $100, would you still pay for it? Right? I mean, so you actually start getting more information about their willingness to pay. If they say, no, that's too much, ask them why not. And what you hear will actually help you make your products better because you'll start hearing what they truly value. And remember, price is a measure of value. It's not a price point. Right? The— one of the interesting stories, and Pete Flint is in the audience at Trulia, they were launching a mobile product. This was way back when before the IPO days. And Pete commissioned a study to go out and just ask customers, is there a willingness to pay for the mobile product? Internally, the belief initially was that, you know, we should charge about 50% compared to the desktop products because, you know, I mean, there's some sort of overlap, et cetera. But what they found out after talking to their, you know, the real estate agents in this case was that there was a 150% is what people were willing to pay compared to the desktop products. 3x more than what the internal perception was. And it was stunning. Great story. They launched the product at that price and designed the product with some mobile features to like sort of fence off these products. And the crux was that the real estate agents really thought that, you know, a mobile lead was way more than a desktop lead, and inherently they were willing to pay more for it. And if you didn't ask the just do it question, you wouldn't have found out. Great story. Right? The second way to actually do it is to ask the direct question. I mean, often I get asked this question, if you just ask your customers how much you're willing to pay, wouldn't you just get garbage back? I'm like, yes, if you just ask it that way, you will get garbage back. So how do you actually ask the direct questions? The smart way of actually asking that question is to break it down. Show a person a concept, a product, you know, sort of showcase it and say, what do you think is an acceptable price for this product? Of course everyone loves to negotiate with themselves, right? So they're going to lowball the answer. We all get that. They're going to give you a lowballed answer. That's okay. Then ask them, what is an expensive price, do you think, for this innovation? Get an answer and follow that through with, what is a prohibitively expensive price for this innovation? And you'll get 3 price points. What this really means is, from our benchmarks and just based on working with hundreds and thousands of companies, what we've come to realize is that acceptable price is the price that people are super comfortable paying, no friction, They just love your pricing because it's a steal. I mean, if you're pricing for growth, maybe you can price in the acceptable area. Expensive is the price that they would actually pay you, but they don't like it. Neither do they hate it, but it's a price usually that's aligned with value. Prohibitively expensive is the price that they'll pretty much laugh you out of the room. But asking that question gives you some guardrails in terms of where you can actually be. And if you do this in a, you know, large-scale manner, let's say around do a large-scale study, just ask hundreds of people, you can plot a chart something like this, as in what percentage of people found a certain price acceptable versus expensive and prohibitively expensive. And the acceptable curve actually goes down because as you increase price, less and less people find that price acceptable. The expensive and prohibitively expensive goes up because when you increase price, more and more people find that expensive. What you start seeing is what we call psychological thresholds or cliffs. So for instance, at $50, at $100, and about $150, there is a drop in that demand curve. And why is that actually important? Because those are the psychological thresholds that people have when they think about your product, in this product, right? So what does that mean? If you price at $49.99 versus $51, suddenly There's a huge portion of people who think that price is not acceptable. This is how those sort of psychological behavioral price points are determined, with just these simple kind of questions, which you can do tomorrow, right? Knowing this is super important because otherwise your options are you'll run a mathematical exercise and say the price is $55, or you will just pull it out and say it's $57 or whatever. But if you didn't know this, you wouldn't be able to really price your products the right way. Right? And also it gives you a range of the willingness to pay for your innovations much before it's kind of productized and released in the market. Approach number 3, and this is an example from Segment, and Peter is also here in the audience. And this was a— we did some, you know, quick and dirty ways to like get to, you know, what is the willingness to pay for some of the new stuff that they were developing. And the way we kind of did this was we forced sort of trade-offs on their customers. So what that means is you're indirectly asking the pricing question, so you're not asking— without asking the pricing question. You put them in situations. So we give them a baseline, which was their current product set when we did it, and said, if you had these options, what would you choose? Or you can choose none of the above. This is akin to real-life simulations, as in this is exactly what your customers go through when they land on your website, for instance, right? Then we asked, Followed that with, you know, another sort of situation and said, if you were in this situation, what would you actually do? Would you take any of these products or would you not? If you changed that, what would you do? So what we're really trying to do is tap into the mental models and rules that people are actually using to make their decisions, which is what they do in real life. So in this example, if someone had picked, like, the team product in the previous one and didn't pick it in the third scenario, you can already infer that the incremental value that is provided by these features does not compensate by the incremental price that you added for that concept. So we were able to get to a ballpark solution of, you know, where they should be. And Peter and team did a great job of taking that and sort of iterating and, you know, adding stuff and actually launched it. And right now, after several revisions, They have more than 3x increase in revenue from self-serve and more than 4x increase in the leads that actually come for their business product. Again, a remarkable story. I definitely urge you to talk to Peter about this as well. So the second thing in the framework, 9-step framework, is segmentation, right? So think about the water that you drink. If it's in a fountain, it's free. You put it in a bottle, it's $2. Put gas in it, it's $2.50. Put it in a minibar, it's $5. It's the same water. Commodity, right? You'll think it's commodity. It's water. It doesn't work that way. We have not found a single market that's actually homogeneous. Whether you like it or not, your customers are different and they're heterogeneous. They have different needs, they have different values, and they have different willingness to pay. And the sooner you identify this, you'll productize towards that, right? I even know some people who actually go down to the mini— I mean, don't go down to the fountain, but take a bottle from the minibar, and I have an argument with them on segmentation, but that's a— Story for another day, right? So how not to do it. Most people actually say that they do segmentation, but they do it kind of based on demographic variables. So they say, OK, think about a person who is— I'll give you an example why this does not work. Think of a person who is 67 years old, born in the United Kingdom, married, has 3 children, lives in a castle, really wealthy. Most of you thought about Prince Charles, but that definition also fits Ozzy Osbourne. And I would argue that both Ozzie and Charles don't have the same tastes, don't need the same thing, neither are they willing to pay the same thing for different things. If you didn't know this, you're building a one-size-fits-all, perhaps a feature shock, and you're under-monetizing your innovations. So the key is to act differently. You, as in the product team, your sales force, et cetera, need to act, innovate differently, as in there's no point building one solution for the entire market. An example of this is when we walked in one of our Clients said, it's a price-sensitive market. We did a survey, and we found that actually everyone said price is important. When we actually dig deeper, we find that there are 4 sets of segments— some that want the product, best product, some that want it now, some that only want the product, and some who are actually price-sensitive. And that's only 20%. And if you didn't know this information, you're building a product for the average and getting it wrong for the entire market. What they actually did then is build products for specific segments. So the key to unlocking segmentation is packaging and bundling and providing your customers with products that meet their needs, their value, and their willingness to pay. The 3rd step in the framework is, you know, how you charge is way more important than how much you charge. And Michelin, for instance, when they released their tires— and tires is really one of the most commodity markets— they came up with an innovation that actually lasts 20% longer. If they had gone and asked the market, we want 20% more price increase, they would have never gotten that. What they actually did was they said, okay, we're going to base the price on a per-kilometer basis. And this was for tires for truckers to move things from point A to point B. And what they actually found was that this was really amenable to their customers, and they were able to extract the 20% because the tires actually lasted more. A great story of how you charge. Is way more important than how much you charge. And there's a lot of stories we have written about, even Optimizely in the book, for instance, not charging by a per-seat basis, but by the number of visitors that come to a website, more akin with value, etc., right? But how do you do it? How do you actually find out which pricing model appeals to your customers? And a really tangible, quick way that you can implement tomorrow is to put your customers through break-even situations. And asked them, what would you choose, or would you be indifferent? So in this example, for instance, it's a financial services marketplace kind of company where they were charging based on the amount that someone was actually selling their item at. So if you sell the item at $10, we asked their customers, would you be okay with a 3.5% plus $0.15 flat fee, a $0.50 flat fee, or a 5% flat fee? Or are you indifferent? If you're a rational human being, you know, you do the math, everything that you were taught in school as micro-choice theory, rational economics, you would say you're indifferent because the math adds up to the same. But we have never seen a situation where the indifferent actually wins. What that tells us is that people have inherent preferences for how they should be charged. In this example, 50 cents looks really awesome compared to $10. When you go to a $200 item, A percentage looks more appealing than like a $10 flat fee, right? So how you charge is important, way more important than how much you charge often. Quick way to actually do it tomorrow when you go back. There's more in the book that we actually wrote. You can take the blue pill, go back tomorrow, build products, slap on a price, and hope to monetize. Or you can take the red pill, design your products around the price, and see how deep the rabbit hole goes. Thank you. Thank you.