The art and science of pricing | Madhavan Ramanujam (Monetizing Innovation, Simon-Kucher)
Madhavan Ramanujam, author of "Monetizing Innovation" and Senior Partner at Simon-Kucher & Partners, discusses core pricing strategies for product teams. He emphasizes product market pricing fit, customer segmentation, effective pricing models, and leveraging behavioral economics.
Deep Dive Analysis
21 Topic Outline
Introduction to Pricing as a Measure of Value
Madhavan's Background and Simon-Kucher's Expertise
Motivation for Writing 'Monetizing Innovation'
Where Pricing Strategy Should Sit in an Organization
Understanding Willingness to Pay and Product-Market-Pricing Fit
Case Studies: Porsche Cayenne and a Two-Sided Marketplace
Methods for Conducting Willingness to Pay Conversations
Logistics and Frequency of Willingness to Pay Discussions
The Importance of Segmentation in Pricing Strategy
Examples of Effective Segmentation: Apple, Eventbrite, Uber
Three Core Pricing Strategies: Skimming, Penetration, Maximization
Leveraging Bundling and Packaging with Leaders, Fillers, Killers
The Importance of 'How You Charge' vs. 'How Much'
Subscription vs. Usage-Based Pricing Models
Testing Different Pricing Models and Structures
Shifting Focus from Features to Benefits in Product Communication
Introduction to Behavioral Pricing and its Impact
Tactics and Psychological Effects in Behavioral Pricing
Determining Pricing Thresholds and Psychological Barriers
Pricing Strategies During a Market Downturn
Madhavan's Upcoming Book and Recommended Resources
7 Key Concepts
Price as a Measure of Value
Price should not be seen merely as a dollar figure, but as a direct measure of the value customers perceive in a product. It indicates whether people truly want and would buy an innovation, serving as a proxy for product desirability.
Product-Market-Pricing Fit
Beyond traditional product-market fit, this concept emphasizes validating customer willingness to pay for a product early in its development. It ensures that the product not only meets a market need but also commands a price customers are willing to pay, maximizing monetization success.
Segmentation (Needs-Based)
Effective segmentation is based on understanding what different customer groups need, value, and are willing to pay for, rather than just demographics or personas. The goal is to 'productize to segments,' meaning to design and offer different products or packages that specifically cater to these distinct needs and willingness-to-pay levels.
Leaders, Fillers, and Killers Framework
This framework helps in bundling and packaging products or features. 'Leaders' are core products/features people actively seek, 'Fillers' are complementary items that add value at a marginal cost, and 'Killers' are items that, if included in a bundle, would depreciate its value for the majority, and are better sold as add-ons to specific niche segments.
Behavioral Pricing
Behavioral pricing leverages the irrational aspects of human decision-making, alongside rational considerations, to frame product offerings and prices. It uses psychological tactics like decoy pricing, compromise effects, and framing to influence customer perception and purchase behavior without necessarily changing the product itself.
Compromise Effect
A behavioral pricing tactic where customers tend to avoid extreme options (cheapest or most expensive) and gravitate towards a middle-ground option. By strategically introducing a higher-priced 'decoy' product, companies can make a desired middle-tier product appear more attractive, shifting customer choice towards it.
Panini Effect
This behavioral tactic taps into the human compulsion to complete tasks or collections, similar to building puzzles or collecting stickers. By visually presenting product offerings as parts of a larger 'puzzle' or collection, and showing customers which parts they've 'completed' and which are 'missing,' companies can encourage them to purchase more products or services.
10 Questions Answered
Willingness to pay is a proxy for how much customers value a product and how badly they want it. Founders need to understand this early to ensure they are building a product that people will actually pay for, achieving 'product-market-pricing fit' rather than just product-market fit.
Founders should start these conversations as early as possible, even when an idea is just forming. It's about iterating and refining the understanding of customer value and payment intent throughout the product development lifecycle, not just at launch.
Instead of direct questions, founders can ask in a relative manner (e.g., 'compared to X, where do we stand in value/price?'), use acceptable/expensive/prohibitively expensive price questions, or employ purchase probability scales. The key is to first pitch the product's value and benefits, then ask 'why' repeatedly after any answer.
For B2C, quantitative validation with thousands of responses can be statistically significant. For B2B SaaS focusing on key accounts, aim to talk to as many as possible (e.g., 20-30 leading accounts), as patterns often emerge quickly.
Companies should at least every six months consider whether to revisit pricing, and likely will need to within 12 to 18 months due to market dynamics. Key product milestones like new features or plans also necessitate a review.
Segmentation is crucial because customer needs, values, and willingness to pay are heterogeneous. By understanding these differences, companies can 'productize to segments' by designing distinct offerings that cater to specific groups, rather than building a single product that fits no one perfectly.
Founders should consider segmentation from the very first willingness-to-pay conversations. This helps identify who is willing to pay, what they need, the size of these groups, and which segment to prioritize for the initial product launch, allowing for tailored value messaging.
Usage-based pricing is currently in vogue, but it's not a universal default. The choice between subscription and usage-based depends on factors like customer demand for predictable bills, usage variability, whether value delivery is ongoing or episodic, and the ability to clearly track and attribute value.
Companies can use 'break-even exercises' by presenting customers with different pricing models (e.g., a higher transaction fee vs. a lower fee plus a fixed amount) that equate to the same total cost. Observing which model customers prefer, even when economically indifferent, reveals underlying psychological preferences.
A key sign is when product teams are overly passionate about the technical aspects and 'bells and whistles' of their product, rather than articulating what those features actually *do* for the customer. Lack of market traction despite a technically sound product can also indicate a failure to communicate benefits effectively.
56 Actionable Insights
1. Achieve Product Market Pricing Fit
Don’t just validate product-market fit; ensure a “product market pricing fit” by incorporating pricing into your validation process. This prevents hearing only what you want to hear about product desirability.
2. Price Before Product
Engage in willingness-to-pay conversations before designing or launching your product. This ensures you build something customers value and are willing to pay for, maximizing success chances.
3. Prioritize Roadmap by WTP
Prioritize your R&D roadmap based on willingness-to-pay conversations, not just internal assumptions or technical resources. Focus on the 20% of features that drive 80% of willingness to pay.
4. Segment by Needs, Value, WTP
Base your customer segmentation on what they need, value, and are willing to pay for, rather than just demographics or personas. Then, productize and package specifically for these distinct segments.
5. Prioritize Pricing Model Over Price Point
Focus significantly more on how you charge (your pricing model) than just how much you charge, as the model itself can unlock significant value and customer adoption.
6. Pitch Benefits, Not Features
When communicating about your product, focus on the benefits customers receive from its features, not just the features themselves. Pitching benefits effectively communicates value, which drives adoption.
7. Leverage Behavioral Pricing
Understand and tap into the irrational aspects of customer decision-making (behavioral pricing) to frame products and pricing in ways that appeal to both rational and irrational thought processes.
8. Create De-Featured, Cheaper Alternate
Prepare for economic downturns by creating a de-featured, less expensive version of your product to offer customers who can no longer afford the full version, reducing churn without direct discounting.
9. Avoid Undifferentiated Price Discounts
Do not rush to simply drop prices during a downturn, as this can establish a new, lower price expectation. Instead, exchange value (e.g., de-feature the product) to justify any price reduction and maintain price integrity.
10. Shift Pricing Model During Downturn
Use a downturn as an opportunity to shift to a more value-aligned pricing model, such as usage-based or outcome-based. Customers may be more receptive to paying less during low usage, which can then scale profitably when the economy recovers.
11. Battle-Test Every Feature
Before productization, battle-test every feature and benefit with customers to confirm their value and willingness to pay. This ensures you’re building what customers truly want, as Porsche did with the Cayenne.
12. Focus on High-Value Features (Pareto)
Identify the 20% of features that drive 80% of customer willingness to pay and focus your development efforts there. This prevents over-indexing on less valuable features.
13. Ask “Why” in WTP Conversations
When customers indicate they won’t pay for an innovation, always ask “why” to uncover critical information for product design and potential strategic pivots.
14. Use Relative WTP Questions
Instead of asking direct pricing questions, frame them relatively. For example, compare your product’s value and potential price to an established competitor.
15. Identify Psychological Price Thresholds
After pitching your product’s value, ask customers for acceptable, expensive, and prohibitively expensive price points. This reveals psychological thresholds and helps identify optimal pricing.
16. Use “Most/Least Important” Feature Questions
When prioritizing features, ask customers to identify the “most important” (must-have, willing to pay) and “least important” (don’t need, won’t pay) from a subset. This helps prioritize the entire feature set relatively.
17. Conduct Trade-Off Exercises
Simulate realistic buying scenarios by presenting different packaging and pricing options and observing customer choices. This reveals mental models and decision rules for more precise price elasticity and market reaction insights.
18. Simple Early-Stage WTP Questions
For early-stage ideas, simply ask “would you pay for it?” If no, ask why. If yes, ask why to understand articulated value and incorporate it into your messaging.
19. Adapt WTP Methods to Stage
Choose willingness-to-pay methods appropriate for your company stage; simple questions for early ideas, purchase probability for seed/Series A, and advanced trade-off exercises for later-stage product launches.
20. Productize to Segments
Design and build specific products or variations for each identified segment based on their unique needs and willingness to pay, rather than creating one product and attempting to position it differently.
21. Act Differently for Each Segment
A valid segmentation strategy requires your teams (product, sales, marketing, finance) to act differently for each segment, developing tailored products, messaging, and strategies.
22. Prioritize Segments Early
From your initial willingness-to-pay conversations, identify and prioritize which customer segments to target first, then tailor your R&D roadmap, resourcing, and value messaging specifically for that chosen segment.
23. Use Bundling & Packaging to Segment
Unlock your segmentation strategy by configuring your product offerings through bundling and packaging, aligning them with what different customer segments need, value, and are willing to pay for.
24. Use Leaders, Fillers, Killers Framework
When designing bundles, identify “leader” products (main draw), “fillers” (add-ons that increase value with marginal price increase), and “killers” (features that depreciate WTP if included in the bundle).
25. Align Pricing Metric with Customer Value
Choose a pricing metric that directly aligns with how customers perceive value and is seen as fair (e.g., monthly tracked users for Segment), rather than internal or technical metrics.
26. Use Subscription for Predictability/Ongoing Value
Opt for a subscription model when customers prioritize predictable bills, usage is consistent month-over-month, or the product delivers ongoing value despite intermittent usage (e.g., identity theft protection).
27. Use Usage-Based for Flexibility/Transparency
Consider usage-based pricing when customers desire low commitment, transparency, or fairness; when usage and value are episodic; when costs scale with usage; or when you have clear, trackable metrics for value attribution.
28. Explore Hybrid Pricing Models
Consider a hybrid pricing model (e.g., fixed base + usage-based overage) to balance predictability and flexibility, catering to different customer needs and usage patterns, as Hubspot successfully does.
29. Test Pricing Models with Break-Even Scenarios
To test pricing models, present customers with economically equivalent options (e.g., different fee structures that result in the same total cost) and observe their preferences. This reveals underlying model appeal, as indifference rarely wins.
30. Use Decoy Pricing
Introduce a higher-priced “decoy” product that makes a slightly lower-priced, desired product appear more attractive and a better value, shifting customer choice towards the intended option.
31. Avoid Over-Featuring Entry-Level Products
Do not give away too many features in your entry-level product. Strategically preserve some value for mid-tier options to leverage the “compromise effect,” encouraging customers to choose a more profitable middle package.
32. Frame Price as “Pennies a Day.”
Frame prices in smaller, daily units (e.g., “$1 a day” instead of “$30 a month”) to make them appear more affordable and attractive to customers.
33. Reframe Annual as Monthly Price
When offering annual subscriptions, message the price as its monthly equivalent (e.g., “$29.99/month, billed annually”) to make it appear more attractive and less daunting than the full yearly sum.
34. Use Panini Effect (Completion Compulsion)
Present your product offerings as a “puzzle” or a completion challenge, showing customers what they’ve adopted and what they’re missing. This taps into a psychological compulsion to complete the set, increasing attach rates.
35. Implement Non-Pricing Actions in Downturn
During a downturn, consider non-pricing actions to preserve price integrity, such as offering more product/value for the same price, changing contract terms (e.g., longer commitments), or adjusting payment terms.
36. Understand Price as a Measure of Value
View price not just as a dollar figure, but as a measure of value to determine if people truly want and would buy your product. Engage in willingness-to-pay conversations early to ensure you’re on the right track.
37. Avoid Internal-Only Prioritization
Do not prioritize product roadmaps solely based on internal assumptions, feelings, or technical resources. Instead, ground your prioritization in what customers need, value, and are willing to pay for.
38. Talk to Customers (Even One)
Start having willingness-to-pay conversations with customers immediately, even if it’s just one, as many companies fail to do this at all.
39. Target Key B2B Accounts for WTP
For B2B SaaS, focus willingness-to-pay conversations on your top 20-30 accounts that drive 80-90% of your business, aiming to speak with as many as possible.
40. Recognize WTP Saturation Point
Continue WTP conversations until you start hearing repeated feedback. If a significant number of people consistently express negative sentiment, pivot your strategy.
41. Regularly Revisit Pricing Strategy
Revisit your pricing strategy at least every six months for consideration, and plan a full review every 12-18 months, especially given dynamic market conditions.
42. Revisit Pricing at Product Milestones
Revisit your pricing strategy during key product journey moments, such as introducing new plans or significant features, as these necessitate a fresh look at willingness to pay.
43. Educate Yourself on Pricing Science
Begin by educating yourself on the scientific principles of pricing, understanding that it’s not just an art, and gain confidence from successful implementations by other companies.
44. Avoid “One Size Fits All” Products
Recognize that customer needs are heterogeneous; building a single product for all segments effectively means you have no meaningful segmentation strategy and will likely appeal to no one.
45. Focus on One Segment First
When launching, focus your efforts on one carefully chosen segment and build a product tailored for them, even if you’ve identified multiple segments.
46. Treat Niche Features as Add-ons
If only 10-20% of customers intensely desire a specific feature, it’s generally best offered as an add-on rather than bundled into a core package, to avoid depreciating value for the majority.
47. Identify Leader Products by Demand
If more than 50% of your target audience wants a particular product or feature, it should be considered a “leader” product or a “must-have” feature in your core offering.
48. Innovate Pricing Models
Be open to fundamentally changing your pricing model to align with customer value perception and usage, even in traditionally fixed-price markets, as Michelin did by charging per mile for tires.
49. Don’t Default to Usage-Based Pricing
Don’t blindly adopt usage-based pricing just because it’s popular; evaluate if it truly aligns with your business, customer needs (e.g., low commitment, less friction), and value delivery.
50. Structured Approach to Pricing Models
When developing a pricing model, first choose the core model (subscription, pay-as-you-go, freemium), then select the key pricing metric, and finally design the price structure (e.g., flat, tiered, variable).
51. Design Value Matrix for Incentives
Create a “value matrix” with two pricing metrics (e.g., seats and departments) where increased adoption across both leads to a better per-unit price. This incentivizes desired customer behavior and allows self-governed pricing.
52. Self-Check for Feature-Focused Language
If you find yourself overly passionate about every detail of your product, you might be focusing too much on features. Reframe your communication to emphasize the customer benefits.
53. Use Lack of Traction as Benefit-Focus Cue
If your product lacks market traction, it might indicate that customers don’t understand its value. Shift your communication to focus more on benefits to clarify what they’re getting.
54. Emphasize Benefits in Pricing Plans
When designing pricing plans, emphasize the benefits each tier provides rather than a long list of features. This helps customers quickly understand the value proposition of each option.
55. Adjust Packaging if Entry-Level Dominates
If your entry-level product is disproportionately popular, it’s a sign you’re giving away too much value. Adjust features and benefits across packages to steer customers towards more profitable middle-tier options.
56. Be Aware of Common Price Thresholds
Recognize common psychological price thresholds (e.g., $29, $9.99) that can impact customer perception and demand. Test for specific thresholds relevant to your product and market.
7 Key Quotes
When we think about price, we think about it as a measure, like you know, liter is a measure of volume, price is a measure of value.
Madhavan Ramanujam
It's price before product. Period.
Madhavan Ramanujam
You cannot prioritize a product roadmap without having a willingness to pay conversation.
Madhavan Ramanujam
Most people think of segmentation as a demographic or persona exercise or you know, how do I position this product to like different personas and things and they get it horribly wrong.
Madhavan Ramanujam
One size fits all, I would quickly collect them and say one size fits none.
Madhavan Ramanujam
How you charge is way more important than how much you charge.
Madhavan Ramanujam
What you build as a product person is features, what people actually get out of it is the benefits.
Madhavan Ramanujam
1 Protocols
Pricing Strategy in a Depressed Market (Downturn)
Madhavan Ramanujam- Build a lesser expensive alternate product by de-featuring your existing offering, keeping it ready to reduce churn if customers can no longer afford the full product. This maintains price integrity by exchanging value for a lower price.
- Implement three non-pricing actions to preserve price, such as offering more product for the same price, changing contract terms (e.g., longer commitments), or adjusting payment terms (e.g., 15 to 30 days).
- Consider changing your business or pricing model, for example, shifting to an outcome-based or usage-based model. This can be more attractive to customers during a downturn as they pay less when usage is low, and allows for easier adoption of a new model.