The art and science of pricing | Madhavan Ramanujam (Monetizing Innovation, Simon-Kucher)

Dec 8, 2022 1h 38m 56 insights Episode Page ↗
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.
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.

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.