New Product Monetization FAQ
Innovation. It’s a clarion call for every business… in every industry… in every corner of the world. It’s the most important driver of growth and, in today’s marketplace, critical to survival. But successful innovation – measured in dollars and cents – remains elusive.
Companies invest substantially in designing and building products. Yet they struggle to monetize them. Billions of dollars are spent and lost every year because more than 70 percent of innovations fail to meet financial goals – or fail entirely.
It’s wasteful. It doesn’t have to be this way. And it needs to stop.
We wrote Monetizing Innovation to help organizations go from hoping they’ll make money on their innovations to knowing they will.
Yes, Monetizing Innovation is applicable for organizations of all sizes across all industries. The concepts in this book are particularly important for companies that spend a lot of money on developing innovations, including those in the technology, consumer and business-to-business sectors.
For more than 30 years, Simon-Kucher & Partners has helped companies develop strategies for successful innovation. Every other year, we conduct the world’s largest survey on the state of pricing. Our 2014 report polled executives in 1,615 companies across the United States, Japan, Germany and 37 other countries. The survey’s primary focus was to measure how well companies were monetizing their innovations across industries and geographies. The disappointing findings were reported in Harvard Business Review: 72 percent of new products introduced over the last five years failed to meet their revenue or profit goals. These figures applied equally to startups and large businesses in every industry surveyed, illustrating that something is very wrong with the way companies bring new products to market.
In the 2014 Simon-Kucher & Partners study, 83 percent of companies reported facing increasing downward pricing pressures. Most companies planned to innovate their way out of this dilemma with new products, services and paths to growth. Yet innovation today is more challenging than ever before for four primary reasons:
- Traditional R&D is becoming more expensive, not less. Costs are going up rapidly, without being offset by price increases.
- Increasingly, we’re seeing disruptive innovation come from smaller companies with lighter capital requirements, meaning they can be more nimble than traditional firms and take bigger risks.
- Product innovation is no longer the preserve of the Western world, as evidenced by the United States and Europe’s declining shares of global R&D spending and the growing share of China and other Asian countries. In fact, China is predicted to eclipse the United States in R&D spending by 2020.
- The rate of innovation is accelerating. A key signpost: Annual global patent applications leaped 2.5 times from 1995 to 2013, and in 2014 set a record for the number of patents filed internationally.
While you might think there are many types of flaws that can cause products to flop in the marketplace, we have found that monetizing innovation failures fall into one of four categories:
- Feature shock: an over-engineered innovation with too many features – often unwanted features that don’t stand out – crammed in, a product that will not fully resonate with customers and is often overpriced.
- Minivation: an innovation that, despite being the right product for the right market, is priced too low to achieve its full revenue potential.
- Hidden gem: a potential blockbuster product that is never properly brought to market, generally because it falls outside of the core business.
- Undead: an innovation that customers don’t want but has nevertheless been brought to market either because it was the wrong answer to the right question, or an answer to a question no one was asking.
Before you set a price and launch your product, you must establish a pricing strategy. Pricing strategy is your short- and long-term monetization plan. At the highest level, a sound pricing strategy must have clear intent, quantifiable goals, and a timeframe for execution. Companies that have a well-defined pricing strategy are 40 percent more likely to realize their monetizing potential than those that don’t have one.
Pricing power is the ability of a company to get the price it deserves for the value it delivers. Properly done, your pricing strategy will become the tool that gives you pricing power – exactly what you want to have with your great new product. Warren Buffett nicely summarized, “The single most important decision in evaluating a business is pricing power.”
In a nutshell, a monetization model is how the customer pays for your new product or service. How you charge often trumps how much you charge. A highly innovative monetization model can make a new offering take off like a rocket.
A number of innovative – yet proven – monetization models are in use today: subscription-based, dynamic pricing, market-based pricing (or auctions), alternative metric pricing (or “pay as you go”), and freemium (a free product or service, with a premium charged for proprietary features and functionality).
Customer segmentation is the most discussed and at the same time the most misused concept in product design. Most companies tell us they have a segmentation strategy, but about half of the time they don’t use it to guide product development. And when they do, they generally segment the wrong way.
There are many flavors of segmentation that may be good for customizing sales and marketing messages, such as persona, behavior, attitude, demographics and more. But 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 that value.
To fully monetize your innovation, you need to incorporate segmentation early in the product development process. This way, segmentation becomes a driver of product design and development, not an afterthought. Successful innovators build the right product for the right segment at the right price to avoid building a one-size-fits-none new product. Remember this golden rule: segmentation should break the market down into a few different groups on which you can act differently.
People make decisions based on rational and emotional factors. Their willingness to pay for your product is not solely based on the value they get from it. We refer to pricing tactics that play to this irrational side of customers as behavioral pricing.
Behavioral pricing calls for refining your product offers and the messages you create about them to make it easier for customers to compare products, decide and purchase. There are several ways to test behavioral pricing tactics:
- Focus groups: provide customer feedback on potential behavioral tactics.
- Controlled A/B tests: let you assess click-through and conversion rates on different behavioral pricing for online offers.
- Large-scale experiments: can simulate a controlled test in survey mode, saving you from having to launch a live test.
Great new products, even when they are priced right, don’t sell themselves. Marketing needs to promote them, and sales needs to sell them. However, often there’s a disconnect between the innovation team driving new product development and the frontline sales and marketing teams responsible for communicating the product’s value. Far removed from R&D, the sales and marketing teams are brought in at the very end to pinch hit. By the time they join the process, it is typically too late. They were not part of the value-to-customer story that drove the product design process and pricing. Nevertheless, they are told to craft the value story and sell it.
While most companies don’t pay enough attention to the gap between R&D and marketing and sales, telling a compelling value story is well within every company’s ability and means. It’s not about getting a top Madison Avenue ad agency. Instead, it requires adding key marketing and sales people to your innovation teams from the very start. This helps them fully comprehend the value messages that resonated most with customers from the get-go, lets them give valuable input to the new product design process, and enables salespeople to focus their conversations on value, rather than price.
You absolutely must have the “willingness to pay” talk early with your customers because it is the most important aspect of moving to a “design the product around the price” innovation process. Having these talks early gives you insights into what customers value and a measure of how much they are willing to pay for that value. Therefore, you must engage in deep discussions with potential customers before you design and develop any product.
As one of the key building blocks for designing the right products for the right segments at the right price points, bundling is more science than art. Selling your products and/or services together – if done right – will increase total profit because customers end up buying more than if the products were sold individually. This also increases customer satisfaction because the buying decision is easier. Bundling is a science because of all of these factors combined.
Often times these business cases are static documents that are quickly forgotten and employed to gain budget approval. They fail to account for critical market information, particularly customer willingness to pay and price elasticity.
Without information on what your customers will pay for your new product and how demand changes when you change the price, your business case will only tell you what you want to hear. The solution to this problem is a living, breathing document that will help you determine how to react effectively once your product hits the market.
A few examples as noted in the book include Porsche and its highly successful launch of the Cayenne and Panamera; LinkedIn and its growth into a billion dollar revenue generator by putting their members first; and Uber and its innovative pricing model that contributed to its wildly popular mobile app.
Click here for an in-depth look at these examples or check out chapter 13 in Monetizing Innovation for even more.
Whether you’re a billion-dollar company or a start-up, there are steps you’ll need to customize – and follow – to implement the monetizing innovation framework at your organization. This implementation has two phases: “Jump-Start and Pilot” and “Scale and Stick.”
In the “Jump-Start and Pilot” phase, you will answer the question “What can we start doing tomorrow?”
- Choose a few products or services your firm recently brought to market, then take our diagnostic assessment and compare their performance with what was predicted in the business plan.
- Participate in early-stage research and attend development team meetings.
- Assess the strengths and weakness of your company’s current innovation monetization process.
- Select a product (pilot) in your pipeline and if need be, form a cross-functional innovation team.
In the “Scale and Stick” phase, you will learn the processes for governance, tools, change management measures, and training you’ll need to implement the new process to monetize innovation.
- Select one product from each of your firm’s primary product groups and apply the six elements of scaling.
- Design a training and change-management plan.
- Lead by example: from the very beginning, show up to new-product meetings and ask tough questions.
- Be able to say “no”: killing unworthy new product ideas not only takes courage, it also takes practice.
- Reward the people who develop products customers love because they enlisted customers’ input to design the product features and determine how the product is priced.