The core thesis of Monetizing Innovation is that product failure is rooted in the failure to put the customer’s willingness to pay at the core of product design. Designing around the price—which measures value and priority—helps guide product design based on the customer. Companies often build the product and then do marketing and pricing, but that amounts to a leap of faith at best and a painful disconnect that leads to failure at worst.
See also:
- Build an initial product a small group of users love is YC and Paul Graham’s answer to this problem
- The number one job of a startup CEO is finding product market fit
- Methods of product ideation seems to leave pricing out (as does most startup advice)
Links to this note
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MAP (metrics, activities, people) is a framework for thinking about SaaS value and pricing. At least one element should anchor a product’s pricing.
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How do you know if your price is too high? A few things could be happening: the product isn’t actually as valuable as you think, you’re talking to the wrong customers, you’re not conveying the value properly, or some combination of the three.
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Pricing for a Wide Range of Company Sizes
When selling a B2B SaaS product to a wide range of company sizes (e.g. SMB, mid-market, enterprise), you generally want smaller companies to pay less and larger companies to pay more. This makes pricing difficult—make it too one-size-fits-all and you can accidentally price out the smaller customers, make it too a la carte, and all customers will find your pricing confusing.
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Outcome-based pricing (or result-based pricing) is becoming popularized again due to services powered by artificial intelligence that are enable intent-based outcome specification. That means charging per unit of value which is the desired outcome.
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§ How to Make Your First Sales Before Launching
Answering the question, how do you do early sales when you are pre-product?
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Maxdiff Comparison Helps Prioritize Features
A MaxDiff comparison helps reveal the ranking of pairs of features without directly asking users to stack rank them. People have an easier time saying the best or worst item in a set than to rank them so this technique is a way of getting a more accurate idea of the relative priority of a feature.
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Pricing the Perceived Value Gap
Cost basis tends to get the most attention when it comes to pricing. I remember business classes in college spent endless hours talking about cost plus pricing, margins, and so on. However, perceived value—the difference between the price and what people think it’s worth—gets overlooked. If the perceived value is high relative to the price, it’s a no-brainer to buy.
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One of the keys to building great products is to regularly make contact with reality. Ideas rarely survive first contact with users—what we think is good might be completely useless to an actual potential customer. Regular contact with reality insulates you from the illusion of explanatory depth.