4 x B2B Pricing supplements 💊
Good stuff for your pricing practice.
Hello, solopreneurs!
Today’s edition comes with a bundle of B2B Pricing supplements to fortify your chances of doing pricing right.
Unlike the Value Prop supplements that i shared before, this time all the supplements come from the same source: the best book i’ve studied for pricing new products or services - Monetizing Innovation by Madhavan Ramanujam and Georg Tacke.
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Interested to practice?
Join the one-time-only B2B pricing workshop next week - offered pro bono as part of the Solopreneur Gym.
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1. Pricing failure types
As we mentioned at the end of the previous chapter, we have analyzed thousands of new product and service monetizing innovation failures for clients over the last 30 years, and we find they fall into four categories: feature shocks, minivations, hidden gems, and undeads. The good news is that there are only four categories! That makes it easier to avoid them.
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Failure Type 1: Feature Shocks
When You Give Too Much and Get Too Little
Feature shocks happen when you try to cram too many features into one product, creating a confusing and often expensive mess. In a sincere effort to have it be "all things to all people," you launch a product that pleases few. The result is the product's value is less than the sum of the parts. Due to its multitude of features- none of them a standout-these products are costly to make, overengineered, hard to explain, and usually overpriced.
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Failure Type 2: Minivations
When You Ask for Too Little, That's What You Get
No one wants to sell his or her idea short. Minivations are products that tap neither a product concept's full market potential nor its full price potential. Companies that fall into the minivation trap underexploit the market opportunity and the price they could have charged, thereby robbing themselves of profits. Minivations go down as undermonetized products cursed with a "what might have been" tag.
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Failure Type 3: Hidden Gems
When You Don't Look, You're Not Going to Find Them
With a hidden gem product, a company has a brilliant, even revolutionary idea but fails to both recognize it and quantify the product's value to customers. Or the company decides it lacks the capabilities to bring the unusual idea to market. Hidden gems often end up in limbo, neither launched nor killed. They often don't make it to market, but if they do, they arrive undervalued, as freebies or deal sweeteners.
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Failure Type 4: Undeads
When Nobody Wants Your Product
The term "undead" historically has been used in fiction to refer to dead people who come back to life, such as vampires and zombies. Applied to monetizing innovation, an undead product is one that still exists in the marketplace, but demand is virtually nonexistent. The product, for all intents and purposes, is dead, yet it continues to "walk around" like a zombie.
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In a nutshell:
”Feature shock: Cramming too many and sometimes wrong features into a product
Symptoms:
Product driven culture
Over-engineering
Unclear value-prop
Too many escalations
Difficult selling
Frequent price cuts
Minivation: Despite being the right product for the right market, it is underpriced and does not achieve full market potential
Symptoms:
Lack of ambition
Low-balling targets
Minimal escalations
Few pricing problems
Fast sales cycles
Sales easily hits target
Hidden gem: A blockbuster product that is never properly brought to market because it does not get recognized
Symptoms:
Lack of recognition
Play it safe mentality
Outside comfort zone
No one responsible for harnessing gems
Undead: Products that should have been killed - Answers to questions no one asks or the wrong answer to the right question
Symptoms:
Lack of objectivity
Yes-maybe-no culture
Pet projects
Very low demand
Sales struggles
Negative press”
2. Pricing strategies
A. Maximization Strategy
This strategy maximizes your goal (such as profit or revenue) in the short term. Most companies choose this strategy for new offerings. You determine the optimal price-the point on the price elasticity curve at which the profit or revenue curve reaches its maximum. (We explain this in the sidebar later in this chapter.)
Companies typically choose a maximization strategy when their customer segments don't have early adopters with disproportionately more WTP. Or they choose this strategy because gaining a huge market share rapidly is not worth the expense of lower revenue or profit. In other words, these companies see little difference between the optimal short-term price and the optimal long-term price.
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B. Penetration Strategy
With this pricing strategy, you intentionally price your product lower than in a maximization strategy to rapidly gain market share. This is also known as a land-and-expand strategy.
When should you choose it? In some markets you must gain share quickly, especially in those dominated by network effects or where customers are highly loyal to the first brand they choose. If you gain customers early in such markets, you are better positioned to maximize customers' lifetime value from future sales and upsells. With a penetration pricing strategy, you make a grab for market share and then expand.
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C. Skimming Strategy
Here you first cater to customers with a higher WTP-the early adopters. Then, you systematically decrease price in order to reach other customer segments with lower willingness to pay. Your initial price needs to be higher than the price you would have charged had you chosen a maximization strategy.
A skimming strategy is especially appropriate if you have a significant number of customers who are willing to pay a higher price than others for your product. Put another way, your customers' WTP varies greatly between early adopters and late followers. Some prime examples are buyers of movies, music, online games, high-definition TVs, gaming consoles (such as Microsoft's Xbox video game console), smartphones (Apple iPhone, for example), and some automobiles. These customers won't wait for a product to become mainstream. It gives them bragging rights; they want to show it off to their peers.
3. Six behavioral pricing tactics
1. Compromise effect: Make decisions easier for people who can't choose. When given a set of choices, people will avoid extremes.
2. Anchoring tactics: Set the context for value. Anchors make the other options look attractive.
3. Using price to signal quality: If it costs more, it reinforces the customer's perception of quality. A product's price sends a powerful signal about its quality. Low price equals low quality; high price equals high quality.
4. Razor/razor blades: Get a foot in the door. Customers are influenced by costs that are immediately in front of them. Even if they calculate their total cost of ownership of a product over time, they will be swayed by the initial costs.
5. Pennies-a-day pricing: Reduce sticker shock and build loyalty. Put the proper thought into framing your price to make it look attractive—not just in coming up with the price.
6. Psychological price thresholds: Avoid falling off the price cliffs.
4. Nine rules for monetizing innovation
1. Have the willingness-to-pay talk early.
2. Define segments based on needs, value, and WTP.
3. Ensure bundling and packaging are not afterthoughts.
4. Choose your pricing and revenue model wisely.
5. Pick the winning price strategy.
6. Build the business case using WTP information.
7. Develop the right value message.
8. Employ behavioral pricing principles.
9. Maintain your price integrity.
Keep your business fit,
Bülent
This is the Solopreneur Gym ⚡️
It’s a gym in the sense that you’re invited to practice and do the reps for the health of your own business. Get inspiration, DIY workouts and access to live practice sessions 👟
Hosted by Bülent Duagi, strategy adviser for CEOs in Tech.