Willingness to Pay

• Having early price discussions are important. You want to understand:
  • Customers' overall WTP for the product and the price range they would consider reasonable
  • How much value customers place on each feature and what they'd be willing to pay for that value
• The goal is to validate feature value and willingness to pay (WTP)
• The simplest way to understand WTP is to directly ask questions about the product and its features and then follow each question with WHY:
  • What do you think could be an acceptable price?
  • What do you think would be an expensive price?
  • What do you think would be a prohibitively expensive price?
  • Would you buy this product at XYZ?
• Another method to understand WTP is to simulate purchase scenarios and ask customers to pick an option. For example, show a product lineup with different price points and feature combinations and then ask which ones they would choose (including not choosing any option)
• Five methods to have WTP conversations
  • Direct WTP questions
    • What do you think is an acceptable price?
    • What do you think would be an expensive price?
    • What do you think would be a prohibitively expensive price?
  • Purchase Probability questions
    • Show a new product concept, explain the value and benefits, attach a price to it, and then ask - On a scale of 1 to 5, how would you rate this product? If the answer is 4 or 5, stop. If the answer is below 3, you lower the price and ask the question again. Ask this question a few times to see if people increase their rating or not.
    • Rule of Thumb - If people say 5, the probability of them buying is 50%. If they say 4, the probability drops to 10% to 20%
  • Most-least questions (MaxDiff Analysis)
    • Start with a finite set of features (10, for instance). Then create a subset of these features (say, 6 features) and ask customers to identify the feature they value the most and the feature they value the least
    • Then show them another subset from the same features set and repeat the question. Repeat this process a few times (5-7 sets) until you exhaust your combinations
    • This method is the quickest way to determine the relative priorities of features and identify the leaders (most valued), fillers, and killers (least valued)
    • The logic behind this method is that when given a set of features, people can easily identify the extremes (most and least) but struggle to identify the in-betweens
  • Build-your-own questions
    • Give customers your list of features and ask them to build their 'ideal product' by selecting the features they value the most
    • The trade-off is that when they add more features, the price should increase
  • Purchase simulations (Conjoint Analysis)
    • Provide customers with a specific feature set and price, they ask if they would buy it. Next, you change the feature set and price and ask the question again. You show 5-8 combinations and see how people react. Once you do it, you can estimate the value of the features and WTP for each one
    • Prerequisite - Identify a good set of features and have a good approximate understanding of WTP (try a few of the other methods mentioned above)
  • Tips for WTP
    • Make 25% of the questions WHY questions
    • When you analyze the answers to the WTP questions, look at the distribution, not just the average response

Customer Segmentation

• Customers are different. They have different needs, differing abilities to pay, and they vary by the degree to which they value the product's key benefits
• When it comes to innovations, there's only one way to segment - by customers' needs, value, and their WTP for a product
• Five principles for customer segmentation
  • Begin with customer WTP. By clustering individuals according to their WTP, value, and needs data, you'll discover segments
  • Pressure test your findings - have you defined a customer group to which you can sell? Are there clear "fences" between customer segments i.e. features one segment strongly wants but others don't? The acid test is asking a group of salespeople whether they can sort their clients into segments you've come up with
  • Have fewer segments. Smart companies start with a few segments (3 to 4) and then expand gradually
  • Don't try to serve every segment. A segment must deliver enough customers and money to make it worthwhile and should align with the company's overall financial and commercial goals
  • Investigate whether each segment has observable criteria for customizing sales and marketing messages. For e.g. a disproportionate number of businesses that operate 24x7 vs normal business hours

Product Configuration and Bundling

• Product configuration means which features and functionalities will be included in a product. Doing product configuration right means you design a product with the right features for a segment - that is, just the features customers are willing to pay for
• Two key principles of product configuration and bundling
  • Leaders, Fillers & Killers

    • To determine what features we should bake into a product, start by separating the must-have features from the nice-to-haves

    • Leaders features are what drive customers to buy a product. Fillers are features of moderate importance or nice-to-haves. Killers are features that will blow the deal if the customer is forced to pay for them

      

    • Rule of thumb to identify killer features: Look for those that are valued by less than 20 percent of your customers and are not valued at all by more than 20 percent.

    • Keep in mind customer segmentation when identifying leaders, fillers, and killers.

  • Good, Better & Best (G/B/B)
    • The classic approach to product configuration and bundling is to create a three-tier model, sometimes referred to as good, better, best or G/B/B. Typically, the good version has the most important core features, and the best has all the bells and whistles (the all-in product/bundle)
    • Ideally, no more than 25% of your customers should opt for the good option, while 70% should opt for the better or the best
• Tips for product configuration and bundling
  • Offers should align with customer segments and their needs, value, and WTP
  • Once you go beyond nine benefits or four products, your product configurations and bundles run the risk of exceeding psychological thresholds
  • Don't give too much away in an entry-level product
  • If you find two customer segments with inverse preferences, you can bundle products together to serve both segments. For example, if one segment finds Product A a must-have and Product B a nice-to-have, and another segment finds Product B a must-have and Product A a nice-to-have, your best strategy may be to bundle A and B and sell one bundle to both segments

Monetization Models

• Five monetization models (not just limited to these)
  • Subscription
  • Dynamic Pricing
  • Auctions
  • Pay as you go
  • Freemium
• Five questions to choose the right monetization model
  • How likely are the customers to accept the model?
    • Customers almost always have preferences for certain models. Make sure your model is in line with their preferences. Test out different models to discover your customers' favorites. One way to do this is to provide your customers with options, the prices of which always total the same amount (if you did the math), and ask them whether they have a preference or are indifferent.
  • How Will Future Developments Impact the Model?
    • What are the key trends in your business? For example, if you're a mobile phone service provider, is the number of phone calls increasing or decreasing? How about the number of devices? What risks and opportunities do those trends present long term? How will the pricing metrics hold up?
  • What Stage Is Your Company In and Does Your Model Choice Fit That?
    • A monetization approach has to suit your company's situation—its life cycle, competitive position, and relationship to customers. If you're a start-up, for instance, you may want to keep things simple and transparent
  • What Are Your Competitors Doing?
    • The reason to ask this question is not to mimic your rivals' monetization approaches but to set yourself apart. Wherever possible, use your monetization model to create a competitive difference
  • How Difficult Is the Monetization Model to Implement?
    • Assess factors like feasibility, the difficulty of customer adoption, and scalability. You must be able to communicate the model easily to customers and partners

Pricing Strategy

• Pricing strategy simply put is a short- and long-term monetization plan. clear intent, quantifiable goals, and a time frame for execution.