As pricers, monetizing innovation is one of the main pillars we place our success on. But what does this term mean? Why is it so important to not only be good at what you are doing now, but to also tap into new attractive business areas? And more importantly, how do you do it successfully? Our findings show that 72 percent of innovations fail to meet their financial targets or fail entirely, which means many companies aren’t quite sure how to monetize their innovations consistently.
Defining monetizing innovation
What does monetizing innovation successfully mean exactly? Simply put, it is to meet or exceed the financial goals a company sets for its new product. In times of escalating downward pricing pressures, many companies decide that an innovative new product or service is the answer to that pressure. However, monetizing it proves more difficult than ever. Research and development is expensive, start-ups disrupt whole markets with their ideas since they are able to take more financial risks, and the overall rate of innovations is accelerating. So, innovation is harder than ever.
What causes innovations to miss their targets?
There are also countless unique product-related reasons that cause new products to flop in the marketplace. True? No – we have found that almost all failures can be grouped into four categories:
- Feature shock: an over-engineered innovation with too many, 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. This is often because it is not enough of an innovation to warrant a higher price, which is caused by either a real or perceived lack of differentiation.
- Hidden gem: a potential blockbuster product that is never properly brought to market, generally because it falls too far outside of the core competency of a company.
- Undead: an innovation that customers don’t want, but has nevertheless been brought to market either as the wrong answer to the right question or as the answer to a question no one was asking.
Knowledge is power
There are a couple of myths that prevail around monetizing innovations that have been difficult to shake: that customers are automatically willing to pay the value or at least the cost of a great new product, that an isolated working innovation team should be exclusively in control of a new product, that it is completely normal to have failures quite often when innovating, that customers have to experience a new product before they can say how much they will pay for it, and that a company first has to physically have their new product before assessing its worth. Although these statements seem to be common sense, they are actually myths to successfully monetizing innovations. In fact, the overwhelming majority of companies accepting these myths are what leads to the 72 percent failure rate for innovations. A more promising approach is to find out if customers are willing to pay for a new product – and how much – before committing resources to building and launching it.
The rules for monetizing innovations
How do companies gain knowledge about customer willingness-to-pay? Here are nine rules for monetizing product innovations successfully:
- Have the “willingness-to-pay” talk early: To find out the price customers are willing to pay for a product, companies have to talk to them. We call it the “willingness-to-pay” (WTP) talk. It is extremely critical to start the conversation before building a product because it helps inform the decision to invest in the innovation, gives guidance on which features to include and prioritize, and enables companies to avoid the product failure categories.
- Don’t develop a one-size-fits-all solution: Companies have to bear in mind that not all customers have the same WTP – since they aren’t a homogenous group and have different needs and preferences. So, a general segmentation strategy should also help guide product development.
- Decide on product configuration and bundling: After finding out what the different customer segments need and are willing to pay, companies have to decide what features and functionality the new product should deliver. These decisions are the key building blocks in the design process of a successful product, and should be informed not just by customer needs, but also by customer willingness-to-pay.
- Find the perfect monetization model: Establishing a favorable monetization model can be as important as the new product itself. How a company charges for a product often has a bigger impact on customer adoption and price perception than how much it is charging. There are countless choices, but a few disruptive price models to consider include subscriptions, alternate metrics, dynamic pricing, usage-based pricing, and freemium as these models have proven effective for innovative new products.
- Pick the winning price strategy: After having the WTP talk, defining features and functions tailored to individual customer segments, and deciding on a monetization model, companies need to pick a short- and long-term monetization plan – their pricing strategy. This should consist of four elements: setting of clear goals, deciding how aggressive pricing should be, introducing price-setting principles, and defining promotional and competitive reaction principles.
- Build an outside-in business case: Developing a business case is a critical step in the product design process. Although it is used only internally, companies need to gather external input on value, price, cost, and volume (by means of the WTP talk) to make it useful.
- Communicate the product’s value: Designing an innovative product is only the first step. To sell it, companies have to have a compelling story to drive customers to buy and use it. Therefore, the marketing and sales departments have to be integrated into the innovation team from the very beginning.
- Use psychological pricing: People make purchasing decisions based on both rational and emotional factors. Companies should use psychological pricing tactics to make use of this fact, e.g. compromise effect, anchoring, price thresholds. Having said this, it is always wise to try these out first with focus groups or controlled A/B tests.
- Maintain your price integrity: All the previous steps need to take place before bringing a product to the market. Maintaining price integrity is our advice in case the market reacts less enthusiastically than expected. Even though there will be pressure to lower prices, to do this immediately would only make the problem worse. Companies need to take a cross-functional approach to identify the real problem with an innovation launch and should try at least three non-price actions before considering lowering the price.