Pricing Digital Products and Data - Part 6
Today, we examine why even the most successful products can't lead you to successful monetization.
Innovation, traditionally, began by research and development creating a new or better product. Then, finance determined what it'd cost to build it, and decided on its price. Marketing would then figure out the value proposition, which was generally viewed more as a "creative" process and finally, sales was off to sell it. Then marketing budgets, advertising dollars, promotions, and discounts came into play to drive sales and this cycle repeated with every innovation.
The problem with his model of innovation are several:
First, by the time the you learn what it will take for the value exchange to happen – as in customers actually acquiring your solution, the product is already built!1
In this model, the value creation happens in a vacuum. You simply don’t “know” what your customers’ perceived value of your offering is or what they are willing to pay for it, to know whether or not your innovation will hit your profit goals.
The product was built with an internally driven cost structure rather than being informed by pricing or profit targets.
This process of innovation has you hoping to monetize it but you don’t actually know whether or not you will be able to.
You simply don’t know whether or not you created the right product – one for which customers are willing to pay in order for you to make it in the market.
Nor do you know whether or not you built your product to the right offer structure for you to address all your target segments.
From wishing to monetize to knowing how you'll monetize
Unless you begin the innovation process with monetization in mind, you simply cannot know to which value stack – and therefore price point – to adjust your cost structure and hit your target profits. Otherwise, you may be working on the wrong feature set or you may be wasting resources on table stakes or, as in most cases, you may be over engineering.
Although spearheaded by the industrial companies, unfortunately this method of innovation is not a thing of the past. Take a look at Amazon Fire Phone that launched in 2014 and flopped famously. It’s an engineering marvel. It launched with a feature called Dynamic Perspective which was designed to give users 3D effects on the display without wearing 3D glasses. To make this effect come alive Amazon designers installed four camera lenses and facial recognition technology that followed your line of sight to the phone tweaking your perception of depth - all of which sucked up the battery life. They also added Mayday Service – remember the “Hi Amy!” commercials? A live video service hotline which is very costly to operate. As if these were not enough, they also added a feature called Firefly that allowed you to do image search and then took you to Amazon as well as a button to actualize your orders on the hardware itself.
Again, Fire Phone was an engineering marvel by far! But how did Amazon know that these were just the features that customers were willing to pay for when selecting their next smart phone? This is not a new-comer hardware aspirant, this is Amazon, the company that knows every way of knowing, using data. EVEN THEY GOT IT WRONG! They built the Fire Phone with such a high cost structure without necessarily knowing whether or not these were the features that would make the Fire Phone a success.
The result? Amazon ended up with a $170 million write-down.
The point here is even when you’re the most customer-centric company of the world, and even when you know more than most companies about your customers you may still get it famously wrong. Because taking an innovation to market – one that meets its adoption and profitability goals requires and entirely different approach. And a really different type of research and data collection methodology. Enter value-focused innovation.
The process we are talking about, value-focused innovation, turns the traditional product innovation process on its head.
Value-focused innovations begins with the user or buyer. Only when you know your buyers’ value stack and their willingness to pay you can determine the maximum price point to which you should build your cost structure that will allow you to make a profit on it. And only after knowing to what cost structure you will build, you can make the feature and functionality trade-offs and decide which features will provide value, which features will raise or lower the customers’ willingness pay or why customers will choose your offering over others. And then you bake all that into your analytics on an ongoing fashion. Your usability and engagement metrics will signal what your customers truly value, use, and benefit from, and that will help guide your future product roadmap.
While these may seem straightforward, more than 80% of the companies are still innovating in the dark.
The product and user experience design community would recognize this process more readily, because designers have long been using similar principles under the umbrella of customer-led innovation. However, the business community has certainly not caught up just yet.
Value-focused innovation differs from customer-led innovation in how it quantifies the economic value of innovation
The difference between value-focused innovation and customer-led innovation is that the former goes one more step further and quantifies the alternative options in terms of the benefits and economic value that the buyers or users receive. Ideally, you should align your innovation process with your monetization process, and that’s what value-focused innovation aims to do. In Part 7 of our series, we do a deeper dive into the value-focused innovation process and lay out a few methodologies for successful monetization.