Pricing Digital Products and Data - Part 7
Today, we go back to our original question? How will you create new digital services, experiences, and transformations that customers are willing to pay for, increasingly more? The short answer is this: you simply can't agile your way into monetization.
Stop making technology the focus of innovation
We need to stop making the technology the focus of innovation and rather valuate the ways in which our innovation benefits a user and a buyer, and set up our business goals and structures accordingly.
While we have valuable offerings we also must have viable businesses. But you simply cannot agile your way into profitability. We are for agile as much as any progressive, data driven product person. However, let’s not mix two things here: while agile can get you to minimally viable product and beyond very effectively, it doesn’t actually get you to minimally viable business. Because you can’t iterate your way into profitability and monetization. And getting your pricing right is key to that.
While we have valuable offerings we also must have viable businesses. But you simply cannot agile your way into profitability.
Pricing does not equal “Prices”
When we say pricing we don’t actually mean “prices.” What we mean is creating the right paths in which the value exchange takes place. Pricing is an optimization game; customers will aspire to maximize their surplus, and you will look to maximize the value you capture.
Here’s another really interesting fact: companies, on average spend 3-4 years in product development, in creating new value. They spend more than a year in planning and taking it to market. And interestingly, they spend an average of only 8 hours in their pricing. So let me repeat that. They spend 3-4 years in creating the value, more than a year in educating the market, and only 8 hours defining how and why the value should exchange hands. No wonder 65% of the new products fail to meet their revenue or profitability targets. Could your product development have been successful if you spend 8 hours in product development?
Pricing is a process.
Also, which process do you choose, when it comes to pricing? How do you assure you are covering your costs or not leaving money on the table? Do you price for acquisition, and if you do, how do you later monetize? Alternatively, do you price for customer lifetime value or your product lifecycle? All complex questions…
There are other considerations too: your brand position, your roadmap, changes in your supply or cost structure, price sensitivity of your buyers, your specific business model, your partners and ecosystem, your distribution structure, your channels, the larger economy and the dynamics of a specific market etc.
While agile can get you to minimally viable product and beyond very effectively, it doesn’t actually get you to minimally viable business.
5 steps of pricing for monetization
An effective pricing process is about making your offer accessible and desirable to the right types of customers while optimizing your profit levels in the long-term. As in every process, there are some best practices in adopting a pricing process that focuses on monetization and making it in the market:
Align your offer structure with the value stacks that represent your different types of customers.
Identify the right value metric that aligns your revenues with your customers’ benefits and structure your pricing using that particular metric.
Then [re]configure your product offering to make your value metric work.
Build in the caps, triggers, and fences that will deliver the right value or mobilize customers to other tiers as their businesses change. Remember, in digital, no behavior happens without a trigger.
Finally, it’s as important to have a mobilization plan as having a monetization plan. You must have a plan for how you’ll move your lower-value customers into higher-priced tiers, and monetize them throughout their lifecycle. Mobilization doesn’t just happen.
Could your product development have been successful if you spend 8 hours in product development?
Organizing for Monetization
It’s also important to add here, that it’s not only enough to change the flow of the innovation process but it’s also really important to synchronize all the teams involved with it. The value-focused innovation process involves marketing from the get-go, such that they don’t have to artificially create a value proposition or go-to-market plan. They’d know exactly the different types of customers, where they are, what they value, how much they value those features and attributes, and their distinctly different buying processes. It’s the marketers’ job to educate the buyers and elevate their value perception to the target price points.
The role of finance in your pricing process feeds into your monetization analytics more than anything. The closed-loop financial reporting can help uncover your true margins. Off-the invoice costs are just as important: cost to acquire, cost to deliver, cost to serve, cost to retain, cost to retool etc. These less transparent costs are just as important to your profits as the chargeable costs, and can strongly influence your product roadmap and customer acquisition plans.
Finally, for the sales team, pricing is one of the most powerful tools to communicate the differentiated value of your offering in relation to the umbrella of other offers and substitutes. A quantified value proposition can do wonders for justifying and charging the true value of an offering.
In the final part of our series on Pricing and Monetizing the Third Wave of Digital Transformations, we bring it all in and leave you with a few specific recommendations about making it in the next era of digital product innovation.