August 2, 2021 • 35min

Pricing Guru Madhavan Ramanujam: How Smart Startups Design Their Products Around the Price

Pattern Breakers

Madhavan Ramanujam is a partner at Simon-Kucher & Partners, the world's largest pricing strategy consulting firm. He is the author of "Monetizing Innovation", considered one of the foremost guides on pricing strategy for startups. In this interview with Mike Maples Jr. of Floodgate, Madhavan discusses key principles for successfully monetizing innovations and avoiding common pitfalls.

0:00

-0:00

Key Takeaways

Price before product - Pricing should be considered from the very beginning of product development, not as an afterthought
Achieve product-market-pricing fit - Test not just if customers like your product, but if they like it at a specific price point
How you charge is as important as how much - The pricing model can be more impactful than the actual price level
Segment by willingness to pay - Build different product versions for segments with different needs and willingness to pay
Avoid common monetization traps like feature shock, minivations, hidden gems, and undead products
Test pricing early by asking customers about acceptable, expensive, and prohibitively expensive price points
Align pricing with value delivered to maximize monetization potential

Introduction

Madhavan Ramanujam is a partner at Simon-Kucher & Partners, the world's largest pricing strategy consulting firm. He is the author of "Monetizing Innovation", considered one of the foremost guides on pricing strategy for startups. In this interview with Mike Maples Jr. of Floodgate, Madhavan discusses key principles for successfully monetizing innovations and avoiding common pitfalls.

Topics Discussed

Madhavan's Background and Motivation (02:32)

Madhavan's fascination with pricing began when he was pitching his own startup idea to VCs as a Stanford graduate. When asked how he knew he could monetize his idea, he realized he only had assumptions, not real data. This led him to join Simon-Kucher & Partners to learn about pricing strategy.

He wrote "Monetizing Innovation" after observing how Silicon Valley was obsessed with creating innovations but paid little attention to monetizing them successfully. As he states:

"For many years working at Simon-Kucher, I witnessed how Silicon Valley was obsessed with creating amazing new innovations, but hardly paid attention as to how to monetize them successfully."

Many companies would build products for 1-2 years before considering pricing
This contributes to the high failure rate of innovations
The book aims to flip the process and consider monetization from the start

The Tale of Two Cars: Porsche vs Dodge (05:22)

Madhavan contrasts two approaches to product development and pricing:

Dodge Dart: Engineers obsessed over building the "perfect" car before considering pricing. Launched at $15,995 but flopped in the market.
Porsche Cayenne: Tested market appetite and willingness to pay before designing. Every feature was validated with customers. Resulted in huge success, accounting for nearly half of Porsche's profits.

The key lesson is that pricing should be considered from the start, not as an afterthought. As Madhavan states:

"Pricing is key from the get-go and needs to be brought upfront in the innovation process and cannot be an afterthought."

Four Common Monetization Failure Patterns (09:31)

Madhavan outlines four common ways companies fail at monetizing innovations:

1. Feature Shock

Adding too many features without considering if customers value or will pay for them
Example: Amazon Fire Phone with unnecessary 3D tracking cameras
Solution: Version products across segments instead of one-size-fits-all

2. Minivations

Good product-market fit but priced too low
Example: Semiconductor company pricing revolutionary chip at $0.85 when customers would have paid $5
Caused by lack of confidence or relying on faulty business cases

3. Hidden Gems

Failing to launch products that don't fit the company's existing business model
Example: Kodak not pursuing digital photography despite having the IP
Often occurs during industry inflection points (e.g. hardware to software)

4. Undead

Products that should never have been launched
Either answer a question no one cares about or are the wrong answer to the right question
Examples: Google Glass consumer version, Juicero

Achieving Product-Market-Pricing Fit (19:30)

Madhavan emphasizes the importance of testing not just product-market fit, but product-market-pricing fit. This means validating that customers like the product at a specific price point.

Key steps to achieve this:

Test if customers need, value, and will pay for the innovation
Ask "why" if they say they won't pay - provides valuable feedback
Put a price on the product in early tests and double it until you hit resistance
Use the "acceptable-expensive-prohibitive" price questioning technique:
- Ask for an acceptable price (they love product and price)
- Ask for an expensive price (aligned with value delivered)
- Ask for a prohibitively expensive price (they laugh you out of the room)

This approach helps identify a pricing range and uncover objections early.

How You Charge vs How Much You Charge (22:41)

Madhavan argues that the pricing model is often more important than the actual price level. He views price as a measure of value, similar to how a liter measures volume.

Key points:

Focus on the pricing model, not just the price point
Align the pricing model with the value delivered to customers
Example: Michelin charging truckers per mile driven instead of per tire
Simple, reasonable-sounding models often outperform complicated ones, even at higher prices

Madhavan recommends testing different pricing models with customers:

"Ask your customers to articulate your own pricing strategy back to you, and if they can do it properly, they've truly gotten it. If they can't and they're struggling, then you actually know that you're creating all this complexity."

Disrupting Incumbents Through Pricing (28:45)

Mike Maples Jr. raises the point that startups should avoid using the same pricing model as incumbents to prevent being easily co-opted. Madhavan agrees, emphasizing:

Disruption can come through charging differently, not just charging less
Using a different model makes direct comparisons harder
Example: Netflix's subscription model vs Blockbuster's per-rental fees

Segmenting by Willingness to Pay (30:05)

Madhavan stresses the importance of segmentation based on customer needs, value perception, and willingness to pay. Key points:

Avoid the trap of building a "one-size-fits-all" product
Customer needs are always heterogeneous
Build products for specific segments rather than trying to position one product to multiple segments
For startups with limited resources, prioritize building for one key segment first
Avoid segmenting solely based on demographics or personas

He illustrates this with an example:

"If you think of a person who's 69, incredibly wealthy, married, lives in the United Kingdom in a castle and has two children, you perhaps thought about Prince Charles, but that also fits Ozzy Osbourne. And I would bet that their needs are very different."

Additional Resources on Pricing (32:39)

Madhavan recommends three additional resources for learning about pricing:

Articles from firms like First Round Capital and OpenView Venture Partners
The Professional Pricing Society - offers courses and resources
"Confessions of the Pricing Man" by Hermann Simon (founder of Simon-Kucher & Partners)

Final Advice for Founders (34:21)

Madhavan leaves founders with a simple but powerful four-word mantra:

"Price before product, period."

Conclusion

Madhavan Ramanujam's insights highlight the critical importance of considering pricing and monetization from the very beginning of product development. By achieving product-market-pricing fit, aligning pricing models with value delivery, and segmenting based on willingness to pay, startups can dramatically increase their chances of successfully monetizing their innovations. The key is to treat pricing as a core part of the product development process, not an afterthought.