Of all the chapters in this book, this one might surprise you the most. In it, we will explain why you absolutely must discuss pricing at the beginning of a new product development initiative, not at the end. As mentioned in Chapter 1, when we say price we mean it to be an indication of what customers value and a measure of how much they are willing to pay for that value. To build a product around a price, you must engage in deep discussions with potential customers before you design and develop it.
Your dialogue must be specifically about their willingness to pay for the product you have in mind. The term “willingness to pay” is so important for us, and our clients, we refer to it by the acronym WTP.
Before we show why having the WTP talk is so important, we'll let a real story do some explaining. It's the story of Gillette's new razor for the Indian market.
A unit of consumer products powerhouse Procter & Gamble, Gillette is the king of the U.S. razor blade industry. Gillette razor brands account for more than 60 percent of the $3 billion U.S. retail market for razors and blades. But in India, a market with the potential to be four times bigger than America's for shaving products, Gillette had only a 22 percent share in 2009. Why? Price. The Gillette Mach 3, a U.S. product, was 100 rupees in India, or $2.24 in U.S. currency. For the majority of the Indian market, that was much too expensive.1
To increase market share in India, P&G realized it had to target the mid- to lower-income segment. The P&G innovation team took a unique approach. In the company's own words, “…inspired laser-like focus drove inclusion of only the most important features that were meaningful for the consumer and allowed the product to be offered at an affordable price.”2
So before sketching out its new product design, the Guard, Gillette spent thousands of hours interviewing people in India and other emerging markets. It observed them in their homes and on shopping trips to understand what features were must-haves and what features were nice-to-haves. From this analysis, the company determined a price that Indian consumers were willing to pay. The target price: 15 rupees for the razor, with 5 rupees for the replacement blades.
P&G designed the Guard around the price. It cut the Mach 3's 25 components down to four for the Guard, making it much simpler and cheaper to manufacture. They made the handle hollow. “I can remember talking about changes to this product that were worth a thousandth, or two thousandths of a cent,” Jim Keighley, the company's associate director for product engineering, told a reporter.3
The results were swift and stunning. By 2012, just two years after its launch, the Guard had captured more than 60 percent of the razor category in India, nearly three times the share of Gillette's previous products and on par with its dominant share of its home U.S. market. The impact on Gillette's customer base was even more substantial, considering the total potential market in India is 400 million men, compared with an estimated 94 million in the United States.4
That was just the short-term impact. P&G's Alberto Carvalho pointed to the new razor's ability to carve out space in Indian men's medicine cabinets for other products from his company. “The first job is to bring more consumers into Gillette. When they start enjoying a better shave, they'll be more open to all solutions,” he said.5 P&G expects the Guard to increase the lifetime value of the company with all those Indian customers, now and going forward.
As the Gillette story shows, it is critical to start the conversation with customers about their willingness to pay for your product before you begin building it. The early WTP talk will help you in three essential ways:
Early WTP talks help you avoid feature shocks by restraining you from overloading your product with unnecessary features that in turn force you to price it too high. They prevent minivations by giving you critical information on how much your customers value your product, and how much they're willing to pay for that value. That information will give you the courage not to price your product too low. The early WTP talk will also help you identify the hidden gems in your firm by arming you with the proof that there is indeed a market for these ideas. Your firm is far more likely to regard them seriously and invest resources to harness them. Last, the early WTP talk will save you from bringing an undead product to market. If customers tell you they're not willing to pay the price you need to make money from your product, that will save you lots of anguish later.
Let's take an example of how an early WTP talk redirected a new product in the works. We worked with a company that served as an Internet marketplace for connecting buyers and sellers. The company was already making money from the sellers and was planning to build a product to improve the buying experience and, as a consequence, charge buyers for using the service.
This was an exciting project, and the innovation team spent more than four weeks identifying “cool” features they could build. After numerous brainstorming, white-boarding, and Post-It notes sessions about how buyers could use the marketplace, the team showed the CEO a product with 25 features. (They had killed 30 ideas and were passionate about the 25 survivors.)
But the CEO was skeptical and asked the team: “How do you know our customers will value these specific features? How do you know which features they'll pay for, and which they'll figure they can do without?”
What followed was dead silence. Nobody could answer the questions. The entire process had been driven by inside-out thinking, and the CEO knew it. So the CEO pushed the team to prove customers would be willing to pay for the service—and would find value for each of those 25 features—before they embarked on a long journey of turning it into a product.
The innovation team recruited several hundred potential customers to validate how much they were willing to pay. First, they explained the product concept and the functionality they were planning to build. Then they tried to understand if the customers saw any value in the concept. Most important, they asked customers whether they would be willing to pay for such a product. They found customers truly valued the concept and were willing to pay anywhere from $10 to $20 for a monthly subscription fee, as shown in Figure 4.1.
The conversations demonstrated the company had a product customers were willing to pay for. Its managers were no longer operating on a wing and a prayer. Next, the innovation team dug one level deeper to find out which features customers were willing to pay for. Prior to that discussion, the team believed one of the coolest features was enabling buyers to find out if one of their Facebook connections had used a seller of a product/service they were interested in. The team thought this feature would be critical to creating trust. They were superexcited about building this and touted it as the number one feature. Certainly, consumers would be willing to pay for that and all the other features (25 in total), wouldn't they?
When the company actually validated this with customers, it turned out customers were only willing to pay for 10 of the 25 features. (These are shown in Figure 4.2.) Of those 10, the Facebook feature ranked seventh in WTP. For customers, the Facebook feature was a nice-to-have, not a must. Customers had become so used to relying on third-party reviews (common at other Internet sites), that they didn't really care much if the reviews came from their Facebook buddies.
The CEO told the R&D team to focus on the 10 features customers valued. The other 15? Forget about them.
In this way, the WTP talk allowed the company to prioritize. Equally important, the talk showed them which features customers didn't need at all. The ranking of the 10 most desired features gave the R&D and innovation team its marching orders—which features should be developed first, second, third, and so on. In the vernacular of software development, it gave the team a product roadmap. More important, because the team focused on only the important features, they consequently built a better product experience for customers.
The WTP talk helped prevent the company from creating a feature shock.
Most companies don't do this kind of homework when they develop a new product or service. Our 2014 survey of 1,600 companies in more than 40 countries (encompassing a range of business-to-business and business-to-consumer industries) found 80 percent wait until just before their product is introduced to the marketplace to determine its price.6 Of those 80 percent, the majority do not have the WTP conversations at all. For those that do, the conversation happens after the product is built, but by then it's too late.
All of these companies operate on the huge hope that customers will be willing to pay for their products and services, but in reality they simply don't know. No wonder the survey also indicated that 72 percent of new products are failures and don't meet their revenue or profit targets.
The smart companies, on the other hand, have the WTP conversation earlier and use this to shape the product and their own destiny.
So having early pricing discussions is essential. But what kind of information are we trying to uncover?
First, you want to understand your customers' overall WTP for your product—the price range they would consider reasonable (if, in fact, they would pay anything at all). Then you have to ask yourself whether that price range would work for your company. It may not if you can't deliver a market-acceptable product at a price that makes you a profit.
Second, you must understand how much value customers place on each feature and what they'd be willing to pay for that value. In this step, you dig a level deeper to understand exactly which features customers value most and would thus be most willing to pay for. This step will help you create your product roadmap—what features to develop first, next, and so on. What's more, it will focus your team on the features that generate the most customer interest and help avoid a feature shock.
One Internet company found this out the hard way—after it had brought a new product to market. The company hosts web pages and registers domain names for small businesses. It launched a new product and wasn't getting sufficient revenue for almost a year. We investigated and diagnosed the product as a feature shock: It had 27 features, many that small businesses did not care about. We told them to whittle the product down to eight features and then increase the price. It worked beyond the firm's wildest dreams, boosting the sales conversion rate and revenue more than 25 percent.
This sounds counterintuitive: Fewer features create more demand? But it was true in this case. Piling too many features into the product was killing demand by hiding the features that truly mattered. The company had created something that many customers thought excessive and thus actually reduced their WTP. Today, the firm wishes it had known that before it launched and watched a year's revenue go poof.
We see this scenario over and over again: A company guesses what customers will value about its product and what they'd pay for it. Don't just hope; find out! Amazon could have found out whether customers valued the 3-D features in the Fire Phone. Validate feature value and willingness to pay, and you'll build far more successful products.
By now you should understand why it's essential to discuss your new product concept with customers, and ask what they'd pay for it, early in your development process. But if you are like most of our clients, you are a little nervous about discussing pricing with customers before you have a product. How does one do that?
The simplest way is to ask direct questions about the value of your product and its features, for example:
Then follow each question with the most powerful question of all: “Why?”
What your customers will tell you will be worth its weight in gold.
Direct questioning is very useful for getting to a quick ballpark range. More fundamentally, it provides a fast way to see if customers value your product and if they will pay for it—before you sink a lot of money into it.
More sophisticated methods for getting at pricing include simulating purchase scenarios that ask customers to pick an option. For instance, you could show a product lineup with different price points and feature combinations and then ask which ones they would choose (including not choosing any option). Again, ask “why?” Then you change the scenario (for example, the feature and price combination) and ask them to choose again.
With this technique, you are tapping into the mental models and rules people use to make choices. This will enable you to understand what aspects of your product drive the most value and how much people will pay for them.
In Figure 4.3, we detail the five methods we have found most useful that you should use when you have the conversations with your prospective customers. Your conversations will typically take one of three forms: one-on-one conversations, focus groups, or large-scale quantitative surveys.
We have conducted thousands of conversations like these for our clients over the last 30 years. Below are the 10 most important insights we have learned from them:
With the five methods for conducting the all-important WTP talk with customers and these 10 tips for using those methods, you are now ready to begin testing your product's market viability.