Book: Monetizing Innovation: How Smart Companies Design the Product Around the Price

If you are interested in business strategies and how companies price their products or services, I highly recommend this book. Its thesis can be summarized into: Product the price, don’t price the product. The authors argued that businesses have a better chance at a successful product/service launch if the businesses do meticulous market research beforehand, figure out the willingness to pay from the end users, find out what they want and how much they are willing to pay for the desired features, and finally build the offerings around the price points. A few notable examples that should be studied by business students include:

  • How Porsche could sell 100,000 of their new cars while Fiat Chrysler could only sell 25,000 of theirs
  • How Michelin switched from selling tires to selling kilometers traveled on their premium tires
  • How P&G rose to capture the majority of market share in the razor category in India
  • How DealShield protected billions of dollars in vehicle purchases and earned Manheim millions in revenue and profit

On Compromise Effect

For example, imagine you are in a wine store and want to buy a bottle. You find three options: a $10 bottle, a $25 bottle and a $40 bottle. Which you would you pick? When asked this question, most people would pick the $25…By introducing the $25 wine, you just made the decision process much easier for everyone. They’ll choose the middle option. This strategy is very common in both B2B and B2C companies

On Anchoring Tactics

Another illustration of anchoring is the Economist magazine’s A/B pricing experiment. The experiment divided people into two groups, A and B. The A group was given two choices: $59 for an online only subscription and $125 for a print and online combination. The B group was offered three choices: $59 for online only, $125 for print only and $125 for the print/online bundle. The $125 print-only option was an anchor. Some 84% chose the print/online bundle in group B versus only 32% who chose that bundle in group A.

On Price Conveys Quality

In a 2008 study, Ariely and his colleagues gave two sets of participants the same pill, telling them it was a painkiller (it was a placebo). Informed that the price was $2.5 a pill, 85% of the participants in the first group said the pill reduced their pain. Told the painkiller’s price was discounted to 10 cents, only 61% of the second group believed the pill reduced their pain.

On Apple Watch

At first, it was available only through Apple’s website and the cheapest version was priced at $349, not very cheap. However, Apple’s launch largely drew negative reactions. One stock analyst noted that a components supplier for the watch had produced fewer units than projected, hinting at underwhelming sales. His comment appeared in a July 31 Wall Street Journal headline that sniped, “Glimmers Emerge on Apple Watch Sales and They’re Not Pretty”

All of this was not what Apple wanted to hear. Yet despite the negative press, despite the warnings of purportedly in-the-know investment analysts and reviewers and the rumors of lagging sales, Apple did not drop its price. It held firm.

Based on International Data Corporation and investment analyst estimates of Apple Watch sales from April through September 2015 (the second half of Apple’s most recently completed fiscal year), Apple sold an estimated 8 million watches. Assuming most sold for the entry price of $349, that would make it a $2.8 billion product in its first six months of life.

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