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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Surprising rules for successful monetization Innovation is the most important driver of growth. Today, more than ever, companies need to innovate to survive. But successful innovation--measured in dollars and cents--is a very hard target to hit. Companies obsess over being creative and innovative and spend significant time and expense in designing and building products, yet struggle to monetize them: 72% of innovations fail to meet their financial targets--or fail entirely. Many companies have come to accept that a high failure rate, and the billions of dollars lost annually, is just the cost of doing business. Monetizing Innovations argues that this is tragic, wasteful, and wrong. Radically improving the odds that your innovation will succeed is just a matter of removing the guesswork. That happens when you put customer demand and willingness to pay in the driver seat--when you design the product around the price. It's a new paradigm, and that opens the door to true game change: You can stop hoping to monetize, and start knowing that you will. The authors at Simon Kucher know what they're talking about. As the world's premier pricing and monetization consulting services company, with 800 professionals in 30 cities around the globe, they have helped clients ranging from massive pharmaceuticals to fast-growing startups find success. In Monetizing Innovation, they distil the lessons of thirty years and over 10,000 projects into a practical, nine-step approach. Whether you are a CEO, executive leadership, or part of the team responsible for innovation and new product development, this book is for you, with special sections and checklist-driven summaries to make monetizing innovation part of your company's DNA. Illustrative case studies show how some of the world's best innovative companies like LinkedIn, Uber, Porsche, Optimizely, Draeger, Swarovski and big pharmaceutical companies have used principles outlined in this book. A direct challenge to the status quo "spray and pray" style of innovation, Monetizing Innovation presents a practical approach that can be adopted by any organization, in any industry. Most monetizing innovation failure point home. Now more than ever, companies must rethink the practices that have lost countless billions of dollars. Monetizing Innovation presents a new way forward, and a clear promise: Go from hope to certainty.
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CONTENTS
Cover
Praise for
Monetizing Innovation
Title Page
Copyright
Dedication
Foreword
Acknowledgments
Part One: The Monetizing Innovation Problem
Chapter 1: How Innovators Leave Billions on the Table
Why the Majority of New Products Fail
Successful Innovation Matters More Than Ever
The Good News: Monetizing Innovation Failures Come in Only Four Varieties
You Can Avoid Failure—but Only If You Play by Different Rules
Chapter 2: Feature Shocks, Minivations, Hidden Gems, and Undeads
Flavor 1: Feature Shocks—When You Give Too Much and Get Too Little
Flavor 2: Minivations—When You Ask for Too Little, That's What You Get
Flavor 3: Hidden Gems—When You Don't Look, You're Not Going to Find Them
Flavor 4: Undeads—When Nobody Wants Your Product
These Four Monetizing Innovation Failures Can Be Avoided
Chapter 3: Why Good People Get It Wrong
Myths and Misconceptions with the Prevailing Mindset
Embracing a New Paradigm
Introduction to Part 2
Part Two: Nine Surprising Rules for Successful Monetization
Chapter 4: Have the “Willingness-to-Pay” Talk Early
How an Early Willingness-to-Pay Talk Propelled Gillette
Why You Should Have the Talk Early: The Three Benefits
The Information You Need from Those Early Pricing Talks
Insights, Tips, and Tricks
Chapter 5: Don't Default to a One-Size-Fits-All Solution
A Paper Company's Segmentation Story
Typical Pitfalls of Segmentation
What Best-in-Class Companies Do
Insights, Tips, and Tricks
Chapter 6: When Designing Products, Configuration and Bundling is More Science Than Art
Product Configuration Done Right
Bundling Done Right
Microsoft Office: A Bundling Blockbuster
Two Key Principles of Product Configuration and Bundling
Insights, Tips, and Tricks
Chapter 7: Go beyond the Price Point
How You Charge Trumps What You Charge
Innovative Monetization Models: More the Rule Than the Exception
Five Powerful Monetization Models
Five Questions to Choose the Right Monetization Model
Chapter 8: Price Low for Market Share or High for Premium Branding?
Creating the Pricing Strategy Document: The Four Building Blocks
Chapter 9: From Hoping to Knowing
How Auto Auctioneer Manheim Tested a New Offering
Why WTP Is Essential For Your Business Case
Nine Steps to Build a Living Business Case
Chapter 10: The Innovation Won't Speak for Itself
A Few Shining Examples of Value Communications
So Why Is Value Messaging Difficult?
The Three Steps to Create Great Value Communications
Chapter 11: Use Behavioral Pricing Tactics to Persuade and Sell
The Behavioral Pricing Dilemma of an Internet Start-Up Company
Six Behavioral Pricing Tactics That Make the Difference
Don't Guess: Put Behavioral Tactics to the Test
Chapter 12: Maintain Your Price Integrity
The Importance of Patience in Maintaining Price Integrity
How to Prepare for Post-Launch
Price Wars: The Only Winning Move Is Not to Play
Part Three: Success Stories and Implementation
Chapter 13: Learning from the Best
The Porsche Story—Veering Off the Sports Car Track to Create Two Winning Vehicles
LinkedIn—Monetizing the World's Largest Professional Network
Dräger—Collecting the Specs for Successful Industrial Products before Engineering
Uber—Monetizing a Disruptive Innovation through Innovative Price Models
Summary: New Roads
Swarovski—The Payoff from Crystal-Clear Ideas on What Consumers Will Pay
Optimizely—How to Price Breakthrough Innovation
Innovative Pharma—How a Customer Value Driven R&D Approach Boosts Success
Chapter 14: Implementing the “Designing the Product around the Price” Innovation Process
Jump-Start and Pilot
Scale and Stick
The Nine Pitfalls to Implementing a New-Product Monetization Process (and How to Avoid Them)
Index
End User License Agreement
List of Illustrations
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Figure 14.1
Guide
Cover
Table of Contents
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Part 1
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Praise for Monetizing Innovation
“Too many startups focus on product engineering, ignore the customer, and end up failing. We launched last year using the approach in this book, and it led to twice the targeted revenue growth and made the difference between the success and failure of our company. Starting with the customer, market, and price is the only approach for product success.”
—Spenser Skates, co-founder and CEO, Amplitude Analytic
“This book is a very practical guide to the difficult decisions that have to be made during the product development process. It's a must-read for anyone responsible for product development.”
—Mark James, senior vice president of global pricing and product, DHL Express
“Many savvy marketers have adopted the important paradigm shift in pricing—moving from cost-based pricing to customer value-in-use pricing. The authors of Monetizing Innovation persuasively explain the next, equally important, paradigm shift: moving value-in-use thinking from the end of the new product development process to the beginning. Companies that apply this wisdom will see a vast improvement in their ability to identify and capitalize on key market opportunities.”
—Robert Dolan, Baker Foundation professor, Harvard Business School
“Madhavan Ramanujam and Georg Tacke use their decades of experience working with companies across the globe to identify the best ways for organizations to innovate profitably. Their book explains how to shift focus—from the product to the customer, from internal concerns to external needs, and from company costs to buyer willingness to pay. Also, and maybe even more importantly, they tell you what not to do with your company's new ideas—to help you avoid product failures.”
—Kevin Mitchell, president, The Professional Pricing Society, Inc.
“Coupling customer-driven engagement with up-front pricing strategies enables innovators to avoid failure. Monetizing Innovation provides an insightful and pragmatic strategy for innovation and pricing.”
—Cary Burch, chief innovation officer, Thomson Reuters
“Way too many R&D teams dedicate their lives to the development of poor product ideas. Monetizing Innovation offers game-changing concepts that help create winning products and optimize product margins. It will also make the lives of product development teams more meaningful and fun!”
—Ralf Drews, chairman of the board and CEO, Greif Velox Maschinenfabrik; former CEO, Dräger Safety
“I have had the pleasure of working closely with Madhavan over the years and his work has made a significant impact on companies I am involved with. His book challenges existing thinking that puts pricing at the very end of the innovation cycle and presents a fresh alternative that is realistic to implement. It is a must-read for entrepreneurs and executive management.”
—Greg Waldorf, CEO, Invoice2go; board member, Zillow
“Understanding and anticipating what customers value is more critical than ever in this Information Age and the authors' ‘nine steps’ provide a methodology that can be applied to any industry.”
—Nigel Lewis, vice president of aftermarket solutions, Caterpillar
“Pricing power is one of the best predictors of stock price performance over the long run. With Monetizing Innovation, Madhavan and Georg address how important it is for pricing to go hand-in-hand with product innovation and design. Not only is the book full of insight and useful information, it dismisses some common fallacies.”
—Chet Kapoor, managing partner, Tenzing Global; board member, BrightCove
“When it comes to understanding pricing and monetization, the team at Simon-Kucher is second to none. Any entrepreneur looking to refine their value proposition and pricing strategy should read this book.”
—Sheila Lirio Marcelo, founder, chairwoman, and CEO, Care.com
“Monetizing Innovation bridges that chasm between mediocre product innovation and trailblazing business transformation. Now product, marketing, and finance teams can all point to a single source of truth—which provides invaluable insights, skills, and ideas to boost product ROI.”
—Duncan Robertson, partner, Paxion Capital Partners; former CFO, OpenTable
“Monetizing Innovation is an excellent book, recommended for organizations that want to optimally target customers and design their products around the price to maximize profitability.”
—Marta Navarro, pricing and upselling director, Renault
“We live in an era where customer knowledge allows for smarter product design. Monetizing Innovation explains the alchemy of ‘going to market’ and pricing strategies to ensure success. It is a must-read for executives navigating the rapid change in customer expectations.”
—Hilary Schneider, CEO, LifeLock
“Monetizing Innovation clearly describes why you need to put your customers' needs, value, and willingness to pay at the core of your innovation process. I have successfully and repeatedly implemented principles outlined in this book to drive business strategy and have seen massive ROI.”
—Vishaal Jayaswal, vice president of client solutions and value strategy, Cox Automotive
“Capital-intensive innovation businesses like semiconductors have watched helplessly as their average selling price and margins have declined. In Monetizing Innovation, Madhavan and Georg show how to create winning solutions for well-defined, defensible customer segments that will drive the top and bottom line. If you are in the semiconductor business and want to make money, you need to read this book.”
—Mike Noonen, co-founder at Silicon Catalyst; former executive at NXP, GlobalFoundries, and National Semiconductor
“It is essential to master the art of Monetizing Innovation. To achieve this, a company needs to have an established culture of innovation so that a constant stream of good ideas can be realistically evaluated for their monetization potential.”
—Jens Müller, COO, Securitas Deutschland
“One would think that the pharmaceutical industry already knows it all in terms of monetizing innovation, given that the market perspective nowadays is already deeply ingrained in R&D planning. But this book shows how important this topic is across industries, and how much we can learn by looking beyond our own industry.”
—Andreas Altemark, GMACS, Bayer Pharmaceuticals
“Solid price thinking and research used to be one of the few dependable and repeatable secret weapons skilled and experienced entrepreneurs could count on for giving them meaningful customer traction and a cash flow advantage over the newbies and incumbents. With Madhavan and Georg's excellent new book, Monetizing Innovation, it is now clearly no longer a secret.”
—Allan Pedersen, CEO, Zensur.io; managing partner, Triple P Capital
“Monetizing Innovation is very relevant in any global context, especially India, where product innovation is just taking off. However, due to the nascent market, companies are struggling to justify investing in high-risk projects since they may or may not yield long-term returns. This book gives them the blueprint they need to remain competitive.”
—Aditya Singh, associate vice president of product, Flipkart
“Innovations can achieve true economic success only when your customers find real benefit from your idea and are, more importantly, willing to pay for it. Monetizing Innovation provides the necessary frameworks and checklists to ensure that your ideas can truly achieve such success.”
—Lothar Kriszun, speaker of the Group Executive Board, CLAAS
Monetizing Innovation
How Smart Companies Design the Product around the Price
Madhavan Ramanujam andGeorg Tacke
Cover design: Wiley
Copyright © 2016 by Simon-Kucher & Partners Strategy and Marketing Consultants, LLC. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Names: Ramanujam, Madhavan, author. | Tacke, Georg, author.
Title: Monetizing innovation : how smart companies design the product around the price / Madhavan Ramanujam, Georg Tacke.
Description: Hoboken : Wiley, 2016. | Includes index.
Identifiers: LCCN 2016004213| ISBN 9781119240860 (hardback) | ISBN 9781119240884 (ebk) | ISBN 9781119240877 (ebk)
Subjects: LCSH: New products–;Marketing. | Pricing. | BISAC: BUSINESS & ECONOMICS / Marketing / General.
Classification: LCC HF5415.153 .R356 2016 | DDC 658.5/752–dc23 LC record available at http://lccn.loc.gov/2016004213
Dedication
For Hema and Ulrike.
Foreword
Innovation is my family business. My grandfather was a master electrician, master machinist, and inventor who came up with a new kind of fire alarm. My father is a physicist who worked day and night at the massive Bell Laboratories research and development facility in Murray Hill, New Jersey, which now has his picture at the door.
Growing up as a Bell Labs kid, I often wondered why these scientists, the smartest guys in the room for sure, were working in what looked and smelled an awful lot like a dungeon. Why weren't they rich and powerful? Of course, it may be that money and success weren't their goals, or there may be truth in the saying: Good at chess is bad at life.
But let me put it another way: Why don't all innovations become successful products? Why do so many fail?
This book has the answer.
Consider the way most companies turn ideas into products and services. They start by analyzing costs, a whole constellation of them: headcount, material inputs, machinery, tech requirements, infrastructure support, and on and on. They subtract these expenses from estimated revenues and out pops the expected profit. On that basis, the company places its bets.
But hold on: where did the revenue number come from? There was no careful scrutiny of detailed inputs. Generally, there was nothing more than an educated guess. That's a wild asymmetry of precision. It's even more reckless when you consider that the two elements—revenue and expense—are equally important in determining viability.
But it's much worse than that. With few exceptions, companies do not examine which features are important to the customer, and which are only important to the inventor. They do not know whether the customer wants one flavor, or a choice of many. They do not know if the customer will pay, wants to pay once, or will subscribe.
This is unfair to the innovator. The innovation team should know whether they are wasting their long nights on a concept that will go nowhere. They should know—as is often the case—when a change to the vision could dramatically increase its appeal. But that requires knowledge companies just don't have.
For the CEO, the executive team, and the R&D chief, this book lays out a battle-tested plan for getting back in control. It is based on the work that Simon-Kucher & Partners has done for hundreds of businesses, including my own. It's a straightforward plan, but not a simple one. Much of it counters the prevailing wisdom. There is no “move fast and break things,” but there is a lot of “look before you leap.”
It may be my bias, but I read it as a love letter to inventors—tough love in spots, but love nonetheless. Those scientists back at Bell Labs with Far Side cartoons taped to every door, the hard-working garage visionaries, the men and women of R&D teams everywhere, they all want the same thing. They want their ideas to come to life. They don't want them to die ignominious deaths on some back shelf.
And for my fellow corporate executives, this is a manifesto. I know of no other book that makes such a clear case for ensuring great new ideas will succeed, or that so clearly explains why we're wasting billions of dollars right now. Ironically, given the title, Monetizing Innovation isn't all about the money. Instead, as the authors would say, it's about going from “hoping” to “knowing.” It's about taking control of your company's future.
—Eddie HartmanCo-Founder and Chief Product Officer of LegalZoomJanuary 2016
Acknowledgments
Just like the new product initiatives we describe in Monetizing Innovation, a book itself is the work of many people who play essential roles.
We start with those who allowed us to tell their stories in detail. In alphabetical order they are: Ralf Drews (former CEO of Dräger Safety), Andrew Freed and Josh Gold of LinkedIn, Bill Gurley of Benchmark Capital, Vishaal Jayaswal of Cox Automotive, Christoph Kargruber of Swarovski, Don MacAskill of SmugMug, and Dan Siroker of Optimizely.
Eddie Hartman (co-founder and chief product officer at LegalZoom) and Matt Johnson (a managing partner at Simon-Kucher & Partners) spent countless hours with us reviewing and debating ideas and giving insightful feedback that made our ideas better and more persuasive. We also owe a big special thanks to Cary Burch of Thomson Reuters, Chet Kapoor of Tenzing Global, and John Cline of Western Union for reviewing book drafts and providing invaluable feedback along the way.
Colleagues of ours at Simon-Kucher played the invaluable role of pushing our thinking. Sara Yamamoto helped shape ideas, reviewed chapter drafts, and served as our go-to person and internal editor. Hermann Simon, one of the founders of our firm and a serial book author himself, reviewed our content and provided great feedback as well. Charlie Sun and Justin Roman helped write several case examples and we thank them for their input and dedication. A number of partners and directors at our firm pointed us to examples that you'll read in the pages ahead and opened doors to their executive suites: Philipp Biermann, Gunnar Clausen, Dirk Schmidt-Gallas, Josee Hulshof, Klaus Hilleke, Dirk Kars, Nick Keppeler, Joerg Kruetten, Susan Lee, Rainer Meckes, Nina Scharwenka, Christian Schuler, Ekkehard Stadie, André Weber, and Antoine Weill. Thank you for helping us build the foundation of evidence upon which the book's insights are based. In addition, former Simon-Kucher colleagues Andrew Conrad, Frank Luby, Anya Rasulova, and Kate Woodward were big contributors to early drafts of the book. We thank you very much for your contributions. Finally we wish to thank Petra Dietz from our graphics department for helping with the numerous figures and charts.
We were truly blessed to have an all-star team of reviewers. They were (in alphabetical order): Andreas Altemark, Cary Burch, Robert Dolan, Ralf Drews, Bill Gurley, Stefan Jacoby, Mark James, Vishaal Jayaswal, Chet Kapoor, Christoph Kargruber, Philp Kotler, Nigel Lewis, Sheila Marcelo, Kevin Mitchell, Jens Müller, Marta Navarro, Mike Noonen, Stefan Paul, Allan Pedersen, Duncan Robertson, Hilary Schneider, Aditya Singh, Dan Siroker, Spenser Skates, Leela Srinivasan, and Greg Waldorf. Thank you so much for your support!
We wish to thank Richard Narramore, our editor at John Wiley & Sons, who saw the potential in our early manuscript and helped sculpt it into the book it is now. The book that is now in your hands wouldn't exist without the invaluable help of Bloom Group LLC. Thank you, Bloom Group team members Bob Buday, David Rosenbaum, and Laurie McLaughlin, for getting our thoughts into prose.
We must thank, and thank again, our family members for their nonstop encouragement and understanding. Our wives Hema and Ulrike offered us unwavering support and encouragement and served as an excellent sounding board for ideas. Finally, we also wish to thank our parents and siblings. This book wouldn't have been possible without their support.
—Madhavan and GeorgMarch 2016
Part OneThe Monetizing Innovation Problem
Chapter 1How Innovators Leave Billions on the TableA Tale of Two Cars
Let's begin with a story about two new cars launched by two well-known, established car companies. One launch went very, very well; the other went very, very wrong.
The first car in our story was launched by Porsche, a relatively small player in the multi-trillion dollar global automotive industry,1 renowned for its 911 sports car that will take you down the road at nearly 200 mph.
In the early 1990s, Porsche was speeding off a financial cliff—if not at 200 mph, then pretty rapidly. Annual sales were a third of what they had been in the 1980s. The company's manufacturing processes were inefficient and defective. The new CEO, Wendelin Wiedeking, at 41 years old the youngest of a new generation of German auto manufacturing executives, decided to institute Japanese-style manufacturing techniques and quality improvements. Costs fell and sales rose, and the company was able to avoid disaster.
The new CEO had bought Porsche some time. He knew the company needed a fundamental change—something different, something new. It needed, as most companies eventually do, to innovate—or risk losing everything. It needed a new car.
In the second half of the 1990s, the company began planning an automobile that was far outside the sports car niche it had focused on successfully for 50 years. Porsche decided to make a sport-utility vehicle—an SUV—a family car associated not with racing's checkered flags but with soccer moms and soccer dads slumped behind the wheel mournfully recalling their lost youth.
Porsche called its new car the Cayenne.
A Porsche SUV? It didn't make sense. The Porsche brand was about speed and power, daring and engineering, not about loading up the family car with groceries and taking Emily, Mike, and their little friends to their Saturday games. What did Porsche know about SUVs? It had never built one before.
But Porsche had done its homework. Specifically, it had designed and built the product—the Cayenne—around the price.
When most people hear the word “price,” they think of a number. That's a price point. When we use the term price, we are trying to get at something more fundamental. We want to understand the perceived value that the innovation holds for the customer. How much is the customer willing to pay for that value? What would the demand be? Seen in this light, price is both an indication of what customers value and a measure of how much they are willing to pay for that value.
Porsche understood all this when it set about creating the Cayenne. Porsche's top executives knew they had a bold, perhaps even revolutionary, concept. They also knew the car would be a tremendous risk. They instructed their product team to rigorously determine what the customer wanted in a Porsche SUV and, importantly, how much they were willing to pay. The message was clear: If the customer was not willing to pay a price that would ensure success, Porsche would walk away from the Cayenne.
Long before the first concept car rolled out of the Engineering Group center in Weissach, the product team conducted an extensive set of surveys with potential customers, gauging the appetite for a Porsche SUV and evaluating prices to find an acceptable range. They were pleased to find that customers were enthusiastic. Analysis showed that customers were willing to pay more for a Porsche SUV than they would for comparable vehicles from other manufacturers. The potential for a hit was there.
This meant that Porsche could invest in building its SUV.
But what exactly should it build? Porsche wasn't about to risk creating a car with a bloated design. Every single feature stood trial before the customer.
Target customers wanted and were willing to pay for a high—and in this vehicle category, unknown—level of sportiness. They expressed an interest in a powerful engine and a handling performance close to a sports car (despite the size of an SUV). Porsche's famous manual six-speed racing transmission was not on the wish list. Out it went. But the voice of the customer convinced the Porsche engineers to include large cup holders, something Porsche was not used to. At every turn, the product team removed features the customers did not value—even if the engineers loved them—and replaced those with features customers were actually willing to pay for.
Porsche's masterstroke was thinking about monetization long before product development for the SUV was in full speed, then designing a car with the value and features customers wanted the most, around a price that made sense. The result was total corporate alignment: Porsche knew it had a winner, and had the confidence to invest accordingly.
Over time the Cayenne enabled Porsche to generate the highest profits per car in the industry—the whole automotive industry. Ten years after it hit the market in 2003, Porsche was selling about 100,000 Cayennes annually, almost five times as many as it did in the launch year. Today, the Cayenne accounts for about half the company's total profit, with the venerable 911 generating a third.2 What's more, the Cayenne enabled Porsche to pay down a suffocating level of debt and increase its cash reserves.
By any and all measures, the Cayenne was a roaring success.
Why did Porsche succeed? It wasn't the company's engineering prowess, although the Cayenne drives quite nicely. And it wasn't a technological breakthrough that enabled Porsche to manufacture SUVs more efficiently or make consumer hearts beat faster. Porsche succeeded by designing the product around the price. This is what smart companies do.
Now, we turn to the second car in our tale. This car comes from Fiat Chrysler, a company that has six times the revenue of Porsche. In 2009, the massive automaker began working to bring something new into the world: a reimagining of the classic 1970s Dodge Dart.
The new Dodge Dart was a crucial entry in a crucial market segment for Fiat Chrysler: compact cars. Fiat Chrysler needed the Dart badly to make the company competitive in the category, a segment in which it had struggled for years. Compacts account for one in every six vehicles sold in America. Every major automaker must succeed in the compact market, explained Fiat Chrysler CEO Sergio Marchionne in a March 2012 interview on 60 Minutes. Any carmaker unable to succeed in the category was “doomed,” he said.3
Marchionne didn't mince words within the company about the importance of the Dart. He told employees just what was riding on the car. “Our future hangs on how well we do here,” he told workers in a 2012 visit to the car's Belvidere, Illinois, plant. He backed up his words with money, committing hundreds of millions of dollars to turn a very successful Fiat model (the Alfa Romeo Giulietta) into a Dodge Dart.
“Of all the cars I can get wrong,” Marchionne said, “it ain't this one.”
Both cars were equally critical to their companies' futures. However, Fiat Chrysler's approach to developing the Dart was radically different from Porsche's Cayenne. Rather than starting with a hard look at the customer, Fiat Chrysler took a hard look at the product.
As it documented in a 90-second TV commercial to market the car,4 Fiat Chrysler's product development process was to design it, build it, rethink it, design it, build it, rethink it—until the engineering team, in its exclusive opinion, felt the car was ready to go. In fact, the advertisement announced proudly that the company was “kicking the finance guys” out of the development process. Money was not going to be an issue. The company would build prototype after prototype to get it right. The executive team “suits” would only interfere with designing the Dart. This car would be built to perfection, the commercial suggested.
“Perfection” as defined by Fiat Chrysler, not the customer.
Then a price was slapped on, and Dodge took it to customers to try to sell it.
Market performance was a disaster. In 2012, the year it launched, the Dart sold about 25,000 units5—a quarter of the total predicted by market analysts and a number that caused Dow Jones's MarketWatch to call the Dart the year's second biggest new product flop. The number one spot was given to Apple's buggy iPhone mapping software. That's right: The Dart was “Apple Maps bad.”
Since then, the Dart has failed to lure most compact car buyers away from the two segment leaders, Toyota's Corolla and Honda's Civic, or even from Chevrolet's Cruze and Ford's Focus. By the end of 2014, sales were so disappointing that the company had to issue temporary layoffs at its Belvidere plant. Ironically, these were the same workers who two years earlier had heard Marchionne say that Dart was the one car the company couldn't afford to get wrong. In the first nine months of 2015, Dart sales were only a seventh of the combined sales of the two compact segment leaders.6
Fiat Chrysler couldn't afford to get the Dart wrong, but it did.
The reason Porsche succeeded with the Cayenne and the reason Fiat Chrysler bombed with the Dart are the same reasons product innovations have succeeded or failed at so many companies in so many industries over the last 30 years: Porsche placed customer needs, value, willingness to pay, and pricing in the driver's seat when it developed the Cayenne; Fiat Chrysler stuffed them in the trunk.
This story is less about the cars than about the two different modes of thinking that went into launching them, and why one way produced a success that helped put its company on an accelerated growth path while the other produced a flop that led to layoffs.
Porsche designed its new car around the price—what the customer valued and wanted to buy; Fiat Chrysler did not.
This story illustrates the main theme of this book: How companies bringing something new into the world can leverage the science of monetizing innovation, increase the chances that their new offerings will succeed, and produce results that can be magical. The odds against successful innovation are always high. But, as you read, you'll learn how a focus on monetizing innovation can substantially increase your chances of financial success.
Unhappily, more new products in every industry go the way of the Dart, and far too few enjoy the success of the Cayenne. We see it all the time. But every company has a chance to create Cayennes and reduce the risk of Darts. The key is to rigorously determine the market for a new product long before the products are built, and making sure the market is willing to pay for that product before embarking on a long journey of productizing the innovation.
Why the Majority of New Products Fail
Each year, more and more of us find ourselves in Porsche's position. Success is defined by bringing new products to market, expanding our reach. The pace of change is accelerating worldwide. For many of us, innovation is no longer a question of prioritization or investment; it's a question of survival.
Yet the failure rate for innovation is shockingly high. Nearly three out of four new products or services miss their revenue and profit goals. Many of those crash and burn entirely, and some take their companies with them.
It doesn't have to be that way.
That's what this book is about. For 30 years, we have helped companies develop strategies for successful innovation—including the launch of the Porsche Cayenne that we described. During that time, we have uncovered the patterns of failure that doom so many innovations. More important, we have forged, and empirically validated, a framework that has helped innovative companies ranging from startups to global brands to meet or exceed their goals.
New products fail for many reasons. But the root of all innovation evil—what billionaire entrepreneur Elon Musk would call the set of “first principles”—is the failure to put the customer's willingness to pay for a new product at the very core of product design. Most companies postpone marketing and pricing decisions to the very end, when they've already developed their new products. They embark on the long and costly journey of product development hoping they'll make money on their innovations, but not at all knowing if they will.
Price is more than just a dollar figure; it is an indication of what the customer wants—and how much they want it. It is the single most critical factor in determining whether a product makes money, yet it is an afterthought, a last-minute consideration made after a product is developed. It is so much of an afterthought that companies frequently call us and say, “We built a product—oops, now we need your help in pricing it.”
To boil it down, these companies conduct product development this way: They design, then build, then market, then price. What we will teach you in this book is to flip that process on its head: Market and price, then design, then build. In other words, design the product around the price.
Think back to the last business case you or your colleagues were asked to write for a new product. How did you arrive at your prices? Did you compare your product to other products in the marketplace, or did you actually ask customers what they'd pay for it? Did you know in advance what would happen if you increased your price by, say, 20 percent—that is, how that would likely affect demand and thus volume?
If you are like thousands of companies that we've worked with over the years, you probably did not. Every one of them claims to have made an airtight business case to top management that vouches for their new product. But in only about 5 percent of those business cases can you find information on how much customers will pay for the product. This means their revenue estimates are, at best, a guess. When you think about it, that's stunning. The business case gives them a level of confidence they should not have. It leads them down the path to failure.
The most successful product innovators we know start by determining what the customer values and what they are willing to pay, and then they design the products around these inputs and have a clear monetization strategy that they follow through with. That's what LinkedIn did before it launched its Talent Solutions service for job recruiters, which now drives the lion's share of the social networking site's revenue and profits. That's what Porsche did with the Cayenne, and what Fiat Chrysler failed to do with the Dart. That's what a large, global pharmaceutical company has done with new products since the turn of the millennium, which has helped the company grow enormously over the last 20 years. That's what crystal maker Swarovski has done in developing new offerings for consumers, and for companies that embed its crystals in their products, to great financial success. That's what Dräger, a manufacturer of gas detection equipment, did in creating a hit new product that protects miners and other underground workers from gas leaks—a product whose sales were 250 percent higher than expected. That's what a six-year-old software-as-a-service firm called Optimizely did in creating a software to help companies improve their websites' abilities to sell their offerings, a software that has been used by thousands of customers. And that's what Uber has done in shaking up the world of public transportation, while watching its private valuation soar toward $60 billion at the end of 2015. We'll tell you much more about how LinkedIn, Porsche, Swarovski, Dräger, Optimizely, Uber, and an innovative pharma profited from designing and developing products around the price in Chapter 13.
This is the model that forward-looking, highly successful product innovators use—companies whose principles for monetizing innovations we will deconstruct in this book.
Successful Innovation Matters More Than Ever
Succeeding at product innovation is difficult, and it always has been. Every other year, Simon-Kucher & Partners conducts the world's largest survey on the state of pricing. Our 2014 report polled executives in 1,615 companies across the United States, Japan, Germany, and 37 other countries. The primary focus of the survey was to measure how well companies were monetizing their innovations across industries and geographies. The disappointing findings were reported in Harvard Business Review: 72 percent of new products introduced over the last five years failed—either to meet their revenue and profit goals, or failed entirely. These figures applied equally to startups and large businesses in every industry surveyed.7
Numerous other studies over the last decade have said your chances of developing a successful innovation are not even as good as winning a coin flip. For example:
65 percent of new products fail, according to the Product Development and Management Association. That rate of failure cost U.S. companies $260 billion in 2010, according to researchers at the University of Texas at Austin.
8
75 percent of venture capital–funded startups fail, according to a Harvard Business School study of 2,000 companies between 2004 and 2010.
9
These numbers show something is very wrong with the way companies bring new concepts to market. No one is immune. As painful as it is to consider, the odds are stacked against all of us.
Yet succeeding at innovating has never been more important than it is now. In the 2014 Simon-Kucher & Partners study, 83 percent of companies reported facing increasing downward pricing pressures. Most companies planned to innovate their way out of this dilemma: New products, new services, and new paths to growth. But innovators face an uphill climb for four primary reasons:
Traditional Research and Development (R&D) is becoming more expensive, not less. Costs are going up rapidly, without being offset by price increases.
Disruptive innovation now comes from smaller and smaller companies, with lighter and lighter capital requirements, meaning they can be nimbler than your firm and take bigger risks.
Product innovation is no longer the preserve of the Western world, as evidenced by the United States and Europe's declining shares of global R&D spending, and the growing share of China and other Asian countries. In fact, China is predicted to eclipse the United States in R&D spending by 2020.
10
The rate of innovation is accelerating. A key signpost: Annual global patent applications leaped 2.5 times from 1995 to 2013, and in 2014 set a record for the number of patents filed internationally.
11
Those statistics are harrowing. But with a 72 percent global new-product failure rate, you can take comfort knowing that if you are facing problems successfully launching innovations, you are not alone.
The Good News: Monetizing Innovation Failures Come in Only Four Varieties
This book is the product of the lessons that Simon-Kucher & Partners has learned over the last 30 years while becoming the world's largest pricing and monetization consulting firm, one with more than 900 employees in 32 offices around the world. Globally, we've conducted more than 10,000 projects for large multinationals, mid-size companies as well as start-ups across industries. We've seen what works and what doesn't, what succeeds and what fails in product innovation.
We've found recurring patterns in new product monetization failure. While you might think many types of flaws can cause products to flop in the marketplace, we actually have found that monetizing failures fall into only four categories:
Feature shock: cramming too many features into one product—sometimes even unwanted features—creates a product that does not fully resonate with customers and is often overpriced.
Minivation: an innovation that, despite being the right product for the right market, is priced too low to achieve its full revenue potential.
Hidden gem: a potential blockbuster product that is never properly brought to market, generally because it falls outside of the core business.
Undead: an innovation that customers don't want but has nevertheless been brought to market, either because it was the wrong answer to the right question, or an answer to a question no one was asking.
The fact that new product monetization failures come in only four varieties should give you comfort. Imagine having to do postmortems that could point to dozens or hundreds of factors!
You Can Avoid Failure—but Only If You Play by Different Rules
Our experience allowed us not only to diagnose these monetization failure modes but to cure them—or even better, avoid them altogether. In this book, we have boiled these secrets down into the following nine new rules for innovation success. The rules are contrary to what most executives have learned about product development:
Have the “willingness to pay” talk with customers early in the product development process. If you don't do it early, you won't be able to prioritize the product features you develop, and you won't know whether you're building something customers will pay for until it's in the marketplace.
Don't force a one-size-fits-all solution. Whether you like it or not, your customers are different, so customer segmentation is crucial. But segmentation based on demographics—the primary way companies group their customers—is misleading. You should build segments based on differences in your customers' willingness to pay for your new product.
Product configuration and bundling is more science than art. You need to build them carefully and match them with your most meaningful segments.
Choose the right pricing and revenue models, because
how
you charge is often more important than
how much
you charge.
Develop your pricing strategy. Create a plan that looks a few steps ahead, allowing you to maximize gains in the short and long term.
Draft your business case using customer willingness-to-pay data, and establish links between price, value, volume, and cost. Without this, your business case will tell you only what you want to hear, which may be far afield from market realities.
Communicate the value of your offering clearly and compellingly; otherwise you will not get customers to pay full measure.
