It’s Price Before Product. Period.

Pricing pro Madhavan Ramanujam uncovers a powerful idea: Determine price before you design your product. Here, he details the ways companies trip up when they try to monetize and explains how to do it right.

Why Pricing is Key From The Get-Go

Over the second half of the 1990s, Porsche hatched plans for a new car. Annual sales were a third of what they’d been the decade prior, so the company badly needed a turnaround. The car hit the market in 2003. A decade later, Porsche sold 100,000 of the model in one year — nearly five times as many as it did in its launch year — which accounted for half the company’s total profit. This enabled Porsche to eventually pay down its debt, increase its cash reserves and generate the highest profit per car in the automobile industry. What was this impactful, new product?

It wasn’t a sports car, for which Porsche is famed – not, for example, the sexy Porsche 911 that can effortlessly hit 200mph. Instead, it was the Cayenne: Porsche’s family-friendly SUV. How did the carmaker find this degree of impact with a vehicle so counterintuitive to its brand? In this case, it wasn’t Porsche’s engineering prowess or manufacturing efficiency, but how it designed the car around what customers needed, valued and were willing to pay for – in short, around its price.

Building around price is the best path forward according to Madhavan Ramanujam, a board member and partner at consultancy Simon-Kucher & Partners. When it comes to this pricing expert, investor Bill Gurley may capture it best: Madhavan Ramanujam is to monetization strategy what Bob Marley is to reggae music. He’s managed over 125 projects for companies ranging from hot startups to the Fortune 500, many of which he writes about in his recently published book Monetizing Innovation. He advises companies on several topics including new product monetization, acquisition and growth strategy, pricing strategy, packaging and bundling strategies, and price implementation. He’s essentially the price whisperer.

Drawing from his talk at First Round’s CEO Summit, Madhavan Ramanujam explains why pricing is so paramount from the get-go and the four ways companies often trip up when trying to monetize. He also shares the three guidelines that startups should follow in order to properly design and price their products. Let’s get started.

Why Monetization Often Fails

New products fail for many reasons. “But the root of all innovation evil is the failure to put the customer’s willingness to pay [WTP] for a new product at the very core of product design. Most companies postpone pricing decisions until after the product is developed. They embark on a long, costly journey of hoping they’ll make money rather than knowing they will,” Ramanujam says. “You can ensure your product not only stays alive, but thrives, by talking with customers early in the product development process. If you don’t, you won’t be able to prioritize the product features you develop, or know whether you’re building something customers will pay for until it’s in the marketplace.”

Missteps with monetization frequently occur when companies try to sell a product that they haven’t price-tested thoroughly in advance. Take the Keurig Kold, a $370 home soda machine, or the “personal transporter” Segway. Mess-ups on monetization usually boil down to misjudgments on price point, features and market. According to Ramanujam, here’s the four ways companies get tripped up, and how to avoid them:

Feature Shock. These happen when a product has been packed with far too many features. “Products fail when they have way too much going on. They’re over-engineered, hard to explain, nothing stands out, and the company puts a price on it and hopes for the best. It’s usually borne of a sincere effort to be ‘all things to all people,’ resulting in a product that pleases few. Due to its multitude of features – none of them a standout – these products are costly to make, over-engineered and usually overpriced,” Ramanujam says.

Take Amazon’s Fire Phone. The company, already the successful maker of gadgets like the Kindle, decided to launch a feature-packed phone that had four cameras, facial recognition technology and 3D effects, as well as Firefly, a shopping feature that let you buy a product by pointing the camera at it. Reviewers panned the phone and sales struggled, leading to a $170 million write-down largely attributed to the unsold inventory.

How to combat feature shock: Beware when your R&D team wants to add a feature but can’t articulate its value to a customer. Instead of cramming tons of features into one product, practice restraint. Separate your customers into buckets depending on their needs, values and WTP. Then tailor your products differently to each segment. Essentially, you want to sort features into different groups and create packages or bundles that appeal to each.

Minivations. Sometimes, companies will create the right product for the right market. The only catch: The company or entrepreneur didn’t have the courage to charge the right price, and as a result, the product is under-monetized. If you evaluate the product’s sales versus its potential, and it gets a C+, that’s a minivation.

Hidden Gem. Hidden gems are products that a company should have developed, but didn’t because it goes against the grain of what it normally offers. Take Kodak as an example. “The company in 1974 had digital photography technology, but didn’t release it because they were concerned about cannibalizing their existing business. Kodak didn’t introduce its first digital camera until 1995, 21 years after the fact. They declared bankruptcy in 2012,” says Ramanujam. “None of this had to happen. Kodak’s team became complacent about their firm’s successful, pre-existing business model, and the company stagnated.”

Undead. This type of product should never be released, as it comes back to haunt you, akin to a ghost or zombie. They arise as either the wrong answer to the right question or an answer to a question no one cares about.

Three Key Rules For Monetizing New Products

Have the Willingness-to-Pay talk early.
Talk about price early in the product development process. About 80% of companies don’t do this — and instead wait until the last minute.
“Ask at the onset whether or not people would pay for the product you intend to develop. This is the Willingness-to-Pay talk,” Ramanujam argues.
Investigate How You Charge As Much as What You Charge
Ramanujam stresses the importance of charging in a way that makes sense and is appealing to the customer — it’s not just about the price point.
Don’t settle for a one-size-fits-all solution.
Your customers are not homogenous, so your product shouldn’t be, either. Instead, create different versions of your product to match your major customer segments.

A Final Word on Pricing

At the end of the day, designing around price will get you the furthest of any strategy. That’s because it forces you to think early and often about what your customers value, and what features — or tiers of features — will maximize your success. Without a price, you don’t have a product. Be careful not to overload your products with features customers don’t want, or build services people don’t actually care about.

“Slapping on a price just before going to market is a recipe for failure. But many commit this crime.”