147. Monetization Strategy & Why Price Trumps Product (Madhavan Ramanujam)

Madhavan Ramanujam l Full Ratchet l Monetization Strategy & Why Price Trumps Product

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Madhavan Ramanujam of Simon-Kucher & Partners joins Nick to discuss Monetization Strategy & Why Price Trumps Product. In this episode, we cover:

  • What’s the backstory and how did you develope this monetization expertise?
  • What VC firms and/or investors have you worked with?
  • What’s the most common missteps that innovators make?
  • What are the 4 types of innovation fails?
  • I want to talk about your three key rules for monetizing new products: Having the WTP conversation early, Investigating how to charge not just what to charge and not settling for one-size fits all… Let’s start w/ the WTP conversation, walk us through this point and the three questions one should ask?
  • Essentially, are you suggesting that startups run a conjoint analysis to see what features customers want and how much they’ll pay or is it more than that?
  • How do the results inform the pricing strategy?
    Is this the Van Westendorp methodology, if not, how’s it different?
  • Talk more about the second rule… Investigating how to charge, not just what to charge.
  • The final rule is: Don’t settle for one-size-fits-all… walk us through your point here. form factor, application, segment
  • This is controversial in the venture space where many investors are looking for one business model across all customers… what’s your response to VCs here?
  • How do you apply your methodology in situations with a nascent market… where customers may not fully understand their needs, the problems they will experience or the solutions available?
  • Final thoughts and advice for startups that are creating a new product?
  • Any words of advice for investors that are assessing startups very early on?


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*Please excuse any errors in the below transcript
Nick: #Madhavan Ramanujam joins us today from San Fransisco. He’s a Board member and Partner at #Simon-Kucher and Partners, and is one of the world’s foremost pricing strategists. #Madhavan has managed over a 125 projects for companies ranging from unicorn 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, packaging and bundling and price implementation. #Madhavan, thanks so much for joining us!

Madhavan: Absolutely, a pleasure, #Nick.

Nick: Awesome! Yeah, I, I remember watching your, your first round summit and ever since that time I’ve just been super excited to get you on the show. And I’m, I’m glad we finally made it work.

Madhavan: Awesome.

Nick: Cool! Well, can we start off with the back story here and sort of what led you to developing your expertise?

Madhavan: So my journey with pricing and monetization actually started way back when I was in Stanford. And in classic fashion, you know, we had a team, like a 3 or 4 people team for a startup. We went and pitched an idea to a VC. And there was this one question that the VC asked me. And I was supposed to be in charge of like the marketing and I was like the CMO kind of person in the group. He looked at us and said how do you know you would monetize on your innovation? I pulled up a spreadsheet with all kinds of assumptions, showed it to him very quickly. He looked at them and he said you’ve labeled them right. Those are assumptions. How do you truly know? And that question really haunted me. I was obsessing over that and as luck would have it, and God bless that VC, within one week I got a call from the Managing Partner at #Simon-Kucher and he was like hey, we are looking for people from Stanford, and we are the world’s largest monetization strategy consulting firm. And I’m like who, Simon, yes? Okay, great. So I kind of joined #Simon-Kucher, to really focus on this specific topic, and really get to the bottom of how do companies truly know that they will monetize and not just hope that they would. Spent the last ten years at #Simon-Kucher.

Nick: Awesome! So what was the startup and how did that work out?

Madhavan: It didn’t work out.

Nick: As many don’t.

Madhavan: As many don’t. And we also benchmarked that about 72% of innovations actually fail. I think we were one of those, if we had done it. It didn’t go anywhere. It was a startup, you know, biotech and medtech space. Essentially a marketplace to put, you know, pharmaceutical companies in touch with some of the latest innovations happening, you know, small shops.

Nick: Got it. So I’ve heard from a number of sort of the top VCs around that you are the monetization guru in the space. Can you talk about some of those firms and investors that you’ve worked with?

Madhavan: Yeah, I mean, we’ve worked with pretty much a numerous, you know, VC firms and their portfolio companies. I think we have done a lot of work for, you know, portfolio companies of VC firms like #Sequoia, #Benchmark, #NEA, you know, #IVP, #Thrive, #Meditech, #Accel, the list goes on, #TCV, etc. So I think we have probably encountered many VCs in our work.

Nick: Great. So you’ve got a great article sort of that breaks down your philosophy and your approach to, you know, determining what’s really important to customers and framing sort of the value conversation around that. So let’s start out with missteps. So when you’re experiencing innovation and early stage technologies, what’s the most common misstep that you see innovators making?

Madhavan: Yeah, the most common misstep by far is postponing pricing decisions to the very end, to the point where it’s almost an after thought. So, I mean, there’s a lot of energy that is put into like, you know, building the right product, but too less thought on how to actually commercialize it. I think that is the biggest misstep that VC time and again. I mean, we even get a call sometimes saying, hey, oops we need a price, we are launching the product in the next week, anything. So I think that’s probably by far the biggest misstep.

Nick: So not thinking about price and not thinking about real value of the product early on prior to R&D?

Madhavan: Yeah, absolutely. Yeah. And just, you know, throwing a product against the wall and hoping that it sticks, and slapping on a pricing strategy and, you know,  hope that it will fly off the shelf. The best companies or the best innovators would have thought about this, you know, while they are developing the product so that they can design the product around what customers need, what they value, and ultimately what customers are willing to pay for, so they can maximize their chances of success.

Nick: Yeah it’s like fire, ready, aim. I’ve seen plenty of startups doing this, and I think we’ve all fallen into the trap. So some of the unintended consequences are these four types of major innovation fails that you’ve cited. Can you walk us through these four common types of innovation issues?

Madhavan: Yeah, absolutely. The first innovation failure type is what we call as feature shock. So these are products that are simply over-engineered. I mean, there’s a lot going on, too many features. I mean, if you hear things like let’s just throw this in because our customers don’t know what they want, you’re probably on to a feature shock, where you built a product that at the end of the day is just excess. And as a consequence, maybe even the price is high and it does not resonate with any particular customer and is just one size fits all. But often that’s actually a one size fits none.

Nick: Yep

Madhavan: That’s the first innovation failure category that we see. The second one is what we call as minivation. So these are products where they were the exact product market fit as in, you know, they were the right product for the right market, but the entrepreneur or the organization did not have the courage to charge the right price. So they basically undermonetized compared to the value that they are generating for their customers. That’s a minivation. We see that a whole lot in technology companies for instance.

Nick: Cost plus instead of pricing based on value?

Madhavan: Pretty much. I think that’s a good summary. The third innovation failure type is what we call as a hidden gem. And these are innovations that you should launch but it kind of goes against the grain of your company or your dna and you don’t bring it to market and you don’t harness the power of a hidden gem. And it often happens when there’s an inflection point, you know, a hardware company trying to do software, software trying to do hardware, offline companies trying to go online, etc. That always happens. One of the, you know, hardware companies that we bumped into, talking about cost plus, they are like oh there’s no cost for our software, we should give it away for free, because they were totally in a cost plus mindset. But their customers really bought the product only because of the software. And they would be like we would buy these products as long as, I mean, just a no-brainer because of the value the software provides. But of course, a lot of monetization potential that’s just kind of left not he way side. The fourth way that we actually see monetizing innovation failures happen is what I call the undead, probably by far my favorite category. So these are products that in kind of classic science fiction fashion you should have never launched because they come back to haunt you. And the come in two varieties. Either they are the wrong answer to the right question or they are an answer to a question no one cares about.

Nick: Yup

Madhavan: Either way, producing them did not move the needle for anyone. And that was just a failure from the beginning.

Nick: Yep. I’ve seen plenty of startups doing this. And I’ve even done this myself, you know, where you, you think you have the answer for the mass market but you don’t test the assumptions correctly.

Madhavan: Yeah, absolutely. And that goes back to the first question you were asking me in terms of, you know, critical missteps. because if you keep building a product in isolation of the customer and just, you know, sort of, you know, a feeling or knowing or thinking that you know everything and then you sort of launch it in the market. You’re just simply hoping and praying for the best. You actually don’t know if your product is going to succeed. And time and again we actually see that as the fundamental reason why some of these innovations fail, because the entrepreneur or the innovator did not have a price and value check prior to releasing the product.

Nick: I love this. Love the methodology. You know, in a former life, 4 years plus ago, I launched my own product within an, a large organization. And I think we spent a full year on customer development before we, we started any R&D. And, you know, a lot of these concepts really resonate. So, I

Madhavan: Awesome

Nick: I wanted to dive in, I want to dive in to some of those. So, in order to avoid, you know, the undead and some of these other potential traps, you’ve talked about 3 rules for monetizing new products. And those 3 are having the willingness to pay conversation early, investigating how to charge and not just what to charge, and also not settling for a one size fits all. Can we start out with the willingness to pay conversation and can you walk us through this point and the key questions that innovators should be asking?

Madhavan: Yeah, absolutely. So I would boil this down to a very simple rule of thumb. We call it price before product. Most people think about product and then price. I mean, price comes before product in the English dictionary and it stops right there for most of us. Right? So price before product, what does that really mean? That is, you know, that really means that you’re having a conversation with customers on whether they need your product, whether they value your product and ultimately whether they are willing to pay for the product, you know, before you productize everything and throw it out in the market. That is the secret of building innovations that you know are going to insanely successful. And as an entrepreneur, as a company, actually you don’t have a choice whether you’ll have a pricing conversation with your customers. The only thing that is in your control is when you will have it. If you have it early while you are productizing, you can actually design the product around this information, and then sort of, you know, launch it with confidence. If you have it after the fact, you’re just hoping for the best. And when we talk about having this willingness to pay conversation, it’s really doing a reality check on the innovation to see if there is, you know, market potential or commercialization. I mean, think of this as like having a sales conversation with your customers or a marketing conversation with your customers, you know, six months or a year before you actually launched your product. And fascinatingly enough, your customers are not even in a negotiation mindset. Those, so they tend to actually give you a lot of objective information. So you’re kind of testing and learning to see if people really value what you’re building. And if someone says they are not actually going to pay for your innovation, the obvious question to ask is why? And often you would hear so much important, you know, details that you can actually design your products or pivot according to some of the feedback that you’re actually hearing in the market. And this will save like, you know, building an undead or just under-monetizing your own products like in innovation etc. So having this conversation early is at the crux of monetizing innovation.

Nick: I’m with you completely. I’ve, I’ve been part of groups before where you sit in a room and everyone’s sitting around and you’re brainstorming new product ideas and putting post it notes up on a wall. And I’ve also been part of organizations where the mantra was problem before product. And it was all about what are the, the main, or sorry, pain before product.

Madhavan: Yep

Nick: So what are the main pain points that customers are feeling and which ones are they willing to put money against to, to solve, and then let’s design the product around that.

Madhavan: Yep. Absolutely.

Nick: Cool. So is this essentially, I mean, at it’s core, is this just a conjoint analysis to see what features customers want and how much they’ll pay for those features? Or is it more than that?

Madhavan: I think it’s actually much more than that. And here’s how I would probably categorize it. I think the biggest and the most important thing to do is to have the conversation. Regardless of, you know, which methodologies are sort of used. In the very early stages of an innovation, even asking the basic questions of, you know, pitching your product and then asking people okay so what would you pay for it, is actually a reasonable question to ask because you’re trying to understand if someone will even pay something for your product, and what would that actually be, and why is the most important question to ask there. Like why did you say what you just said? And I think it’s, you’ll learn a lot of information. So just from a basic conversation to all the way to like something like a conjoint that are multiple, you know, methods that you can actually use. When we do work for companies, we typically triangulate based on multiple methodologies. Which kind of also factor in the customer psychology and not just a quantitative analysis to actually truly come up with, you know, what is the right pricing strategy. So like, for instance, while a conjoint analysis could probably tell you, you know, what the trade-offs are between features and price, you probably would not understand, you know, what is the psychological threshold in the market? Is there, for instance, you know, a $29 kind of threshold that if you cross it, no matter what math you actually do, people would actually think that it’s expensive? How do you actually bring all of that together? And we write about this in the book, Monetizing Innovation, in chapter 4. Essentially there are 4 or 5 different methods, conjoint being one of them.

Nick: Got it. And you’re asking questions, once you have a concept, you have a product concept, you’re presenting that to customers and then you’re asking questions about sort of the, you know, at what price is this, is this product inexpensive, reasonable, expensive, prohibitively. Can you, can you talk about what those questions are and how that helps you kind of find the best opportunity and the best areas with which to, to price the product?

Madhavan: Absolutely. So think of the situation where, you know, you’ve kind of built a prototype or you have a wireframe or you have a product concept, and you really want to validate, you know, whether there is a market potential for this product. Having those conversations with the expensive, prohibitively expensive kind of questions, is a simple and easy way to find out whether at least there is a market potential for what you’re really building. And the way this happens is you would pitch your product, talk a lot about the value, you know, what pains are you actually solving, what gains do the customer do actually get. And then follow that whole conversation with okay so what do you think is an acceptable price for this product or an innovation? Clock that answer and then follow that with, you know, what’s an expensive price. And then follow that with what is a prohibitively expensive price. Of course, I mean, asking someone tell me what the price should me for my product is like a garbage question and there’s garbage in and garbage out. But asked this way, what really happens behind the scenes is, you know, people love to negotiate with themselves, they love to low boil an answer. So they would probably say something for an acceptable price that is, you know, where, where they just not only love your product but they also love your pricing.

Nick: Yep

Madhavan: That’s kind of what we’ve seen. And expensive price tends to be around the price that they would actually pay. They’re not really happy nor are they pissed off, but it’s the price that they would pay for the value that your products might actually bring to the table. And then prohibitively expensive tends to be around the price that people would laugh you out of the room, no matter what you do. But having asked this question, at least you get some broad breast strokes or ranges of like pricing that is probably relevant. And then you can actually productize with the price rather than just price the product. And I think that is where also some of the magic really happens for like successful products.

Nick: Got it. This, this field is reminiscent of the Van Westerndorp methodology. Is, is there similarities between this approach and, and that one?

Madhavan: Yeah. I think there is similarities for sure. I think the Van Westerndorp methodology goes through like 4 of these questions.

Nick: Yep

Madhavan: And I think in practice, we actually just ask for acceptable and expensive often, just to at least get a quick range. Because asking that question multiple times, you tend to get like some noise that is picked up. 

Nick: Got it. And then, I want, I want to jump into the second rule here. This is probably the most interesting for me. So this is investigating how to charge and not just what to charge. You know, in the, in the tech world, we see a variety of models. We’re seeing SaaS models, we’re

Madhavan: Yep

Nick: seeing, you know, fee for a amount of data. We’re seeing companies like #Slack that get above a certain threshold and then they’re charging the enterprise for various security and other features. Can you talk about this point about sort of this investigation of how to apply a monetization model and not, not just a fixed price?

Madhavan: Yeah, absolutely. So this is probably the, one of the most important rules, how you charge often trumps how much you charge. And what we mean by that is if you take like for instance, SaaS or tech companies, I think the default temptation is to think about pricing per seat or per user or like some kind of, you know, seat based licenses. Those

Nick: Yeah

Madhavan: might work for a certain products or categories. But you should ask yourselves this question, is your pricing model truly aligned with the value that you bring to the table? And if not, can you actually come up with a model that aligns with how customers perceive value from the product? And you can switch to more of a value based, you know, pricing metric. I’ll probably give you a non tech example and then a tech example to make the point.

Nick: Yeah,

Madhavan: Right?

Nick: That would help.

Madhavan: Just a easy example to relate to, like #Michelin for instance, when they launched a, you know, super innovative tire. This was, you know, supposed to actually last 20% longer than like normal tires. And these were like tires that were made for truckers to move goods from point A to point B. I would say that tires are probably one of the most price sensitive markets because there are too many alternates and no one knows what is actually going on. Right? If they had gone and asked for a 20% premium on a per tire basis, there is absolutely no chance they would have actually that money.

Nick: Sure

Madhavan: What they actually did was fascinating. They changed the pricing and business model to actually charge based on the per mile that the tire was actually driven. This was a huge hit in the industry because, you know, the tires lasted 20% as they should. #Michelin got that money back because of the per mile or the per km. But fundamentally the truckers actually loved that model because it really aligned with, you know, what they were actually doing. Because now they could pay as they go, they didn’t need to like have investment to buy, you know, tires. But the more fundamental reason was they could actually put the tire cost even in an invoice and send it to their customers saying I got charged for 1200 miles job by #Michelin and here’s the charge. And they would actually even put it in the invoice  item. Fascinating,, right? I mean, they could

Nick: Wow

Madhavan: pass through the entire cost.

Nick: And they could track all of that.

Madhavan: Yeah they could track all of that. And something that was actually not even possible before this kind of pricing model was actually invented.

Nick: Sure

Madhavan: And the whole chain actually benefited from that in some ways. And there was this spreading of like, you know, willingness to pay. This worked great. So let’s take a tech example that probably is kind of similar. If you take a company like for instance, #Optimizely, right. I mean, it’s an A/B testing platform. Great product. And if you think about how they actually monetize, let’s say if they had monetized based on a per user basis, they would have probably left a lot of money on the table. In the sense that in an average company, there are probably 3 or 4 people or probably, you know, a small group of people, who are actually do A/B testing, who understand how their products and offerings can be, you know, better brought to the market. What they actually did was they actually charged based on the monthly visitors that actually come to your website. And the pricing is actually scaled and based on that. Which is actually quite kind of fascinating because the more visitors that you actually have on your site, you’re actually deriving more value from that kind of A/B test compared to someone else. So I think that scales more with value rather than just a seat based pricing. And I think those kind of, you know, pricing models are really important to consider. Another one which comes to mind, a company called #Segment. They had a dramatic increase in their, you know, top line after they changed their pricing model from like an API based pricing to more like a monthly track visitors, which was more aligned with the value that they were actually bringing to the table to their end customers. Right? And thinking about how to actually charge is at the crux of monetizing because then you can outline your products more closer to value.

Nick: So #Segment was charging based on API calls, and then they moved over to more of a volume based pricing model?

Madhavan: So they used to charge based on an API call and then they moved to a metric that they basically call like a monthly visitors that are tracked.

Nick: Got it.

Madhavan: That’s kind of what they did. And there was pretty dramatic impacts to their top line.

Nick: Got it. I’m going to geek out for a second, but I’d love your take on this. So,

Madhavan: Yep

Nick: The very first product development I ever worked on was a customer had come to our business who was an engineering company. And they needed a way to weigh the mass of mail when it was moving at extremely high speeds. So think of a letter, a snail mail letter that you get in your mailbox. They needed a way to determine the mass of the letter at very high speeds. They could determine postage. They had optic systems to figure out, you know, how many stamps you had on the postage. But they couldn’t figure out mass. And big mail sorting providers these things are millions and millions of items of mail moving through at incredibly high speeds. And so they came to us and we used, you know, basic physics. So f=ma, force=mass x acceleration. We had a pinch wheel with a motor that was able to fling the mail forward through the mail sorting system. And we could measure the velocity at two points in time to get our acceleration. So when we had the force from the pinch wheel, we had the acceleration, we could solve for mass. And we were able to get this highly, highly accurate. It was within .0001%  I think of the actual mass. But the biggest problem we had is the customer that came to us couldn’t pay for the machine, because it was over a 100,000 bucks of CapEx. So we were trying to get creative, and I suggested, you know, maybe we can structure a deal that we get to share in what they call revenue recovery. So

Madhavan: Yep

Nick: This customer had over a 100 million dollars of lost revenue per year in under postage, people that weren’t putting, you know, the correct postage on the mail items. And so instead we proposed to structure this deal where we would get a percentage of all the revenue that was recovered

Madhavan: Mmhmm

Nick: on this new technology. And that’s the only way that we actually got it deployed because they couldn’t handle the CapEx upfront.

Madhavan: That’s a great example. And I think that’s also what, those kind of percentage and revenue based models or even aligning on like the actual thing that the product is actually doing, is a sure recipe for success. I mean, a parallel example, one of, you know, the software companies that we work with which produces like, you know, lab reports, they used to actually price based on like, you know, blanket, you know, this the price that we would actually charge. We changed it simply to like pricing based on a per lab report basis.

Nick: Mmhmm

Madhavan: Very simple adjustment. And like you said, I mean, customers could now suddenly afford their product, but more importantly, when they actually started seeing the value and they were actually willing to pay for it, because, you know, that’s exactly why they bought the products. So that’s a bit of putting your money where your mouth is. So.

Nick: Yeah. I wish there was all this flexibility to price whichever way you want with big organizations. But sometimes there are limitations.

Madhavan: Absolutely.

Nick: So you’ve pointed out that there’s not one size fits all. Right? That’s kind of the final rule. Can you walk us through your point here and how you can build flexibility in, into monetization strategy?

Madhavan: Absolutely. The rule simply at the heart of it means that there is no market where there are homogenous preferences. And understanding this is critical because then you can build products to like different groups of customers who need things differently, who value things differently, and who are willing to pay for it differently. Right? I mean, even if you think about, you know, water that we actually drink, in a fountain it’s free, in a bottle it’s $2, if you put gas in it it’s $2.50 cents. Throw it in the minibar, it’s $5. This is the same water, right?

Nick: True

Madhavan: But it’s packaged, productized differently because different customers need value things differently. I mean, some people might want to carry around their water. Some people don’t want to go down from a hotel room, they would still take the minibar, right? Whatever, right? I mean, there are different needs. And, and there’s a simple example to keep in mind that a one size fits all is usually a one size fits none. When you think about it as a one size fits all, people build a product to “the average customer”, but such a customer perhaps, you know, never existed. 

Nick: Yep

Madhavan: Right? I mean, and building products to the right segments is actually fundamental. I mean, many technology companies would build products and then they would try to position that product to like multiple segments, but

Nick: Mmhmm

Madhavan: by then you’ve lost half the battle because you have the same product and you’re just relying on marketing to like spin it as if it were like, you know,

Nick: Yeah

Madhavan: different across different groups of customers. But had you realized the needs and wants earlier, then you would productize with that. That’s really what we mean by a one size fits none kind of rule. And even if you take a product like for instance an iPhone, there’s an option starting from I think 399 all the way to like 999. There’s different products. I mean, the iPhone 8 and iPhone X, the feature differences are perhaps minimal, but they are productized at different price points for a reason, because they are tapping in to different people’s willingness to actually pay for a phone. And I think it’s a classic case of segmentation.

Nick: Interesting. So it sounds like you can adapt price based on product form factor, application, the segment that you’re serving, a variety of factors.

Madhavan: Yeah absolutely.

Nick: So, I mean, this is a bit of a controversial topic in the venture space, where, you know, many investors are looking for one business model across all customers, you know. What’s your response to VCs on this point?

Madhavan: I think having one business model in the early stage is just fine. But that does not mean that you probably just build a one size fits all. I think those are a bit different, right? I mean, you could still have a few versions of your products with the same kind of business or pricing model and keep things simple. Because when you’re starting, you probably want to keep a reasonable amount of price transparency and you want to focus more on like growth. But at some point it might make sense to actually investigate, you know, different pricing models or different business models for your customers. For instance, what works for an enterprise customer, for a technology company or a software company, might not actually work for, you know, the mid market or the smb’s. And can you actually come up with a different pricing model and business model, you know, for those segments and then can you productize towards that would be a natural question to ask. But it doesn’t have to be focused from day one. But at some point it’s going to become really relevant.

Nick: Got it. So is it, is it a series of testing then based on all these different factors? Do you create concepts and then test them against your target market for each?

Madhavan: Yes, that’s exactly how we would go about it.

Nick: So, how do you apply your methodology in situations with nascent market where customers may not fully understand their needs, the problems, or the solutions available?

Madhavan: I think, funny enough, the principles are quite similar in the sense that you are still having that conversation of trying to see if people will use your products, do they need it, do they value it, and would they even pay for it. I mean, we worked recently with a number of companies that actually are bringing, you know, virtual reality and augmented reality products to the market. I mean, there’s not necessarily a mainstream case right now. But at least there’s some level of awareness. I would say it’s a nascent market. But the way we kind of went about it was, you know, having that early willingness to pay conversation, were people excited about the product, would they pay for it, you know, what would they pay for it. And, you know, kind of putting them through different situations and trying to see if the product was actually available today, how would they make their choice. And then really tapping into the mental models and rules on how they are making a decision. I mean, it’s some simple tests for instance, if you are bringing a product really early in the nascent market and you’re having a conversation with customers, and in a survey or in a discussion or even in any kind of setting they might tell you yeah I like this product, I would buy it. Ask them if they would actually put down a credit card to pre-order some of this stuff, or like would they pre-commit to some of these kind of products. And you’ll actually truly start hearing some, you know, relevant information, specially in nascent markets to see if people are ready or they just simply saying that they would actually buy a product. And those kind of simple checks could be really useful.

Nick: Yeah, I’m with you on that. I, I always felt like it was my responsibility when I was developing products to come up with a solution. It was on me to, to extract the key problems and the key pain points from customers. I’d be curious where you stand on this because I’ve interacted with a bunch of entrepreneurs that sort of asked their customer base, you know, what solution would you like. And I’m very much against that. I’m much more sort of in the camp where the innovator comes up with the right solution to sort of the customer’s problems.

Madhavan: Yeah. I think that I have a very clear stance on this. I think the innovator comes up with a product, to your point. But I think where I probably differ a bit is once you have an idea or you are coming up with something, start testing the market viability much before you actually launch the product, and have that conversation on, you know, would people need value or would they pay for your product much earlier.

Nick: Yep

Madhavan: I think that’s the

Nick: Yep

Madhavan: only difference. I mean, it’s not like going and asking the market, hey what should I build tomorrow. That’s your job in some ways. Right? I mean, as an innovator, I mean, you are building a product but having that conversation. I think where this sometimes becomes tricky is if you are in the mindset that your customers don’t know what they want and it’s your job to actually make products, at the extreme, what that really translates to is keep building a product, keep building a product to redesign it, build it to perfection, slap on a price, throw it in the market and hope that you will actually succeed.

Nick: Yeah

Madhavan: Right? I mean, and it’s terrible. And then the majority of people who tried that have a really bad outcome. I mean, of course we love to talk about exceptions. We would say but #Steve Jobs didn’t do this. We don’t talk about the 98% of people who are exactly the opposite outcome.

Nick: Oh yeah

Madhavan: Right?

Nick: The feature shocks and the undeads and, and all the rest

Madhavan: Yeah, yeah exactly. And in the book, in chapter 2, I think we wanted to name it, you know, you are not #Steve Jobs, but the editor thought it was too provocative so we kept it to Why good people get it wrong.

Nick: I don’t know, provocative sells.

Madhavan: Yeah, I know. Yeah. Maybe for next edition.

Nick: There you go, there you go. So what other key points of advice or insight do you have for startup founders that are creating new products?

Madhavan: Yeah. I think test, test and learn, and test early. And I think go beyond just a product market fit, and try to achieve, you know, a product market pricing fit. I think that’s where the magic happens. I mean, if you go and ask someone do you need this product, they might still say, you know, they need it. Do you need it at $200, the whole conversation is different. So if you didn’t put pricing as part of your product market fit, you’re probably often hearing what you want to hear. So I think having that product market fit pricing or product market pricing fit kind of validation early and kind of keep doing it and iterate the product around this kind of information to maximize chances of success. I think that would be I think what I would probably tell entrepreneurs.

Nick: Yeah. I just had a founder, I talked to him yesterday, that did a, a really nice robust study on if people were interested, and, and would purchase this product. But he didn’t give them a price. And I was, I was kicking myself on the phone. I’m like I wish I would have told him to do that or I wish he would have, he would have

Madhavan: Yeah

Nick: known. But he didn’t attach a price to, to the, the purchase intent question, right. Like,

Madhavan: Yeah

Nick: how, how likely you would it be that you buy, and likely to buy, or definitely would buy.

Madhavan: Yeah

Nick: And there was no price attached. So it’s, it’s kind of an empty analysis.

Madhavan: Absolutely. And this is actually possible even if you are, you know, kind of working even in a big company. I mean, we write about, for instance, #LinkedIn, where they actually sell beta versions, as in the sales person needs to go and sell beta versions to customers as pilot customers. And if people are not willing to put money then they don’t have skin in the game. And that also gives them a clue on whether there’s a traction for the product or not before they fully productize something.

Nick: Interesting. What about any words of advice or thoughts for people on the investment side that are assessing startups very early on while they’re in sort of the product development process?

Madhavan: Yeah. A piece of advice would be to really gauge whether there is a monetization and profit potential for startups. I think there’s probably an over emphasis sometimes on growth. And then, you know, the money would come later. 90% of companies that are landing and expanding are landing not really expanding. And they’re struggling with monetization and profitability. So I think keeping an eye on that, and really asking those questions to startups to see if they have done some kind of price validation around the products that they are actually developing, I think would be fundamental. Some of the ones that, you know, we work with, have put a lot of focus around this particular aspect. And even when they are making an investment would truly try to understand what is the pricing power for a startup before, you know, making an investment decision. And I think that’s an important part, sometimes overlooked, but I think needs to be done systematically.

Nick: Yeah. #Tom Tunguz was on the program, and

Madhavan: Yeah

Nick: his comments were very similar. He said, you know, if you’re really building something of value, why can’t you charge for it from day one?

Madhavan: Yeah, yeah.

Nick: #Madhavan, just to wrap up here, what topic and/or guest should we have here on the program, and what would you like to hear them cover?

Madhavan: Yeah I think it would, I think good to follow up with a story from an entrepreneur or a, you know, CEO of a startup who probably made some, you know, had the right focus on having conversations with their customers around willingness to pay and pricing earlier. And sort of how they built the product around that kind of information. I think that might be fascinating. Just kind of hearing the whole entrepreneurs side of the whole journey. I think that might be a good feature.

Nick: Great. And, #Madhavan, what is the best way for listeners to connect with you?

Madhavan: Yeah. I think the best way to connect with me is on #LinkedIn. If you can manage to spell my name, you should easily be able, you can easily find me if you google for words monetizing innovation or #Simon-Kucher, and then there’s a way to contact me through the #Simon-Kucher, you know, website. And you can also follow me on Twitter, madhavansf, that’s madhavansf for San Fransisco.

Nick: Awesome. Well, it’s been a big thrill getting a chance to connect with you and look forward to reading the book and connecting when I’m out in SF.

Madhavan: Thanks so much #Nick, it was a pleasure.