So, hi, Madeline. Great to have you on the, NFS podcasts today. Thanks, Pete. Pleasure. Well, Madovan, it's a real pleasure. You know, you're, like, the Jedi master of pricing for startups. And a number of years ago, you've wrote a wonderful book that I recommend to all my, startups here is called Mondaytizing Innovation, and you're a partner and board member at Simon Currier, which has worked with dozens dozens of unicorns like Hooper, Asana, Eventbrite, and Segment, and many others.
And so it's a real pleasure. And, of course, Trulia, we Pete together a number of years ago on a project, truly. Yeah. That's right. I think it brings back good memories. I think I need to also make a note to myself to update my LinkedIn title, Jedi Master. I never had that one far? We at NFX love Star Wars analogies. So maybe just sort of casting back to when we work together, truly, if I recall correctly, the business was scaling incredibly quickly.
We were doubling revenue year over year, you know, going public. And I think we had, in retrospect, an incredibly unsophisticated view about price We launched a product. We were making money. Things were going great. And I think we were at a juncture of kind of really thinking about kind of product evolution. You know, the time that we spent together kind of really in enabled me to kind of unlock the idea that pricing is incredible and underestimated and almost magical Beller.
And so hopefully today we'll have on the Facebookcast, a real sort of founders master class on your pricing philosophy and practices and also some practical tips for the founders and executives out there. Absolutely. Look forward to it. That sounds good. Let's dive in. We speak to a lot of incredibly talented founders and executives and startup advisors, and we hear all this advice around coding and design and piring and fundraising and branding and culture.
And that she has very little on the thing that many of them think most about, which is making money, growing revenue, and being profitable. And that's really where you spend your career in terms of pricing strategy. Philosophy. And so so maybe just from a high level, why do you think that startups have this blind spot with regard to pricing and monetization? So I think that's really well said.
You know, the last 2 decades have been spending time on this particular topic and I witnessed how Silicon Valley, especially has assessed with creating amazing new innovations, but hardly put any attention to monetize them successfully. I mean, we used to get a call even saying, hey. I'll build a product We've been working on this for the last 2 years, and, oops, we need a price. And by the way, we needed it last week. Right?
I mean, when you couple that with, you know, failure rate that we actually see in the valley, then you start seeing some patterns. When you take a step back, the classic phrase that comes to mind in these companies is you know, spraying and praying. You know, in other words, the fundamental issue for the high failure rate of innovation is that people build products without any clue as to whether someone will value the product or Morgan importantly, whether they would pay for it.
In other words, pricing or commercialization becomes an afterthought after building the product and that is the core reason why many of these innovations fail. But then if you ask, why is that the case? Like, why do people not pay attention to, you know, pricing? Let's from the very beginning stages of an innovation.
I think the root cause is pricing as a discipline probably is, you know, not that often talked to CEOs in any kind of setting, like, for instance, in a business school, you might learn quite a bit of, like, finance, operations, marketing, etcetera. But pricing is course probably doesn't necessarily exist in many business calls. I mean, pricing remains a bit of, like, a black box.
Most people think of this as a art, but they don't realize that there are, you know, tools and it's actually more of a science than an art. And that's also where we've been spending quite a bit of time, like, sort of educating and demystifying pricing and putting more of the signs and rigor into everyone's thinking. And I think when you think of it that way, it's then you can take a systematic view at monetization and have a short, long term commercialization strategy that goes along with it.
Mhmm. And then just you know, obviously, that sort of innovation and sort of software cycle has evolved substantially. You know, you wrote, think of the book, the root of all innovation, Evo, is the failure to put a customer's willingness to pay for a new product at the very core of product design. Hasn't kind of the startup ecosystem evolved to kind of match that?
So the start up ecosystem has evolved a bit to understand whether there is a product market fit, but I don't believe it is fully evolved to understand whether there's a product market pricing fit. And let me explain what I mean by that. With a lot of emphasis on things like, you know, lean starter, putting customers in the sort of center of innovation process.
I think there is realization that you need to test and learn in terms of, like, building your products, but often this test and learn measures don't involve any kind of pricing insights mean, to give you an example, like, for instance, the headset that I'm wearing right now, if someone asked me, do you like it? I would say, yeah. I like it. Do you like it at $400? The whole conversation is different.
If you don't put pricing as part of that product market fit validation, you're often hearing, you know, what you wanna hear. So it's really about achieving product market pricing. And as a company or an entrepreneur, I mean, if you think about it, you don't have a choice whether you'll have a pricing conversation you know, with your customers.
You can build your products and then slap on a price and have that conversation, AKS, pray, and pray, or you can actually have this pricing conversation much earlier in the innovation process, test, and learn, and then truly try to understand whether people, you know, value the product, and are they willing to pay for it? And if not, as the most important question, why?
And often you hear so much insights in, you know, how you can design your products in such a way that you'll actually max optimize your chance of, you know, commercial success. So I think while the ecosystem is evolved quite a bit in terms of test and learn capabilities, I do still think that there is a lot room to grow in terms of testing and learning, pricing, and willingness to Pete. Maybe let's go there.
So let's think of, like, so NFX, we found primarily companies at the product market fit stage. So what are, like, some practical tips advice for founders at this sort of seed stage? You're like, how can I identify the willingness to pay for these actual settlements? What are some things I can do today?
Yep. So in chapter 4 of the book, monetizing innovation, we actually write quite a bit about this, but in a nutshell, I would urge founders, you know, to start with ideas, you know, wireframes, blueprints, whatever it is, and start having the conversation with customers first of all, to see if the ice light up. Right? I mean, pitch the value to your customers and, you know, have that conversation where you're truly educating them about the value. Have that first and then ask a simple question.
Would you pay for it? You know, if someone says no, ask them the most important question, which is why, like, we just discussed and you hear information to really design your products in such a way that they will actually pay. I mean, if you think of this, you're kinda having a marketing and sales conversation with your customers much before you bring the product market.
And if they don't Pete, chances are they won't bite after product is built either because you're gonna have the same marketing and sales conversation. So counterintuitively, in fact, your customers are not even in a negotiation mindset, and hence, they tend to give you more objective information. So there's various ways that you can go about sort of asking the willingness to pay questions. Right?
I mean and I can probably, for your listeners, give a few examples or techniques just as a flavor, stuff they can try Monday morning when they're back in some ways. Right? Please. Just give us some frameworks. Perfect. So at the very simplest way after you've had the sales and marketing conversation, you know, put a to it and say, would you pay for this at this price?
And if someone says yes, in your future test, keep doubling it till you reach a point where, you know, people start reacting violently. You know, there's a really simple way to, like, really find out where are you crossing some psychological thresholds. Right? I mean, let's put a price as part of the conversation. I to take the headset example if I was testing and learning this, I would pitch the value and say, you know, 50 100, 200, 400, and at some point, it's gonna break. Right?
I mean, just understand where is Another way to test this is to anchor people and test in a relative way. I mean, I cannot tongue in cheek say that people are, absolutely meaningless, but relatively smart. What I mean by that is if you're gonna ask someone, hey. How much should I charge for this product? You'd get some garbage back because, I mean, people don't understand magnitudes. They're not supposed to even tell you that stuff because that's your job.
But relatively speaking, people are a lot more comfortable in actually making judgments. So Morgan instance, let's assume you're a SAS startup, you know, pitch this value, have the sales and marketing conversation, and then switch gears saying know, things like, for instance, ask them, do you use Salesforce? If they say yes, ask them if Salesforce was, let's say, indexed at 100 in value, it brings to the table, where do you think we would stand?
This trade off most people can actually make because you're actually asking relative to something they already know. Right? So if they say 80, that means they're know, your relative value is 20 percent lesser than Salesforce and so on. And then ask them the question. Let's say if Salesforce is indexed at Hunter on price, where do you think we should be? And, again, this is something that people can actually, you know, make judgments for. So I think these are some, you know, simpler techniques.
Things can get a bit more interesting when you actually do this more systematically. I mean, one of the interesting ways that we've also recommended in the book is to ask what call the, you know, acceptable, expensive and prohibitively expensive questions. So these are ways to quickly identify, you know, psychological thresholds. After you pitch a product and have the sales and marketing in a conversation, talk about the value as someone.
Okay. What do you think is an acceptable price for this innovation? Of course, we know that people love to low Beller. They love to negotiate with themselves. They'll give you an answer, clock it. Then ask them, what do you think is an expensive, you know, price for this innovation? And then follow that with, what do you think is a prohibitively expensive price for this?
What we have seen over and over again from, you know, many thousands of projects that we've actually done acceptable price tends to be the price where people not only love your product, but they also love your price. And if you're in a growth stage, you need a low friction price know, maybe acceptable is okay because it becomes a really, really no brainer.
Expensive price tends to be the price that is more value priced as in you know, prices aligned with the value that you deliver, and people don't necessarily love you or hate you. They're kinda neutral, and that's that prohibitively expensive tends to be the price where people laugh you out of the room.
And, I mean, these kind of things, if you do that scale, like, even through a, you know, let's say, quantitative survey, you start plotting graphs like we've shown in the book, which actually show you cliffs in the demand curve where there are some psychological thresholds across the population and knowing these kind of things are important. I believe Rahul Wara from Superhuman talked about this in one of your podcasts.
This is the exact technique that he used after reading, monetizing innovation to really identify pricing in a superhuman. We also talk about more advanced, let's say, methods of having the willingness to pay conversation using know, trade off exercises and such, but I would leave that to, you know, people to read the chapter. And if there's one chapter you read in the book, read chapter 4, that title have the willingness to pay conversation on how to have it.
Yeah. And I remember vividly those charts, which was like eye opening. There's a sort of, you know, and sometimes your intuition is right, but more often than not that is wrong around these things because you're not as close in the psychology of the customer. And I think if there's other areas around segmentation and kinda how you charge customers as well thinking through those elements as well.
Exactly. And if I remember back the trulia days, it comes down to, like, having that conversation and just doing it in some way, shape, or form. Right? I mean, I remember when we Pete looking at the product, you came up with a new innovative, you know, idea around mobile leads. And I think that your intuition, right, so was that mobile leads would be perceived to have more value than, let's say, a desktop lead Morgan real estate agent.
And, hence, you know, they might actually be willing to pay more for it. And I remember some of the debates where people were like, oh, are we gonna double charge this for desktop versus mobile, etcetera? But when we went and validated this on your behalf, we clearly found the you know, willingness to pay, and we found these psychological thresholds that we talked about. And if you don't do it, you're never gonna find out, and you're just gonna guess is incredibly eye opening.
You know, let's just say you kind of build this framework and you understand that's willingness to pay. And then, you know, for so many startups, the last 12 months has been, like, a roller coaster ride, radical shifts in the market, radical shifts in consumer behavior. You know, I'm curious just maybe first at a high level, what have you seen a sort of pricing expert in Silicon Valley?
What have you seen happen to the way that startups have been, and larger companies have been thinking about price. And just what is some advice that you would give to sort of founders and executives? So we are seeing, I would say, at a high level, 2 types of patterns. Either your demand spike like crazy or demand was falling and often pretty fast. Nothing a bit in between.
If you look at companies benefiting from the crisis, those would be companies like instance, in the video conferencing space, delivery platforms, collaboration software, and so on. Right? I mean, stuff that was already digital, but you need more of it during a lockdown period. For these companies, you know, or companies where you're seeing a demand spike, it could be tempting to think about a price change in terms of a increased price because you're seeing, you know, more demand.
So, like, classic economics would actually tell you that, okay, let's increase our price because we also see, you know, increased demand. But the obvious backlash is that you could come across as goging your customers, and that is absolutely something you should not do. Right?
Instead, better strategy would be to focus on gaining as much market share as you can, but at the same time, creating more premium lines of services because if you're onboarding many more customers, chances are you can also sell more premium stuff to those existing customers. So, like, focusing on more of a land and expand strategy.
Like, for instance, if you are in a delivery platform, you know, creating a new line of service like rush delivery or, like, extra add ons that can be upsold to customers, those are the things that really wanna focus on if you're seeing a bit of demand spike to, like, differentiate your products in such a way that you're still landing and gaining market chair in a disproportionate way, but also preserve some expansion room using other products and
innovations that you might actually be able to sell But the far more dominant pattern, I would say, that we are seeing is, you know, companies losing some sort of demand anywhere 10 to 20% or even Morgan, hence, on average, being, you know, 10 to 20% or a bit more down on revenue. You know, for these companies, it could be super tempting to, like, lower the price. Right?
I mean, because we are seeing demand actually, you know, fall down and should they lower the price to actually gain back the demand, etcetera. Lowering the price would be absolutely the wrong thing to do in Morgan situations. You know, if you lower the price, it does not mean necessarily that you will get the demand in these kind of situations that we live in.
What you rather wanna do is think about probably options that you might have at your also that could probably achieve the same purpose, but without dropping your price. I mean, if you drop your price, you're necessarily going to be training your customers to expect your service for less when things pick up again, the one rule that I give startups is think of 3 non pricing concessions before thinking about dropping price. So, for example, Can you give more product and preserve the price?
So, like, if you had, let's say, a good, better, best product lineup and you're seeing drop in demand, can you actually give a better product or best product, preserve the price to your customers so that they won't actually leave. You know, can you be more flexible, let's say, with payment terms? Can you work on a risk or reward basis? You know, can you bundle products and create a white glove service?
You know, there are various things to actually do to actually see if you can, you know, achieve or perhaps even create a lower entry offering. Like, the feature the products and create a low entry offer that people can actually take during these times. So they still are in the system but at reduced value. Essentially, keep price and value alignment intact even during these kind of tough times. I mean, some examples of things that really worked well in the last recession, for instance.
I mean, you know, like, flexible payment terms, really Beller Hyundai in the last recession when they actually said something like return your car if you lose your job. You know, the market share increased by 5 x just based on some of those kind of know, adjusted payment terms, kind of, mechanisms. 1 of the startups that we actually recently worked with, we changed the entire licensing model to be more of a usage based rather than a fixed fee.
By this way, we did not lose a single customer because if you're not using the product, you're actually not paying for it. But if you're using the product, you will pay in alignment to the usage. You know, I mean, you can think of this software as a software that serves the leisure travel and tourism industry, which is you know, pretty much really impacted really bad. Right?
I mean, so, of course, I mean, switching to a usage model actually really helps because this is something that they actually wanted to do over the years, but this gave them a unique opportunity to actually do it.
And when things actually pick up again, the price is now going to be aligned with value, and it's not gonna be just a simple let's say, you know, per month Pete user kind of subscription, but more on a usage basis, they've not only kept their customers and reduced their churn risk, but they will recover when things actually become stronger.
So I think there's a lot of pricing lessons that, you know, startups can actually take from the last pandemic, but it's at the highest level testing and learning pricing during these times has become that much more important because all the stuff that knew about your elasticity has gone out of the window.
It's interesting how, you know, certain startups which have kind of meaningful scale while customers are kind of struggling, and there's definitely a willingness to add to give customers a break, then the switching costs are so high and the substitutes are so poor that some of these companies they come out of the recession environment incredibly dominant, you know, and it's through the test of time, whether in 2001 or 2008, these platforms come out of it in an incredibly strong position.
So that's super helpful. Absolutely. I think, like, the saying goes when there is a strong win, some people take Beller. The best ones build windmills are So you need pricing windmills. Right? I love it. So in your book, you mentioned 5 pricing models that and the test of time. Clearly, there's kind of not one size fits all. Maybe just touch a little bit on, like, the different pricing models that you found to be kind of most common and successful from your research.
Yeah. I think before we get into the 5 pricing models, I think one tip that I would definitely want to leave with your listeners, which we summarize quite succinctly in the title of that chapter is how you charge is often way more important than how much you charge. And this is an aspect that most, you know, people actually neglect because when they think about pricing, they're thinking about a dollar figure, which is, you know, just a price Flint.
How you charge is way more important because you can align price with how your customers perceive value. And if you do it in the right way, then you have a winning model. Choosing a price point becomes that much more easier. In a sense that even when, you know, there is a breakeven kind of situation, people have an inherent is for, you know, pricing models.
And we often do this interesting exercise with our clients' customers to, like, truly understand what model might actually make sense and this is something that your startup founders can do, let's say, Monday morning when they get back. I mean, the idea is to put people through breakeven situation So for instance, let's assume that I'm a, you know, ecommerce platform and I'm charging based on a commission structure. And let's say their customer is selling something at $10.
If you ask them, you know, which of these following fee structures is more appealing to you. And if you say, let's say, you know, 3% as a commission, you know, or you might say 30¢ or 1.5% commission and then 15¢ or you're in different in among these options. And if you're a economic rational human being, you would say you're indifferent because all of the math adds up to the James thing. Right?
But we've literally not found a single case where people would actually say this in a dominant fashion, which means that people have an inherent preference for what makes sense. What we have seen is, like, for instance, in these kind of examples, if people gravitate to, let's say, the, you know, 3% that actually intuitively makes more sense to them than a flat fee.
And if you tap into this and you identify pricing models that just make sense for your customers, then you're often unlocking a lot of magic because then you're aligning your pricing with perceived value automatically. I mean, there are companies like, for instance, AWS that, you know, pioneered some of this also. I mean, if there's on a usage basis or a metro mileage, you know, insurance on a per mile basis.
So don't just rush to, like, coming up with a price Flint, think about pricing models, and I think how you charge often way more important than how much. Super. Yeah. It seems a simple thing, but if you can unlock that, then absolutely breakthrough pricing innovation. So to go back to your original question of what are the know, 5 powerful monetization models that make sense. We wrote about subscription, which I think is pretty obvious for most people.
I mean, this is, you know, charging on a, you know, per month basis. If you're a software, it might be, you know, per user per month, etcetera. One caveat though I would mention is don't just rush to us subscription on a per user per month because that's the most, you know, familiar model for you. Really test and learn if that is the right model. And even if you're on a subscription basis, you know, what is the right metric to actually align your pricing is key for you to actually think about.
We also talk about dynamic pricing, which is becoming increasingly more important especially when the world is moving way more digital, you know, having the ability to actually flex your price based on supply and demand, thing is becoming a thing. And even in many consumer situations where it was thought not to be possible, it's actually becoming, you know, more and more possible because you can hyper personalize offer, you know, to a customer through a combination of pricing and promotions.
So dynamic pricing, I think, is really important. Market based pricing or auction based models are also equally getting back a bit more involved and trying to see if that's an option that actually works for you. The pay as you go metric or know, aligning more on a per usage kind of metric is probably now one of the artist trends in SAS companies where you know, people are thinking about, is there a usage based metric or a usage based model that I can come up with?
Because often when you just have a subscription price, you're capping out on your monetization potential. Of course, you're, you know, giving predictability to your customers, but truly your price is not necessarily aligned usage or value that people actually derive. So if you can unlock a pay as you go kind of model, like Snowflake, for instance, is something that we saw recently that could actually be really meaningful.
And the last one that we talk about in the book, we talk about it as more of as a pricing model, which is something that people, you know, really need to think about is a freemium pricing. To us, it's more of a model than a strategy because if you're really having a freemium pricing, the key is to have a proper expansion motion from the land of free to, like, expand to, like, paid offerings.
Many companies that actually put out premiums don't think about this very strategically and often have given the farm away. I Morgan, and there's no room to expand because, I mean, funny enough, what we find time in again I mean, Pareto's rule probably applies to, you know, a customer value and willingness to pay as well. 20% of what you build dictates 80% of the value.
All of the entrepreneurs and startups Beller this 20 percent of things pretty quickly, and they call it a MVP and throw it out in the market, but they've given away 80 percent of the value. And then they obsess over 80% trying to build stuff that's only worth 20% more, and they don't have any room for expansion. Right? So before rushing into freemium, think hard about it.
And if you do do it, do it in such a way that there's a proper land and expand motion or restrict a premium usage beyond a certain point so that, you know, there's a natural expansion that happens in your customers. But these are the 5, you know, sort of pricing models that we talk about, and someone needs to think about before rushing to pricing. That's super helpful. Yeah. I can see many examples come to mind when you say giving a freemium model giving away.
And like you say, think about price almost before product which defines the strategy. So we've talked a lot about, you know, successes and pricing. Let's talk about some of the challenges like how startups fail and, like, mistakes that teams make when they're thinking about pricing? We were able to run some of the, you know, world's largest studies on the pricing monetization, etcetera. And routinely, we try to understand, you know, what is the, you know, state of the union on pricing per se.
And the last time we ran this It was across, you know, 2000 plus companies, predominantly, you know, c level people taking some of our studies, and we plan to understand you know, what is the success or failure rate of innovation and why that is happening. And what we find is there's 72% monetizing innovation failures. Leave it at that. Right? In a sense, it's 72% of innovations. No. Don't Pete the light at the end of the tunnel. That's actually pretty high, and it's not just us saying it.
I mean, if you look at Howard Business Review, you would see 8 in 10 start fail. The cool thing that we were able to do is to, like, zoom back across the thousands of projects that we have done in pricing and then try to understand what are the failure types And when we look at it, it only comes down to, like, 4 monetizing innovation failure types. And when you recognize these 4, you can actually avoid these for and build the 5th category, which I call breakthrough success.
So in a nutshell, the 4 are as follows. The first one is what I call as a feature shock. So these are products where, you know, there's simply too much going on. It's over engineered often over featured, and because it's over featured, it's overpriced and it just does not sell. Right? I mean, it happens in the best of companies.
For instance, Amazon, one of the most successful companies of our times when they build a five phone, There's a plethora of features that people simply did not need that was well documented, I think, by MarketWatch. And one of them was even, you know, 4 cameras that could actually track your eyeball moment so that you didn't need geeky glasses to get 3 d perspective. Sounds cool, but would you pay for it? No. Right? I mean, the phone launched at $179 in, like, literally 6 months.
It was 99¢, and they rolled off the business another 3 months. It was an over engineered feature rich product that no one simply wanted. The way to avoid a feature shock is to build versions of the product so that you're not trying to build a what I call a one size fits none, but you're sort of rationing the product based on different, you know, types of customers you actually might have.
The second monetizing innovation failure that we often see, especially with the ones that actually have a product market fit is what we call as minivation. So this is a failure type where you probably have the exact right product market fit, a lightning in the bottle, but you just didn't have the Currier to charge the right price. And you undervalued your own innovation. Right? So you basically charge much lesser than what you could have charged.
Just to give you an example, for instance, you know, one of the semiconductor startups Pete in the area, you know, they came up with a groundbreaking, you know, chip that was supposed to revolutionize consumer electronics. And they were thinking about how to come up with a price. They said, okay. The last generation we priced at 6 cents. Okay. Maybe this is really groundbreaking, and we have to undo. And we can't be pricing it less than the previous generation. Let's do this as 85¢.
You know, I mean, this product of through off the Beller, but the sort of hidden secret in the room was everyone knew that they could have done better pricing, then they did a post modem for their own pricing. What they found out was these consumer electronics companies charge up to $50 premium from people like you and I because this part was actually inside those electronics. So if you look at the economic value of $50 generated 85¢, that's simply not fair.
And in fact, the companies that participated in the post modem we're joking that you could have charged up to $5 and we wouldn't have Flint the eyelid. Right? I mean, so if you didn't have the right Currier to charge the right price, you're under monetizing and producing and innovation. The 3rd type of monetizing innovation failure we see is what we call as hidden gems.
So these are products that simply go against your DNA your company, and you probably don't bring it out because you're worried about cannibalizing your existing business. And if you don't go looking for it, you're never gonna harness find the hidden gem.
I mean, classic example of a company that failed to do this was Kodak, which had, you know, the IP for digital photographs back in 1973, I believe, but never productized it because worried about cannibalizing the print business and the risks is a bit in history. They're living mostly on patents.
And, you know, our company that probably did this successfully someone like auto trader or cars.com, which actually got launched by the Atlanta or the Chicago daily newspapers when they realized that, you know, the age old Advertisements in newspapers was gonna go away because of the inflection of the internet, and they actually Beller 2 sided marketplaces, which are now multibillion dollar businesses in their own rights.
Hidden gyms often happen when there's an inflection Flint, and this is actually pretty crucial, especially given the last pandemic Pete. Right? I mean, when companies try to switch from offline to online or when you're having a software business, but you also wanna pivot to or the other way around. Whenever there's an infection point, often there's a hidden gem waiting to be uncovered.
And it's the start ups, which are the fastest moving, and they've got less than sort compensate baggage, which can take advantage of that. Absolutely. But if you don't go looking for it, you're never gonna find it. They remain hidden. So I think knowing when to pivot, what to do is that in hidden James, I think its startups definitely have a vantage or more established companies because there's a bit of, like, in their DNA.
The 4th monetizing innovation failure that I about probably my favorite is what I call as undead. These are, you know, products just like in classic science fiction movie fashion. You should have never launched it because they come back to haunt you. And they come in 2 flavors. Either they had the wrong answer to the right question or the answer to a question no one cares about.
Either way, you shouldn't have productized it, but you threw it in the market and know, hope for the best without understanding the product market pricing fit. A classic example of this was in a Google glass, which was know, thrown out of the market for $1500, probably lived with the Paparazzi for a few weeks before it was gone. And that just creates massive internal disruption and distraction and then obviously just brand damage as well.
Are there any frameworks to help founders think through how to avoid these failures? Any kind of quick sort of perspectives for founders to avoid these failures?
Yeah. So we actually write about a 9 step framework in monetizing innovation to avoid these kind of failures it starts with having that willingness to pay talk early without which you can't really prioritize what you're actually building and integrating pricing and willingness to pay into the product design process, and it ends with, you know, maintaining your pricing integrity and avoiding knee jerk reactions when it comes to pricing.
I think probably some of the key steps in the framework for startups that people have to probably internalize is I would say probably summarize it as having the early willingness to pay conversation is truly important. You know, don't default to a one size fits all solution. I often call it one size fits none. Like it or not, your customers are going to be different. So understanding segmentation and differentiation is at the heart of monetization.
That's an important lesson in the framework or step in the framework. We already talked about, you know, how you charge is way more important than how much you charge the pricing model is an important step in the framework and how to determine that. Having the right monetization strategy is important in the sense that skimming? Are you penetrating the Morgan, or are you sort of maximizing short term goals, trying to understand what the strategy is and how to pick one is important?
And I would probably say, last but not the least, If you don't speak value, no one will get it. And this is a mistake that I see startups do time and again as in they're so obsessed over building products and are probably more engineering focus that they talk about features and they don't talk about benefits. I mean, benefits is what people get. Features is what you build. You need to articulate benefits and speak value and not speak features.
And we've seen actually double digit improvements in revenue by just changing the, you know, articulation of value I think that's a really important step in the framework. Yeah. I've seen so many kind of radical improvements just in, I don't know, our time at Trulia, just working through some of the some of the imagery, some of the selection of products which can have this radical impact. So maybe just think about we talked a little bit about truly before.
It'd be great again to a couple of examples. We talked about truly how we worked on that kind of mobile product, and that was, you know, one of a couple of breakthrough projects we with. Maybe if you're willing to share a couple of examples, companies you work with and breakthrough kind of products, maybe we start with Etsy, you know, the last year we talked about earlier in the conversation around how the pandemic has kind of changed a company's trajectory.
And I think Etsy has just had a remarkable year. And maybe just show a little bit about, you know, how you think about Etsy and the kind of work you did with them, which I think started pre pandemic. Yes. Exactly. I mean, we worked with them in a 2018 time James, And what Etsy did was they actually changed their, you know, pricing model, and they also rolled out at that time new monthly, you know, seller subscription packages.
And that was know, based on work that we had done with Etsy, and I remember the Etsy stock price. There was something like a left for that Etsy stock price comes roaring back. That's literally what happened on the day the changes were actually announced. The stock price for Etsy increased by 40% and they never looked back in some way, shape, or form.
And Josh, the CEO actually announced that the most significant, you know, news of the second quarter at that time was the change in pricing and actually announced this and the street rewarded them. But more importantly, what they were able to do is to align that price with the value that they deliver and also create these sort of, you know, seller subscription packages that would right size customers to, like, the right product or the right value that they actually needed at the right price.
So rather than having, again, a sort of one size treatment across the board. So I think many of the lessons that we talk about in monetizing innovation actually applied in that particular case as well. I mean, it sounds like it's hard to understand the numbers, I think, in abstract, but just know, having worked with you, the projects here are kind of not like flipping a switch. There's kind of months, if not years of work, but, you know, one change delivers 40% stock price increase.
And it probably, you know, I don't know the exact numbers, but the revenue increase over time is certainly higher than that. So it's like the leverage at scale is just unbelievable. Absolutely. It's a gift that keeps giving, right, because it's not just that one time activity, but it's an annuity in some way, shape, or form. Right? And then some of the other companies, so perhaps Uber or Evernote, I know you've worked with them.
Yeah. For Uber, what we actually did with them, and I can discuss this because we had even a press release with Uber that we Beller them design the, you know, Uber rewards or loyalty program.
So if you actually open the Uber app, there's a systematic way to actually you know, sort of earn points based on your spend patterns and use those points to qualify for reward tiers and also redeem these points in a sort of reward store to actually gain, you know, rewards back for the points that you actually earn this entire loyalty program, you know, design we actually help them with and help them operationalize it.
This gave a proper mechanism for Uber to invest in their customers know, especially the ones that were, you know, providing value to Uber to, like, really invest back to actually earn their loyalty, so to speak. Right? I mean, the thing with pricing is monetization is a really broad topic. I mean, you really need to think about your customer lifetime value.
And when you think of it that way, loyalty programs are at the crux of, you know, your overall, you know, strategy, so to Pete, especially in many cases, a loyalty program when combined with other things can actually make a lot of sense. In many, let's say, marketplaces, there's a lot of emphasis to give promotions probably a, you know, disproportionate amount of promotions to gain, you know, kind of demand.
But promotions end up training customers only one way as in when promotions actually exist, people are in the boat. Loyalty programs are a bit more sort of you're giving something. You also get something back. And what you're getting back is people's loyalty. So focusing on customer loyalty is critical in many of these sort of marketplace companies, and that's what we actually help over with. Ewitt, just from a there's often sort of 2 schools of thought.
The best, you know, law it is driven by kind of product satisfaction and just, you know, perhaps Amazon is, like, is very much focused on that approach. And then in Uber, obviously, you know, chose the rewards. Like, in what environments, you know, whether that's a competitive set or kind of product set should people think about a rewards program?
I would argue Amazon is a rewards program, which is, of course, different than Ubers in the sense that it's a paid membership through the form of prime. Right? I mean and if you look at prime, the key proposition is that, you know, you eliminate all kinds of shipping costs. A membership program really works well when, you know, there is a single or probably a handful of pain points that everyone has. And if you pay for a membership, those pain points go away.
Like, difference of the shipping cost. I think in those kind of situations, a paid membership could actually make sense. For instance, even in, you know, companies like food delivery platforms, if you have a subscription that actually gets rid of all the delivery fees, that actually is usually a home run-in many kind of situations. Right? I mean, so I think those kind of things I would broadly classify as membership programs, not even just subscriptions.
In those situations, a membership or loyalty program makes sense. In other situations where, you know, let's say you're in a situation where it's highly competitive in some way, shape, or form, and you need mechanisms to, you know, keep your customers, keep them coming back.
Things like, you know, loyalty programs, with points and redemption structures makes a lot of sense because in a way, you know, endowment effect kicks in in the sense that if you actually give something to people, they value it way more. And if you points and other mechanisms, you know, people actually start expressing their interest and loyalty to a brand because they actually have some skin in the James, and they have some points, etcetera. We actually hold.
And we've seen over and over again that the, you know, you're creating an alternate currency, but the value of this currency increases a bit irrationally when have loyalty kind of constructs. So maybe, Madivan, just switching to Evinote. That's another company you work with, which, you know, I recall back a number of years ago was highly criticized in online media about the trajectory of the company. How did you work with that company and what was some of the lessons from that engagement.
Yeah. In fact, if I remember business insider called him the 1st dead UnicON in 2014, right, I mean, it was really tough times. We actually worked with, you know, Eleanor in 2016 and, you know, the core emphasis was trying to understand, you know, how can we accelerate more conversion from free to paid and what is the right packaging and pricing strategy?
We tested a bunch of things, you know, on behalf of Evinor on what is the right product Pete, what are the right features that go into products, what is the right monetization model, etcetera, etcetera. The key nugget came down to changing the monetization model. What I mean by that is, I mean, they used to charge based on a per user, you know, per month kind of model. What we actually changed this to was a per user, per device kind of model.
As in if you actually go and try to use Evernote today, if you use Evernote on 2 or less devices, then it is free. If you use Evernote on 3 or more devices, you need to pay for it. And this was a change in the monetization model, which, you know, greatly benefited them when we operationalized this 2016, and they in fact ended up almost doubling their conversion.
And in 3 months, switched from, you know, red to black, and we, coincidentally, also ended up writing a Harvard business case with them on how to turn the elephant and the evident monetization strategy. But at the heart of it, it totally made sense because it was also aligned with how people perceive value.
I mean, if you're using Evernote on 3 or more devices, it is more akin with know, getting all the benefits of a cloud based note taking kind of structure, you know, premium users with mid sense. And if you're not, then you don't pay for it. Right? I think that was a key example on how you charge is way more important than just how much. You're fascinating.
So maybe just to end with, like, let's take a step back and, you know, obviously, you've spent your career studying kind of pricing and monetization. Like, I'm curious, like, taking a step away from startups and technology. Any advice for the listeners out there that just like how can you apply some of these principles to lie? I mean, in some ways, we're all products. In some ways, we have just how we have bugs, but, you know, we're all products in some way.
And, like, how might, you know, like, engineers or professionals or teachers? Like, how should kind of people think of how do they kind of effectively, you know, create the value that they deserve in what they do? That's quite deep. I've never gotten that question for the let's talk about pricing philosophy.
I mean, if I have to abstract this at the highest level, at some point, people need to realize what value they bring to the table and what price or, let's say, rewards or compensation that they actually need to get in proportion to the value that they actually bring to the I think the lessons from price and value sort of equate even in our own lives to some extent. I mean, the Latin actually had only one word for price and value.
It was called premium think they figured out long back that value and price are the same reflections in some way, shape, or form. So Morgan instance, if you are, let's say, in a position to negotiate your compensation.
All of the methods that we talk about in terms of, let's say anchoring, tapering, and all of these kind of you know, techniques to, like, negotiate when you're in front of a salesperson probably also applies to you when you're negotiating about your own compensation packages in some way, shape, or form, right, or put another word, you know, putting yourself in a situation where you have stake in the outcomes, I think, becomes way more important
because then you're binding yourself to the value of what your entity actually provides. So, I mean, kind of partaking in the overall equity or value generation of your company actually becomes now that much more important. I think that's a bit of a life lesson some way, shape, or form. I mean, one of the main reasons that pushed me to even be a partner in my current firm, yeah, I mean, I think that those could be some interesting, you know, life learning.
And I would probably say the third one, if you're pricing your own you said, you know, all products, which is a really interesting take. I sounds a bit like science fiction movies, but let's go with that. If you're all products and you're pricing ourselves as in pricing our own services, let's say you're a contractor or consultant of what would come up, man. If you're pricing your own services, avoiding a cost plus mentality is critical. I mean, don't just say, okay.
It's a $100 per hour or something, and then just make sense because I mean, you wanna align your price with the value that you actually bring to the table rather than a dollar per hour kind of, default thing, which is easy to do, but off on the absolutely wrong thing to do and thinking about more value based pricing or pricing based on outcomes is also something that you wanna think about if you're pricing yourself or your services. It's fascinating.
Well, maybe with that, Madeline, this is just a fascinating conversation. Thank you so much for joining us today. And, again, monetize the innovation to Rick at Book, and thank you for your speakers and thoughts really appreciate it. Thanks, Pete, for the opportunity. Really loved it. Wonderful. You've been listening to the NFX podcast.
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