Unlike in the past, we are now able to identify the value received by using a product or service. What was earlier only a vague notion is now quantifiable and hence, there is a desire to pay only for the value that we get. This has brought tremendous innovation in pricing and also on our usage of these products/services.
No wonder we see a Spanish comedy-house charging pay-per-laugh, Rolls Royce charging per mile for airplane engines, and also well, pay-per-watch as we all know. Good pricing doesn’t let an innovation go to waste and if pricing is at the core of the product, it has a better chance of winning. Don’t believe me?
Let us look at an example to prove this.
A ‘perfect’ car and a car with a ‘perfect’ price
In the early 1990s, Porsche was struggling. Sales had plummeted and operations were inefficient. It needed a blockbuster car to pare its debt. And contrary to its positioning of sports cars in racing circuits, Porsche wanted to build a family car, an SUV, called Cayenne.
In the early 2000s, Fiat Chrysler was also missing a car in the compact car segment and considered the Dodge Dart can help beat the Civics, Cruze, and Focus of the world.
Porsche surveyed customers on the desired features of Cayenne and realized people are willing to pay more for an SUV with a sporty performance. Porsche started with first principles, added every feature based on the user’s willingness to pay for it and the demand at that price point. As a result, the famous 6-speed racing transmission links were out and cup-holders were in.
Chrysler on the other hand, proudly announced that the car is going to be a ‘perfect’ compact car. The product development process was designed, build, and rethink until the car was ready and they slapped a price on it. The ads announced that the product team has kicked the finance guys out of the entire process.
Flash forward, Cayenne’s sales were ~100,000 annually and it was responsible for half of the company’s profits in the early 2000s. Dodge Dart’s sales were just a quarter of the projections and it won the 2nd biggest product flop award by MarketWatch, second to Apple Maps. It laid off employees from the Dart manufacturing plant.
Porsche designed its new car around the price – what the customer valued and wanted to buy; Fiat Chrysler did not and paid for the same.
Moral of the story: Instead of going with design, build, market, and pricing, going with the market, pricing, design then build to improve our chances of success.