Value 101
For the past three weeks, I've been working on a pricing structure proposal. I nearly tore my hair (or whatever is left of it) out trying to understand the real value drivers and create a 12-month revenue projection. It's been particularly intense since this is my first time directly owning this area. I might just be a budding financial analyst at this point! Through my research, I've learned a lot about what value truly means and the key considerations for selling value to customers interested in your product.
Our core responsibility as product managers is to build products that the customers love and the business can be confidently define as useful. But "love" or “usefulness” is often tied to perceived value. Understanding and articulating the true economic value of our products is crucial for successful product development, pricing strategies, and ultimately, business growth.
What is Value, Really?
Value isn't just about features or functionalities. It's about the tangible benefits a product delivers to a customer, specifically the economic advantage they gain. This advantage can manifest in various ways, such as cost savings, increased revenue, improved efficiency, or risk reduction. It's crucial to shift the focus from what your product is to what it does for the customer and the resulting economic impact.
The Two Pillars of Value
Building a successful value proposition rests on two fundamental pillars:
Identifying Customer Value Drivers: This involves understanding the specific product or service characteristics that create value for customers and provide them with an economic advantage. Think of these drivers as the levers that pull the customer towards your product.
Designing the Offering Structure: Based on the identified value drivers, we design an offering structure – a bundle of products and services tailored to meet the specific needs of a target customer segment. This structure ensures that the right value is delivered to the right customer at the right price.
Step 1: Customer Value Drivers
Identifying customer value drivers requires a deep dive into four key areas:
Customer: Understanding your customer is paramount. Ask yourself:
Why do they choose our products?
What are their key segments?
What benefits does each segment seek?
What impact will our product have on their current revenue and cost structure?
Competitor: Analyzing your competition provides valuable insights. Ask:
Who are our key competitors?
What value do their products offer?
What are their competitive differentiators?
What are the value drivers of their products?
What are their price points?
Product: A thorough understanding of your own product is essential. Ask:
What are our key product features?
What is our product differentiation?
What is the current usage pattern?
What additional value-added services does our product provide?
What are our price points?
Organization: Your organization's strategy plays a crucial role. Ask:
What is our organization's strategy to compete in the market?
How has our company historically priced profitably in the market?
Key Questions to Help Define Value Drivers:
Understanding Our Customers: What problems do our customers need help with? What frustrates them? What do they want to achieve? How do they know if they're successful?
Looking at Competition: What other options do our customers have? What are our competitors good and bad at? How can we stand out from them?
Our Product's Strengths: What special things can our product do? How do these features help our customers? What are our product's limits?
Market Changes: What's happening in the market now? What new things do customers need? How is the market changing?
Inputs for Identifying Value Drivers:
Customer Interviews: Talking directly with customers to learn what they think. These conversations help us understand their needs, problems, and what they want from our product.
Surveys: Forms and questionnaires sent to many customers to collect their feedback. This helps us spot common patterns in what customers want.
Data Analysis: Using special tools to understand which product features matter most to customers and how they make choices.
Product Information: Detailed documents that explain what a product can and cannot do, including its features and limits.
Sales History: Looking at past sales to understand buying patterns. This helps us make better decisions about prices and who to sell to.
Product Requirement Documents: Guidelines that list what customers want and what the market needs. These help us build better products.
Market Research: Studies about our market and competitors. This helps us find new opportunities and stay competitive.
Company Goals: Making sure our product plans match what the company wants to achieve in the long run.
Team Targets: Specific goals we want to hit, like sales numbers or market share, which help us decide what features to build.
Step 2: Designing the Offering Structure
Once you've identified the key value drivers, the next step is to design an offering structure that effectively delivers that value to your target customer segments. This involves creating bundles of products and services that address specific customer needs and price points.
Key Considerations for Designing Offering Structure:
Segmentation: Divide your customer base into distinct segments based on their needs, preferences, and willingness to pay.
Value Packaging: Group products and services together to create compelling offerings that cater to the specific needs of each segment.
Pricing Strategy: Develop a pricing strategy that reflects the value delivered by each offering.
Communication: Clearly communicate the value proposition of each offering to the target segment.
Examples of Offering Structures:
Good-Better-Best: Offering different tiers of products or services with varying levels of features and pricing. A good example is Samsung that offers smartphones in tiers such as Galaxy S23 (Good), S23+ (Better), and S23 Ultra (Best), each with increasing features and price points.
À la Carte: Allowing customers to choose individual products or services based on their specific needs. Fine dining establishments often provide à la carte menus where customers can select individual dishes rather than pre-set meals, allowing for customization.
Bundled Offerings: Combining multiple products or services into a package at a discounted price. Microsoft bundles software like Word, Excel, and PowerPoint into its Office packages or Creative Cloud subscriptions for Adobe products.
Subscription Models: Providing access to a product or service for a recurring fee. A great example is Spotify which provides access to music streaming through monthly or annual subscriptions with options for individual, family, or student plans.
Quantifying Economic Value
The final piece of the puzzle is quantifying the economic value delivered by your product. This involves translating the identified value drivers into measurable financial benefits for the customer. For example:
Cost Savings: How much money will the customer save by using your product?
Increased Revenue: How much additional revenue will the customer generate by using your product?
Improved Efficiency: How much time or resources will the customer save by using your product?
Risk Reduction: How much will the customer reduce their risk by using your product?
Methods for Quantifying Value:
Customer Case Studies: Documenting real-world examples of how your product has benefited customers.
Return on Investment (ROI) Calculations: Demonstrating the financial return that customers can expect from using your product.
Value Calculators: Creating interactive tools that allow customers to estimate the potential value they can gain from using your product.
Value isn't something we declare; it's something our customers experience. Our job is to uncover it, amplify it, and ensure they're willing to pay for it. That's how we build truly valuable products and businesses.
Stay focused on the customer.
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