Maximally Valued Product – How to find customer value perception?

The common definition of MVP is the Minimal Viable Product. The other MVP you should start thinking about – if you are serious about ringing the cash register – is Maximally Valued Product.  All that validated learning is useless if you cannot find whether customers are willing to pay for the value your product creates or if you cannot ring the cash register.

I introduced this new MVP in my last article.

A Maximally Valued Product for a given customer segment is the product version that adds most value to the customers while enabling marketer to extract their share of the value as price premium.

It is a very specific definition and it is customer centric. It does not leave the market wide open. It focuses on value created by filling a need (the need can be anywhere on this consumption spectrum). It closes with your share of the value created. After all charging for value created remains the simplest of all business models.

Here is a very easy way to remember MVP – Your $499 iPad that did not include ear-phones!

The next logical questions are

  1. How can we find the different segments?
  2. How can we find their different value perceptions?
  3. How can we map that value to a price they are willing to pay?

You business may be new. The technology may be most innovative. Likely nothing like your product existed before. But the methods to answer these questions are old -

  1. Find segmentation from cluster analysis
  2. Find value distribution with conjoint analysis
  3. Find price perception by adding price as component in conjoint analysis

See this brief introduction on how it is done in this Slideshare presentation -

But  but …

Who has access to these kinds of resources to do elaborate customer segmentation or complex analytics to find value and price perception. Especially startups.

Here is a teaser on a lean startup’s method for answering these questions. You will have to wait for the next article on how to analyze the results from this method.

Let me give you a very simple tool to answer two of these questions – segmentation and value perception. For finding pricing you can talk to me.

Think of your customer’s value perception as a resource allocation problem. Say you give your customers 100 coins. You present them an assortment of  benefits or a need fulfilled. Their job is to allocate those 100 coins such that they give more coins to the benefit they value more and vice versa.

Before you rush into this you need to know the following

  1. What are the key benefits do you want to measure vs. a long list of features? You find that  from initial customer discovery.
  2. Of those what can you deliver through your product and do it better than competition?
  3. How do you account for non-interest? That is how do you weed out those that are simply not interested in any of these benefits but did the coin allocation simply because you asked them to.

When you collect data from reasonably large sample (100-300) of target customers you will end up with a distribution of value perception. The data have the segmentation dimensions and the value perception of benefits.

Let me tell you more on how to analyze this distribution to find segments and value perception in my next article.

Do This Thing That Doesn’t Scale – Charge For Your Product

In his recent essay titled, Do Things That Don’t Scale, Paul Graham (who needs no introduction) urges startups to do things that don’t scale. In the context of customer targeting he writes,

Sometimes the right unscalable trick is to focus on a deliberately narrow market.

Take this specific advice and think of it in the context of monetization although that is not what Paul Graham had in mind or would approve.

In any market there exists a distribution of prices customers are willing to pay for a product. It ranges from $0 to some reasonably high positive number. If you set your price at $x then anyone who is willing to pay $x or more will buy your product and the rest wont. If you set the price to $0 you let the whole market in. That is indeed scale.

What if the deliberately narrow market you define is the segment that has a compelling problem to address and is willing to pay for an offering that fills that need? Sure it won’t scale because you need to

  1. Find the segment and precisely define its needs
  2. Find the economic value add to that segment from a solution that fills the need
  3. Find a way to target the customers in the segment as they do not stand up and identify themselves
  4. Understand how these customers make buying decisions and adapt your methods to make it easy for them to hire your product
  5. Explain to them why your product is the best option over other alternatives
  6. Prove to them the value from your product
  7. Finally do the most unscalable thing – ask them to pay for the value you created

Does charging for the value you create comes to mind when you think of things that don’t scale?

After all in the words of another startup founder,

 “It’s not a product until you define a set of customers whose needs you meet and who want to pay you.”

 

 

 

Customer Job To Be Done Growth Matrix

There is a very simple way to think about how to grow business. It requires us to think in terms of markets and products.

Markets – Current market segment you play in and new markets you do not serve yet
Products – Your existing products and new products you have not built yet (and are outside of your current product line)

That gives us four ways to grow any business

  1. Sell more of what you make now in markets you already play
  2. Sell something new – not just product extension, something outside your product line – in markets you already play
  3. Enter new markets with your current products
  4. Enter new markets with something new - not just product extension, something outside your product line

It is more popularly known as Ansoff Growth Matrix.

Ansoff Growth MatrixThe matrix tells us it is easier to do 1 and gets progressively difficult to do steps 2, 3 and 4.

Loyalty proponents believe in staying with 1 and may be add a bit of 2. Product proponents get bored with 1 and want to build new and great (facebook phone). Those who believe buying growth spend more time and resources on 2 and 3 by acquiring businesses that sell in new markets or acquiring companies outside their core (eBay/Microsoft acquiring Skype)

There is a problem with this matrix. It is product driven as opposed to being customer needs (jobs to be done)  driven. When you look through the lens of your current products and new products you end up with approaches like unnecessary M&A and Facebook phone that are not aligned with how customer needs and how those needs are changing.

Let us redraw the matrix but now with Customers (customer segments) and Jobs as the two axes. If you are not aware of the “jobs to be done metaphor“, please see here before reading further.

Briefly, the metaphor asks us to think about customer needs as jobs to be done. Customers hire products among many alternatives to fulfill those jobs.

Customer Jobs To Be Done Growth MatrixNow it is not anymore the question of how to sell more of same products or build new products but a question of what are the current jobs we are addressing and what new customers and new jobs provide us opportunities for growth with our core competence.

Here is the recommended strategy for each quadrant

  1. Existing Customers and Jobs: Continue product evolution that cements your product as the best candidate for the job.  
  2. Existing Customers and New Jobs: The new jobs could arise because of trends impacting customers or simply adjacent jobs you never positioned your product for. Remember positioning is telling customers which job your product is applying for. Instead of going after jobs that are outside your core competence you are better off investing your limited resources on evolving customer jobs and related jobs that can be served by product pivots vs. completely new products (facebook phone)
  3. New Customers and Jobs you currently address with Existing Customers: Here the invariant is the jobs – two different segments have the same job to be done but you chose one segment over other and now considering serving the second segment. Understand the reasons why you did not choose that segment in the first place – is it the challenges in reaching them?, is it their willingness to pay? etc.
    Understand that different customer segments have different alternatives for the same job and hence different reference price. Choosing to serve lower willingness to pay segment should not come at the expense of price erosion in higher willingness to pay segment.
    My recommendations are to focus on packaging and pricing innovations that help protect current profits and add net new profits from new segments. It is not revenue growth at the expense of overall profit drop.
  4. New Customers and New Jobs: You still have the option of better product positioning to help capture new markets. But most times you are looking at completely new jobs that require product innovations and business model innovations.
    But the advantage is your focus on customer jobs and not on products – your innovations are aligned with customer jobs. While this step once again proves to be most resource intensive with most uncertainty, taking the jobs approach helps you ease into this without taking big risks, pie in the sky product innovation or expensive acquisitions.

There you have it, your recipe for growth derived from customer job to be done.

Segmentation, Targeting, Positioning and Pricing As Customer Jobs To Be Done

The Customer Jobs to be done is a powerful metaphor introduced by Clayton Christensen in thinking about demand and new product development. Christensen’s framework requires us to view our product as something customers hire to get a job done. With different customers there are different jobs.

The term ‘job’ really represents the unmet need at hand. It covers both utilitarian as well as hedonistic (and hence needs and wants). It also makes sense to view this as ‘hire’ decision since they can either stick with what they already have or switch when they find better alternative.

He illustrated that with an example of why different customers hired milkshake from a fast food restaurant. Understand the different customers and the different jobs you find what product and what prices.

In some sense this isn’t new if you viewed what Ted Levitt wrote 50 years back – “customers are not buying quarter inch drill, they are buying quarter inch hole” – which speaks about the customer need and not the product and its features.

The other solid strategic marketing framework that came from Levitt is

  • (Customer) Segmentation
  • Targeting
  • Positioning
  • Pricing

And the Jobs metaphor fits perfectly well with this tried and tested framework (in strategic marketing there is really nothing new despite what some gurus say). Let me map the STPP to Jobs To Be Done metaphor

Segmentation: I am not talking demographics based indirect segmentation here but the right way of segmenting based on customer needs (or needs based segmentation). You are grouping together customers based on the similar jobs they are trying to get done.

Targeting: Strategy is about making choices. Simply because you mapped out all different segments with their needs does not mean you can serve them all. No one has that level of infinite expertise or resources. You need to find where you will differentiate enough to succeed. There are multiple different customer segments and many different jobs, but which customer and which jobs are you going to target?

Positioning: Positioning is creating a unique, relevant and differentiated positioning in the minds of the customers for your products. From the jobs perspective it is telling them clearly which job you want them to hire for and why your product is the most suited candidate for that job. While your product could be hired for many jobs you want to go after those where you have sufficient differentiation and also pay well. You don’t believe Apple wants customers to hire iPad as a way to display photos on their coffee table, do you?

Pricing: Pricing is your way of getting your fair share of value you create by doing the job. It is what your product gets paid for getting the job done. (I did not run out of things to say on pricing, that has been the main focus of this blog.)

That is it to marketing strategy.

On Pricing High

On one hand you find advice about giving your product away in the hope of monetizing them later. On the other hand, more recently, you find articles like this and this on the need to price it high. The latter article even goes on to say customers will be happier if you charged them more. I find these latter class of articles do even more disservice than the former.

These simply take the exact opposite position to the free idea and make it sound these are based on evidence. Simply showing a numerical example is not evidence.

None of these one size fits all advice columnists tell you to start with customers – find the different segments, what they value, what they are willing to pay for, which segments you should target and with what offering.

If you do not know your customers or why they are hiring your product how can you say they are happy because they are paying more?

 

What would you do? A Business Case Study

Your product takes 8 years to build. You do have your pipeline full so you produce units to sell every year. But it takes 8 years from the very first step to shipping it. You are innovating, introducing changes and features that fit the times and customer segments. But any innovation or changes you want to introduce will take 8 years to hit the market.

Your customers are changing and the macroeconomy has its effect on customer buying behavior. The core customer group you used to sell has no need for your product. The newer crop is not interested because their taste, needs, lifestyle, business process etc are changing. In fact, over the past 30 years your addressable market reduced from 40% of  total market to just 23%. Your market share comes from this addressable market, you are not the only player in the same product category and there is excess supply as well.

Those customers who continue to buy your product prefer the cheaper version of the product,  the version that isn’t as profitable to you as your premium version.

You are seeing competition from alternatives. While these are priced at 75% premium over your product, these last 6 years while your product lasts just 1 year.

Your product is not without its value. Most of the value comes from non-utilitarian reasons while the competition is mainly competing on convenience. You have not done much in communicating this value differentiation to your customers.

Competition has different and more elaborate Go-To-Marketing strategy. They are available in more places while your channels are disjointed and limited.

Competition also has advantages on marketing while you hardly have any marketing.

How would you fix this? Where would you start first?

Fix marketing (messaging etc)?
Fix Go-To-Marketing along with Segmentation strategy?
Fix Product Strategy?
Fix Product Development?
Fix Pricing?
Or instead of fixing, just fold?

Think this is an unrealistic case? See here.