Moving to Customer Driven Product Development and Pricing


Does this sound familiar?

  1. Long list of features that are thought to be cool and must-haves. Most of them compiled by looking at other products in the market and  by generalizing from an individual’s personal pain-points and wish list.
  2. All these esoteric features hastily force-fitted into benefits – because marketing is about benefits and not features.
  3. Search for customers – and if the first set of customers don’t like it, try another and another

If this is the product development flow then it inherently drives a marketer to commit the mistake of cost based pricing.  Since product development starts with features, pricing starts with cost — cost of components, cost of R&D etc. Then a marketer tacks on an artificial margin that is treated as sacrosanct and determines the price.  Then they search for customers with needs and  are willing to pay that magical price. Economic value add to the customer does not picture in this process. As the marketers find fewer customers willing to pay that price they resort to price cutting and eventually to complaining that customers decide on price not on “features”.

(Sidebar: The extreme case of this is what is happening with all things digital for which the marginal cost (cost to produce, store and distribute one additional unit ) is $0.)

Which funnel is yours?

Now consider this, take a look at the funnel on the right:

  1. Identify the needs and wants of different customer segments, select those that offer the greatest opportunities and you have unique competitive advantage in serving.
  2. Create a credible value proposition. Determine the product positioning to credibly answer the question, “what jobs are your customers hiring your products for?” and what benefits are key to get those jobs?
  3. Design the minimal product that delivers  those benefits at the lowest possible cost.

Starting with the customer segments and their needs leads a marketer to the correct way of pricing – value based pricing. Asking what jobs customers are trying to solve enables the marketer to create a credible value proposition. Calculating economic value add to customers reveals what the customers must be willing to pay for the product. Then it is applying innovation to design the product with the minimal feature set  that can be produced at a profitable cost.

When you start with customers and value the marginal cost becomes not the prime determinant of pricing but just a gating factor below which the products cannot be sold.

Which funnel is yours?

7 thoughts on “Moving to Customer Driven Product Development and Pricing

  1. Olga
    Thanks for the comment. With the right product strategy, adopting processes like agile to operationalize the strategy is the next logical step. However, even agile processes and iterative workflow do not guarantee success if the business did not start with customer segmentation and needs.
    -rags

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  2. The first list is completely WRONG. You can’t get a live product if you follow your competitors all the time and analyze markets. Of course, this should be done, but this is not the main thing that shapes up product development. With our product, targetprocess.com, agile project management tool, we’ve implemented features based on our own workflow as an agile team – and of course considering requests of our customers. It’s not about verbal message – it’s about CORE of the PRODUCT what it DOES. Not what marketing says.

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