Does this sound familiar?
- 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.
- All these esoteric features hastily force-fitted into benefits – because marketing is about benefits and not features.
- 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.)
Now consider this, take a look at the funnel on the right:
- Identify the needs and wants of different customer segments, select those that offer the greatest opportunities and you have unique competitive advantage in serving.
- 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?
- 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?