The Value Step Function

Your product adds incredible value to your customers, your messaging and value proposition is all done right and yet your customers do not see that value. Neither are they willing to pay for that value. Most of the customers are simply happy with cheaper alternatives even though these are a very poor imitation of your superior product.

No, you did not overprice it and the messaging is almost flawless that your product name has become a verb.

What is the roadblock? This is because the value perceived by customers is not a linear function of product features. Value is a step function – an initial package of features causes a step increase in value perceived but  after that point it can level off for a very long time or until another shift occurs at which point it makes another step jump.

It is the value step function that prevents a true innovation from gaining market share and  capturing value. Customers are so delighted by the first order benefits, because these lift the customers out of the misery of ordinary and status quo, that they lack appetite for the second order benefits.

Since the incremental value perceived is negligible to most customers, the marketers find it hard to translate their high value proposition into customer utility and hence higher willingness to pay. Even with greatest marketing, only a sliver of customers pay the premium.

Take for example the case of TiVo. It is  a verb now and its customers are true apostles and yet there are only 1.5 million TiVos in a market with 30 million current DVR customers and another 60 million prospects. Forrester analyst James McQuivey explains:

“A basic DVR made by a cable company is so much better than what you have when you don’t have a DVR at all. It’s a little bit like making it just outside the gates of heaven, and it’s so pleasant and warm that you don’t realize that just a couple of steps away there’s a better experience to be had.”

This is a case of Value Step Function.

This is not totally new, this takes us back to customer driven product development and pricing. A product does not have  pack a full suite of features nor does it have to be far ahead of the competition and its alternatives. It only has to be just ahead in the minds of the customers and offered at a price that matches the value. Once you know the price customers are willing to pay it is a question of whether or not you can produce it at a cost that delivers you profit.

Do you know your customers Value Step Function?