A Simple Versioning Rule

Your product Plans/Pricing page lists multiple versions, most commonly 3 to 5 versions.  The vertical columns are well crafted, graphically stunning and neatly arranged with all the right visual nudges designed in.   Now the question,

What is the minimum number of  choice dimensions should the versions differ across?  (A choice dimension can be either a product attribute like number of users allowed or a non-product attribute like service/support etc)

a.  0
b. 1
c.  2
d. Versions must differ across all dimensions

The correct answer is 2. If you are versioning your product it must differ across at least two choice dimensions.

The first dimension is price.  If your versions do not differ in price, there is no point in creating the versions. The versions simply add to your costs and make it difficult for your customers to choose. If all you are doing is offering customers cars of any color and yogurts with different fruits – you are not versioning.

The second is the dimension that has the most incremental net value. Net value is the difference between the perceived value to the customer and the cost to deliver that value. It is not enough you pick the dimension that is valued differently by different customers, it must be possible for you to share in that value creation.  If your product is bits and not atoms, the cost component is zero and this dimension defaults to perceived value.

A striking example is Apple’s iPhone and iPad versions (iPad versions technically differ across three dimensions if you include the 3G). This is as simple as it can get – versions that differ across just 2 choice dimensions and are simple enough for the customers to understand.

Now the execution questions for your “bits” product:

  1. What should the price points be for each version?
  2. How can you find the dimension whose perceived value differs the most across segments?

You can answer these yourself if you follow the methods I set forth in a previous tutorial. Or if you would rather not spend your limited time on roll-your-own customer research and analytical modeling – Ask me about these.

Buzzword alert:
Lean Versioning: When your versions differ across minimal number of versioning dimensions. When versions differ across exactly 2 choice dimensions that is the “Minimally Versioned Product”

Should you listen to your most loyal customers?

Should you listen to your customers who take the time to write to you asking for specific products or features? The common sense answer seems yes, but should you always listen?

The WSJ has a story of loyal fans of British version of Cadbury’s refusing to accept the version sold in the US markets. The latter is manufactured by Hershey’s under its licensing agreement with Cadbury’s with a recipe tailored to the US market. Should Cadbury’s or Hershey’s listen to these most loyal fans and change their recipe? The article in WSJ describes these fans as someone who,

wants nothing to do with the stuff made in the U.S. “Oh, it’s so yuck,” she says. “You might as well eat a Hershey bar.”

With such loyal fans does it not make sense to a marketer to listen to them? The answer is not straightforward and need to be analyzed from at least three angles

  1. What is the customer saying and what do they really want?
  2. Is the customer insight actionable and profitable?
  3. What is the share of profit from these customers?

The first point is the most repeated story that if Ford had listened to its customers it would have developed faster buggies. In the book Game Changer, P&G’a retired CEO, Mr. A.G.Lafley calls this “customer driven and not customer led”. It is important you listen to your most loyal customers but everything you hear are not the customer insights – not to mention the biases in what we choose to hear and how we interpret it.

The second point is about relevance of customer insights to your business. In the Cadbury’s story the insight you may find is that the customers are really holding on to their memories of living abroad and are trying to relive by reminding themselves of the chocolate they ate there. This would be a valid information but it is insight only if you can act on it, the action required fits your business strategy, and you can generate profits from it through product innovations.

The third point is about  the share of profits you generate from these customers. What is this segment’s willingness to pay for such product variation? What are your costs to produce, distribute and get it to the target segment? It is not just how big this segment is or how much revenue you generate – the segment has to generate enough profit to justify new action.

Next time you see a flood of tweets, blog posts, and other social media expressions of customer likes and dislikes, ask the three questions before you rush to implement change.

It’s Not What It Costs You It’s What Your Customers Value

Whether you are a small business or a large corporation marketing means Segmentation and Targeting. Marketing is about finding what is relevant to each segment and delivering at a price they are willing to pay. There is nothing more to it. It is however easier said than done. It does come  easy to companies like P&G that have done it for so long, institutionalized the process, has the resources to conduct customer research, gather insights and invest on new product lines to monetize those insights.

Not all can afford such unfettered access to intellectual or capital resources.

I saw a post by an artist, Ms. Michelle Moyer, of White Dog Studios, who makes and sells jewelery. Michelle is thinking about pricing her wares correctly. She says,

I think that artists undervalue their work far too often. When I go to shows or browse online and see handcrafted pieces selling for a price that I know will barely cover material costs, if at all, I cringe because this sets the market lower for my work. I believe that my work has value and that incorporates not just the material costs, but the time it takes for me to develop the design and make the piece.

I want to highlight a great point that Ms.Moyer intuitively figured out, it is the effect of reference price. Customers do not know the absolute value of the crafts. There is not a universal system that tells us how much we value Ms. Moyer’s craft’s vs. others. We look at prices relative to available options. While there is no common value for crafts, presence of lower priced competitive items sets a lower reference price for her customers.

Ms. Moyer  talks about rest of her pricing in terms of material costs and labor costs, and about how much artists value their work. Pricing is about capturing a share of the value you create for your customers. Your costs are irrelevant to your customers. Pricing needs to be based on value added to customers. It is not about what you value or what you think the value is, it is what your different customers think.

The value is not the same across all customers. In the book Game Changer, retired CEO of P&G Mr.A.G.Lafley talks about “who is your WHO?. The “WHO” refers to the customer. Mr.Lafley, goes on to say

“As you work to better understand the WHO, you’ll discover that people use your product for different reasons. They may have different occasions for when and how to use it; differences about what they think is a good value, and what they are willing to pay. One size does not fit all”

Ms. Moyer  is practicing a type of multi-version pricing,

I try to offer a range of pieces at various prices. For example, this bracelet, for sale on my Etsy shop, is only $20, which I believe is a fair and affordable price. This bracelet, on the other hand, took much longer to design and create, so it is priced at $70.

This is good but her  multi-version pricing is once again based on her costs rather than on segmentation or customer value. Taking a lesson from Game Changer, there are opportunities to find  the reasons people buy the bracelets, different occasions and how the customers use the bracelets.

It is not easy when you are a small business  who cannot afford to hire someone to do strategic marketing or invest in doing customer research or segmentation studies. Even a simple pricing of just one version of your product gets harder  when you make products that have no “common value”.  So the easiest route seem to be producing what is easy to you or pricing it based on your costs.

But it does not have to be as rigorous and formal as it is for a multi-billion dollar giant like P&G.  You can solve 50% of the problem by simply  starting a conversation with your customers.

This blog  and I can help you get started on the right type of customer conversation and finding what they value.  Write to me.

Related article: Small Business pricing.