How do you compete against free?

You likely have heard the refrain many times. Be it from app developers, startup founders, guru bloggers, or even sales folks and product managers from large enterprises.

How can we compete against free? Customers have so many free options. If we don’t give it away for free they are happy to go with so many others who are willing to do so.

And the free argument is bolstered by pointless justification about market size. If no one is paying, there is no market size (as it is measured in $).

So what is the answer to competing against free? Let me point you to a story about how some skateparks are making money.

There is practically no dearth of public and free skateparks – every city, however small seem to have one. I was surprised to see one in the town of Lahaina in Maui. There are enough public skateparks to the extent that I feel resources are being diverted to one kind of outdoor entertainment. According to SkatePark.org, in 2011 alone cities across Unites States added 845,205 sq. ft of skatepark. (That is decent sized homes for 845 people.)

Is there a market for private skatepark that charges (gasp) for skating? It turns out yes and many different parks are doing so. And they do that by starting with — wait for it — customer segmentation.

They are targeting customers who are turned off by public skateparks – those who feel the public skateparks are too crowded and infested with “snot-nosed punks”.

“It’s guys getting away from their wives and kids.”

And by offering this segment a differentiated product the private skateparks are able to charge for it.

They charge dues and maintenance fees that allow members—most of whom are over 30—to ride in a controlled environment free of the nonpaying skaters, scooters and Rollerbladers who clog up public skateparks.
Members pay a $500 initiation fee in addition to $80 a month in dues

It is true that presence of free options takes away large portion of user base but it does not mean you will only succeed by also giving away your product for free or lowering your prices as close to free as possible. Competing against free starts with customer segmentation and not by seeing the entire market as your target segment.

Every skater in the park is not your customer. Stop doing market size estimates based on billions of users. Nor should a marketer resort to simply getting skaters to skate in ones skatepark for free with the hope of monetizing them later.

Rings a bell?

Find those segments whose needs are not served well by the free options, find what they value and willing to pay for and offer them a product with compelling value proposition.

Saying we can’t compete against free shows you have not done your segmentation right.

Starting with free to get everyone’s attention with the hope for monetizing later is just that, hope, not marketing strategy.

Product Positioning – Telling Customers What Job Your Product Should Be Hired For

A powerful marketing metaphor introduced by Clayton Christensen, author of Innovator’s Dillemma and Professor at HBS, is looking at customer need as job to be done. The complementing part is to look at your product as something customers hire to get that job done.

As an aside, I should note here that Customer Job To Be Done is a strategic marketing framework and not operational one. You should avoid that devolving into “time and motion” like studies. And to a large extent this is not new, studying customers in their “natural environments” has been practiced by many of the CPG companies (P&G and Unilever) for decades.

Finding customer job to be done is only part of the marketing puzzle. When you study customers  you will surface many unmet needs and many different ways they fill those needs (or not fill). Your task is to determine which job or jobs your product is most suited for, has competitive advantage over any other option and will help maximize your profit.

The profit component is non-negotiable – after all if the customers are not willing to pay for getting their job done why bother delivering a product? And that is where Product Positioning comes in.

Yes you identified customer job, designed product that fills that need far better than others and that job pays well too but you are not done yet. You need to tell the customer explicitly what job you want your product to be hired for. Product Positioning is making it explicit to the customer what exact job/jobs they should hire your product for.

If you do not do not positioning your product you run the risk of

1. Customers deciding on their own and for a job you did not have want it to be hired for
2. Your competitors will do it for you and yes to your utter disadvantage
3. Media and “mavens” will do it for you and often incorrectly – even the most friendly media can do harm by positioning your product incorrectly

On the other hand, actively managing Product Positioning and effectively communicating to customers the job your product is best suited for, you get to control the price you can charge for it and hence your profit.

So take control. Don’t stop with uncovering customer jobs, tell them exactly where your product fits.

Do your customers know what job your product should be hired for?

Stop Saying 4Ps of Marketing

The 4Ps of marketing (or  more precisely marketing mix) is neither relevant nor correct. Luckily, most product and marketing managers who think strategically do not ever mention this concept let alone rely on it for their decision making.

Why? Let us recap the what the 4Ps stand for

Product What are you marketing?

Price  What are you charging for it?

Promotion How will you get the message out?

Place  Where will it be sold?

What is missing here?

People  Who are the customers?

Problem   What is the problem customers are trying to address? What is their compelling need? What is the job customers are trying to get done?

Positioning  How do you tell customers what job your offering is applying for?

Pay   Not just price but a comprehensive view of how your offering will get paid for its value-add? This also includes pay-now, pay-as-you-go and pay-per-use considerations. Pricing for the product remains the simplest way for a product to get paid for the job it is hired to do but expanding the scope to consider other monetization models helps to look at the bigger picture and align pay with value delivered and customer expectations.

Voila! This is another 4P  (which also points to the fact how easy it is to come up with mnemonics). You can see how starting with people and their problem helps you define the offering better instead of starting with a product and looking for ways to price and promote it and places to sell, completely ignoring customers and their needs.

The original 4Ps of marketing mix served students and consulting interviewees (People), who needed fast way to remember concepts (Problem), to help ace the test/interview  (Positioning) and were willing to pay high price (Pay).

Besides those segments and jobs to be done, 4Ps should not be used.

And if you are still hiring people based on their ability to recite 4Ps, well ….

Did you also notice Product did not feature here and I kept calling it as “your offering”?

The Simplest of all Business Models

If you want to use Wifi at Pete’s Coffee & Tea you will have to buy something first.  At the counter they give you a code to use, that allows you about an hour of surfing time.

In many local coffee stores you technically have to buy something but once you do, you can stay parked in their tables for hours without buying anything. In Pete’s bigger competitor, Starbucks coffee, it is the similar unlimited free access plus access to premium extras like The Wall Street Journal.

Coffee shops complain about those who occupy tables for hours at a stretch, buy little or nothing and mooch on their bandwidth as well as electricity. Customers who do spend money at coffee shop and need good connectivity for an hour or two complain about the poor speed and difficulty in finding tables near outlets. General customers (who hire the coffee shop for, coffee) complain about the crowd and lack of seats to simply sit and enjoy their brew or have a conversation.

Free Wifi became a popular perk for coffee shops, restaurants and hotels to attract customers and keep them in their shops. If the customers chose your business over others because of free Wifi, you win. If the customers stay because of free wifi and continue to spend during their stay, you win. You have successfully used free wifi as lead generation tactic and customer retention  tool. (Freemium?). For instance, Panera bread saw its sales increase by 15% when they introduced free wifi.

On the other hand, what is free to customers, is not so to businesses. There are costs of operation (making sure there is enough capacity) and opportunity costs (both for the money spent on their big pipe broadband and the moochers). When everyone else offers free wifi it becomes difficult for a business to either stop offering it or start charging for it. Add to this customer dissatisfaction from providing poor internet service.

Look at where we are in the discussion. We are not talking about the compelling value proposition a coffee shop (or a restaurant) offers but talking about a perk. Let us not forget the primary job these businesses wanted customers to hire them for. If customers’ choice is made based on secondary and tertiary factors, the primary value proposition has become irrelevant. If a business fears their customers will walk next door for free wifi they are admitting that their product is an easily replaceable commodity.

That is a bigger problem they ignore while fretting about wifi costs. In focusing on free wifi as lead-gen activity they ignored the core customer segment they started with and the customer jobs they hoped to serve. While some may call free wifi (and Freemium?) as business model innovation, this is essentially losing sight of customer needs and your core competence.

If the customers didn’t hire your coffee shop for coffee, should you tie your business model to selling coffee? That is an incongruence between value creation and value capture.

On the other hand your strategy – to serve the most amazing coffee – need not be fixed. You can see the customer shift and decide your strategy is to serve those customers who have a connectivity need and are not satisfied with existing alternatives. You recognize customer issues with poor speeds in free wifi places and provide reliable speeds as differentiated feature. In such a case you cease being a coffee shop and become a workspace provider. And guess what, you now can charge for that value delivered.

The business model is back in sync with value capture matched to value creation.

That is exactly what is happening in Russia’s Clock Cafe.

“You don’t have to pay for coffee or tea or cookies. You should pay for time, and time costs — I hope — [are] not that expensive.”

And their target segment? Students and business folks who hire them for connectivity and hence pay for the value they get.  Nicely done. However, I think they fixed one mistake but introduced another – making coffee free. There really is no reason for them to offer free coffee, especially the premium kind they claim they deliver,

We have cappuccino, latte, espresso, Americano, and our coffee is not the cheap one

They are committing the flip side of free wifi at coffee shop mistake. Sooner or later they will run into the free wifi problem in reverse. Why bother with coffee or why not charge for it? Especially if the customers didn’t hire you for coffee?

When it comes to business strategy, starting with customer needs and choosing the ones that you can serve better than others remains the best approach. And when it comes to business models, charging for value you deliver remains the simplest of all approaches.

What is your strategy? What is your business model?

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.

The iPad mini Price Premium

A common analytical method in pricing is Conjoint Analysis. While this has evolved into far more sophisticated methods, at its core Conjoint Analysis is about finding how much utility different customers assign to different “features/aspects” of a product. If you know the utilities you can find how to price different product versions.

Here is a quick tutorial if you want to know more.

In the case of tablets you can think of iPad and Fire to be a collection of  features (or benefits) that customers assign perceived utilities. So when you add up the utility assignment for each feature you get the total utility.

Total Utility from Tablet = Fudge Factor +
Price Point ($199, $329)+
Utility from physical features (screen, wifi, etc) +
Utility from Brand +
Utility from Ecosystem

A few days ago Amazon ran a message on its main page comparing Kindle Fire and iPad mini, feature by feature.

The message essentially says Kindle Fire at $199 price point offers better features (by extension better utility) than iPad mini at $329 price point.

Likely true. But the point to note is the utility value from features is neither absolute nor intrinsic. It is perceived utility and it differs from segment to segment. Furthermore there are the “Fudge Factor” – the unknowns, Brand premium and Ecosystem Premium.

Apple likely found a sizeable segment – different from Amazon’s target segment – that assigns lot more value to Apple’s Brand and Ecosystem than they do for Amazon’s Brand and Ecosystem and hence is willing to pay $130 more for iPad mini. (Technically it is $95 more if you consider Fire without “Special Offers” and add price of Fire charger).

Amazon’s comparison is valid. But if the customer segments and their value allocation is not the same, then it does not matter that Fire packs better features at lower price. That is likely why Amazon decided to pull the Ad?