Do you worry about your customer end use?

Here is what a business owner said two years ago about selling to new customers who caused a surge in demand that depleted supply at the expense of his current customers,

“Business is business.  If you sell prime rib, do you care if they’re going to make goulash out of it?”

Does it matter to you what your customers do with your products?

Before you answer, think about these different but related questions,

What job is your customer hiring your product for?
What job  do you want your customers to hire your product for?

Let us get some more context here. This quote comes from a 2011 story on the rooster feather fashion trend. People started a new fashion trend of putting rooster feathers as hair extensions. Soon salons all over the country started stocking up on rooster feathers, offering it as fashionable hair trend to their customers.

Before this hair craze the only known segment that hired rooster feathers was fly-fishers.

Fly-fishers prize Whiting saddles because they have a pliable center shaft and can be wound around fly-fishing lures.

“A pattern that creates the illusion of wings fluttering on the end of your line, if you tie it right.

“So you’d actually lash it in, tie it to the hook, and then you would wrap the stem of the feather…”

Fly-fishers hired the product for a specific job, reasoned with both utilitarian and emotional components. Thanks to their needs and user behavior business for rooster feathers were predictable. Then the surge happened with hairdressers.

The hairdressers. They call multiple times a day. They walk in off the street.

“I like that it’s really low maintenance,” a end user said. “You can straighten it and curl it, and it’s not permanent.”

With hairdressers came different prices. Feather prices saw 500%-1000% price increase as hairdressers were willing to take all the feathers they could because their end customers were willing to pay $50 per extension.

“That’s probably, maybe $300 or $400 worth of hackle, as it used to sit. And it’s probably $3,000 or $4,000 worth of hair extensions now”

With the new segment and its job to be done the same product assumed new value and a new price. Should the fly-fishing shops and rooster farms take advantage of it? Given limited supply and time it takes to produce (the roosters take time to produce feathers) should they embrace the new segment at the expense of current segment?

See this scenario in the context of the job-to-be-done growth matrix I created.

Customer Jobs To Be Done Growth Matrix

Fly-fishing shops and rooster feather farms have started in top left quadrant. There was one segment with well defined job to be done and a price to go with it. And without any deliberate action from their part the bottom right quadrant developed – new customers and new jobs. The choice, under constraints, is to whether to move to that quadrant  and not serve the current segment.

It is one thing to make deliberate strategy choice to grow your business by finding new customers and new jobs and serve those with product pivots and product innovations. It is another to handle an uncertain new growth opportunity thrust upon your business. Businesses need to ask,

  1. Do we understand the new customers and their new jobs well?
  2. Is our product the right candidate for that job, today? Will it remain so tomorrow?
  3. What other alternatives do these new customers have for the job to be done?
  4. Are my current customers and their job to be done changing?
  5. If I choose the new segment, will my current one exist when the new demand dries up?
  6. Will our new customers take you in a direction you did not plan on?
  7. Will you have competitive advantage when serving new jobs of new customers?

So to answer the questions I posed in the beginning of the article, yes you should worry about how your customers use your product. To be precise, what job they are hiring it for. That drives not only product innovation but also your strategic growth decisions.

Some see the big upside from new customers and are ready to overlook the uncertainties in demand and the risk it poses to core customers. Others ask the right questions (like the seven questions above) and stick with serving jobs they understand and know they can serve successfully, far into the future. Like this other fly-fish shop owner who is refusing to sell to hairdressers and de-marketing to turn away new customers.

There’s no actual evidence, but he’s hoping to start a rumor the feathers cause balding.

 

 

 

Customer Job To Be Done Growth Matrix

There is a very simple way to think about how to grow business. It requires us to think in terms of markets and products.

Markets – Current market segment you play in and new markets you do not serve yet
Products – Your existing products and new products you have not built yet (and are outside of your current product line)

That gives us four ways to grow any business

  1. Sell more of what you make now in markets you already play
  2. Sell something new – not just product extension, something outside your product line – in markets you already play
  3. Enter new markets with your current products
  4. Enter new markets with something new – not just product extension, something outside your product line

It is more popularly known as Ansoff Growth Matrix.

Ansoff Growth MatrixThe matrix tells us it is easier to do 1 and gets progressively difficult to do steps 2, 3 and 4.

Loyalty proponents believe in staying with 1 and may be add a bit of 2. Product proponents get bored with 1 and want to build new and great (facebook phone). Those who believe buying growth spend more time and resources on 2 and 3 by acquiring businesses that sell in new markets or acquiring companies outside their core (eBay/Microsoft acquiring Skype)

There is a problem with this matrix. It is product driven as opposed to being customer needs (jobs to be done)  driven. When you look through the lens of your current products and new products you end up with approaches like unnecessary M&A and Facebook phone that are not aligned with how customer needs and how those needs are changing.

Let us redraw the matrix but now with Customers (customer segments) and Jobs as the two axes. If you are not aware of the “jobs to be done metaphor“, please see here before reading further.

Briefly, the metaphor asks us to think about customer needs as jobs to be done. Customers hire products among many alternatives to fulfill those jobs.

Customer Jobs To Be Done Growth MatrixNow it is not anymore the question of how to sell more of same products or build new products but a question of what are the current jobs we are addressing and what new customers and new jobs provide us opportunities for growth with our core competence.

Here is the recommended strategy for each quadrant

  1. Existing Customers and Jobs: Continue product evolution that cements your product as the best candidate for the job.  
  2. Existing Customers and New Jobs: The new jobs could arise because of trends impacting customers or simply adjacent jobs you never positioned your product for. Remember positioning is telling customers which job your product is applying for. Instead of going after jobs that are outside your core competence you are better off investing your limited resources on evolving customer jobs and related jobs that can be served by product pivots vs. completely new products (facebook phone)
  3. New Customers and Jobs you currently address with Existing Customers: Here the invariant is the jobs – two different segments have the same job to be done but you chose one segment over other and now considering serving the second segment. Understand the reasons why you did not choose that segment in the first place – is it the challenges in reaching them?, is it their willingness to pay? etc.
    Understand that different customer segments have different alternatives for the same job and hence different reference price. Choosing to serve lower willingness to pay segment should not come at the expense of price erosion in higher willingness to pay segment.
    My recommendations are to focus on packaging and pricing innovations that help protect current profits and add net new profits from new segments. It is not revenue growth at the expense of overall profit drop.
  4. New Customers and New Jobs: You still have the option of better product positioning to help capture new markets. But most times you are looking at completely new jobs that require product innovations and business model innovations.
    But the advantage is your focus on customer jobs and not on products – your innovations are aligned with customer jobs. While this step once again proves to be most resource intensive with most uncertainty, taking the jobs approach helps you ease into this without taking big risks, pie in the sky product innovation or expensive acquisitions.

There you have it, your recipe for growth derived from customer job to be done.

What job do these brands want their product to be hired for?

The product is wrist watch – one with simple utilitarian job to be done. We sure all need some version of it and there are many versions available at our disposal. And there are non utilitarian jobs – hedonistic and even conspicuous consumption. Not all segments have these second level jobs but some do.

We are willing to pay a price based on the job we hire the product for. It is under brand’s control to choose the segment with certain high paying jobs and positioning the product with a price to go with it.

Let us look at the positioning of luxury watch makers to see what job they want their customers to hire their product for.

Breitling – Instruments for Professionals
Nothing about time here and the other instrument often associated with the watch? Airplane! And a price to match those private jets.

Patek Philippe – You never really own a Patek. You merely look after it for the next generation.
And you don’t buy it to tell time either. It is a investment for generation and hence the price.

Rolex – The Crown of Achievement
No mincing words about conspicuous consumption. Nor are they giving any utilitarian rationalization reasons. It is about targeting those with achievement to flaunt.

Sure these watches tell time and there are billions of customers who have that job. But there are many other candidates for that job and no one is willing to pay much for that job. Hence these brands chose the small segment with the second level jobs and have the wherewithal to pay for the job.

That is some positioning, telling select segment of customers exactly what job the product is applying for and setting a price based on that.

How do you position your product?

 

When segmentation fails do you pivot to a new one?

A few months back this is what I wrote about economic value add for business vs. consumer segments while writing about price of LED bulbs,

Here is a case study done by US Department of Energy for LED bulbs. The initial price is almost twice as much as traditional lighting systems. While consumer segments most likely are not willing to pay twice the price for LED, business segments are. That is if you show them the value.

For instance, you and I may not mind changing light-bulbs every year because our opportunity cost is $0. But for businesses there are real costs associated with maintenance. Every bulb change avoided is not only savings in bulb cost but savings in maintenance costs.  If you add these all up, despite the high initial cost, the LED systems  deliver 9% in total cost savings over the lifetime.

Then I went on to show the economic value add from switching to LED bulbs

led-evaIt seemed no brainer to start with the business segment that had real costs and savings (and budget to spend),  show them value using hard numbers and gain adoption. So did Cree, the maker of LED bulbs, think. Cree based their strategy on a similar analysis that pointed to increased adoption by businesses because of energy and labor cost savings from switching to LED bulbs.

As it turns out their segmentation strategy did not work out and they decided to shift focus from business segment to consumer segment,

the company is making an about-face. Durham, N.C.-based Cree is putting out a new line of bulbs built around light-emitting diodes, or LEDs, for the masses in hopes that greater use by consumers will eventually affect the choices made at their offices

Why did their initial segmentation fail to pan out? There are two main reasons I see,

  1. Value Waterfall – As someone who defined value waterfall, even I failed to take this into account while I did the economic value add math for LED bulbs. Despite the real value there are several aggravating factors like cost of doing business, trust discount, switching costs, etc. that knocked down perceived value.
  2. Pricing Model – The LED bulbs are priced twice as much as incandescent bulbs and deliver their value over long period of time.  That is the LED pricing captures value upfront while delivering customers value over time. A better model for businesses would have been a subscription pricing model based on usage. Cree needed monetization model innovation to go along with their product innovation.

I do not believe their segmentation failed nor do I believe they need to switch from business to consumers. But Cree believes,

The bet is that light bulbs might follow the same trajectory as touch-screen smartphones, whereby consumers grew comfortable with the technology at home and then insisted on having it available at work.

While that worked for phones that we use everywhere and at work and think of it as part of our self the same logic does not extend to light bulbs what are simply part of the environment.  Besides how can they get consumers to pay twice the price when the economic value add math does not add up and the fact that it does not have aspects of conspicuous consumption like a smartphone does?

I wrote recently how monetization model innovations follow segmentation. Cree’s segmentation was not wrong it is their product positioning and monetization model that need to be realigned to the business segment.

When your well thought out initial segmentation fails it does not mean you chose wrong and you must switch to a completely new one. Segmentation is a strategy and changing it is not like a product pivot. And there is no guarantee you will succeed with the new segment if you commit the same mistakes you committed with targeting, positioning and pricing with the first segment.

How do you choose your segment and what do you do when your product fails to get traction?

Why I Think Google Chrome Pixel Pricing Is Wrong

chrome-pixelWhen Google unveiled its new touchscreen laptop, Chrome Pixel, Chrome executive Mr. Pichai said

the high price tag was justified and argued that the Pixel stands up very well against a MacBook Air

It is usually a bad sign when a brand uses words like, “the pricing is justified”, let alone  comparing against market leader with established track record in the category. Last time we heard the price tag justification it was from then Motorola executive on Xoom pricing. We know how it ended (agreed, one data point does make evidence).

If you are going to justify your price tag the best path is to use cost arguments, signaling to customers that you were doing it only because of your hardship and appealing to their “good will”. Classic example is Starbucks. While you set the prices based on customer value (and definitely not on costs) you do not communicate so explicitly to your customers.

This is how head to head comparison of MacBook Air and Chrome look like (after upgrading MacBook Air to 8GB RAM).

Macbook Air - Chrome Pixel Comparison

Let us assume, for now, that indeed Chrome Pixel is packed with features, compares favorably against MacBook Air. But does that mean Google can set the price point to match value delivered (or perceived)? No. The reason is the Value Waterfall.

Value Waterfall

Several factors are at work here that cause value leaks, bringing down the price customers are willing to pay. In case of Chrome Pixel, the value leaks are

Credibility Discount: It is from a brand that isn’t known for making premium hardware. Nor is the Chrome operating system as mature, full-featured or have supporting App ecosystem as Apple’s OS X.

Selection Cost: Customers are told the additional value comes from touch screen feature (which may not be relevant to them) and from the extra 1 TB of Google Drive storage for 3 years. This isn’t as obvious to customers who have to do the math to see value of 1TB of Google Drive.

Cost of Doing Business: Operating System, Apps, buying experience, support, user experience – everything comes into play here knocking down value delivered.

Risk Aversion Discount: This isn’t the first attempt by Google in making hardware but there isn’t much track record for customers to see. For all practical purposes this is version 1.0 from an upstart laptop maker who does not have integrated hardware-software design.

Reference Price Difference: While Google wants the reference price to be that of MacBook Air, customers will most likely use previous Google Chrome models sold at $299 and tablets with same storage ($499 for Nexus 10).  Despite the additional features and the value Google would want customers to focus on, customers will see the price jump from $299 Chrome to $1,299 Chrome Pixel an unpalatable (and even unjustified) price increase.

So it is not a surprise we see several media reports knocking down Google’s pricing. In his review of Chrome Pixel, Om Malik wrote,

Pichai and I argued a bit about the pricing strategy: my belief is that they need to sell a lot more devices so the price has to be much much lower. Pichai argues that one needs to be able to open our mind to the possibilities of a cloud-based machine. He said that one shouldn’t look at the 32 GB of storage, but instead focus on the terabyte of storage space that comes as part of Google Drive.

Google is not only trying to justify its pricing but also its measly 32GB storage by signaling value from its 1TB cloud storage. But the Google Drive cloud storage comes for only three years and costs $50 a month. On the surface it would appear the 1TB space is good value – if you were to get it separately it costs you would pay $50 a month and hence a value of $1,800.

But that depends on a customer segment that values cloud storage over additional flash storage on their laptop. Besides after that three years it is going to cost customers $50 a month because with all their data on Google Drive there will be significant switching costs. This goes back to the value leaks I discussed above.

Finally, is it possible that they uncovered a segment that values this product at the current price point and we are not the target segment? Mr. Pichai replied to Om,

“The device is for a segment committed to living to the cloud, and who really want a good, high-end laptop, and we believe we have built the best laptop for that experience,”

If true then they should have controlled the messaging channel and the messaging to communicate the pricing and value proposition to just that segment with proper product positioning.

They are not clear in their product positioning to that segment – they are positioning Chrome Pixel against MacBook Air, asking customers to hire Pixel for the same job customers hire MacBook Air for and for the same price. That contradicts their segment definition of “committed to living in the cloud”, because that segment may be hiring different cheaper alternatives and not $1,299 MacBook Air.

Furthermore even if such a segment exists, their willingness to pay will probably go down when they see the media reports on Google getting its pricing wrong.

At this point it is safe to drop likelihoods and probabilities and go on record to say, “Google got its segmentation, targeting, positioning, product and pricing wrong”, with its Chrome Pixel.

 

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?