Unlock Your Product’s Value with Pricing

From my experience, value-based pricing is one of the most often used, yet least understood concepts in product management. While deceptively simple on the surface, most product managers have trouble turning it into something concrete. Sure it makes sense that a good product should provide value to the customer, but trying to get a handle on this is like trying to catch smoke with your bare hands. Luckily, this task is a bit easier for those of us in the B2B space since we don’t typically have to be overly concerned with the fuzzy intangibles so important in B2C like how our brand will help the consumer achieve their personal goals, laddering up to get closer to the consumer’s core values, and all that noise. But even still, understanding how your product can help a customer improve their business does not automatically translate into a price point.

Economic Value to the Customer (EVC), a concept I mentioned in a previous post, can be of great help in this situation – especially when you’re working on pricing a new product and you don’t have the luxury of existing sales data to calculate a demand curve (not that this is exactly easy either). Once you’ve completed the EVC framework for your product you’ll be able to use it to help diagnose why sales are slow, assist sales force personnel in negotiations and even determine which enhancements will result in the largest gains in customer willingness to pay.

The basic premise behind EVC is that consumers buy not just on price, but on the basis of the economic value that the price represents. This means that customers attempt to discern the Net Value of your product. For those that are mathematically inclined, you can think about it like this:

After customers gather information about all the options in the marketplace, they will (quite logically) select your product only if it proves to yield the highest Net Value relative to competing offerings. Reordering variables shows us that the price you charge for the product, therefore, must be less than or equal to the sum of the Differentiation Value (∆V) and the Reference Value (R). The Reference Value is the price of what customers view as best substitute and the Differentiation Value is the value to the customer (both positive and negative) of any differences between your offering and the reference product.

Said another way, a product’s total economic value is the price of the customer’s best alternative (the Reference Value) plus the economic value of whatever differentiates the offering from the alternative (the Differentiation Value).

Of the times that I’ve used EVC, one case illustrates the process extremely well. I was launching a bundle of web services that allow third-party service providers to automate receiving work assignments from their customers. Prior to this solution, the only alternative was a manual process, so in other words, the Reference Value was the cost associated with employing staff to manage the work conducted between the two companies. Through a number of conversations with managers at these firms I was able to uncover the fully loaded cost per employee as well as the ratio of employees relative to work volume on the average. These details unlocked the cost of the manual process and hence, the Reference Value.

The Differentiation Value consisted of a number of components. First, the new system would require an up-front investment in information technology to implement the web service interface. So relative to the manual approach, this was a negative – remember that your product will probably have pros and cons when compared to the competition. Benefits over the manual approach included reduced headcount, improved performance (increased throughput) and improved quality.

Once you have these details, calculating the Willingness To Pay (WTP) is fairly straight forward. Simply sum the dollar value of the cost savings generated from the labor reduction and the value of the productivity and quality gains. This exercise yields the maximum WTP. Note! This isn’t the price, but rather the amount at which the customer would be indifferent between the manual process and the web services. You’ll want to set the price below the maximum in order to share some of the value created with your customer and entice them to make the purchase. Economists know this as Consumer Surplus.

As you can see, the process of measuring your Differentiation and Reference Values isn’t exactly a plug-n-chug operation. Applying EVC necessitates effort and creativity, which requires you to think broadly about the sources of value for your product. Usually, in the B2B space economic value can be expressed as revenues gained or costs avoided by purchasing the product. This means you need to truly understand your customer’s business and how your product will impact it. Only then will you be able to determine if your pricing is doing a good job of getting a piece of the value your product is delivering to the customer.

Drive your New Product Management Team to Success

Congratulations! You now have the opportunity to lead a team of other product managers. Or maybe you want to position yourself as a contender for a leadership position and make a proposal.  What should be your first steps?

You already know about the constraints: your product managers are very busy, so any new team-building effort will have to come at the expense of something else. You are also aware that, when left to their own devices, most product managers will tend to neglect their strategic role and slide towards the tactical, which is not sustainable in the long term.

With this in mind, how can you build a great Product Management team?

Of course you need to carefully listen to all parties, as well as tirelessly communicate your plans. However, here are 5 values which can help you progress tremendously and, if applied carefully, can help you set the tone.

1) Collaboration between product managers: Most product managers work in isolations, ignoring what the other product managers are doing. They may be competing against each other (not a bad thing when kept in check, more on this later) unnecessarily for resources, the customer’s yearly budget as well as the sales force’s attention. Some may have found creative solutions to problems which other Product managers don’t even know they have. Clearly you need to get your Product managers to talk to each other. How can this be done?

  • Share what works and what does not. Have each product manager present to the group their  successes and a failures
  • Improve usage of and proficiency in company tools such as CRM, SharePoint, marketing portal and internal blogs to facilitate the exchange of information
  • Share important analyst/industry data to ensure the group shares a common view of your industry
  • Improve product linkages: Brainstorm on how your team’s products can leverage or integrate with each other or new possibility for creative packaging.
  • Encourage Product managers to review each other’s important documents, such as business cases, market positioning or even requirement specifications prior to releasing them outside the group.

No doubt this requires a big time commitment, and not everything has to be implemented on day one, but the productivity improvements will be compelling.

2) Inside/Outside Accountability: It is important that your product managers know what is expected of them and what is not. Similarly the rest of the organization must be realistic and crystal-clear about what it can expect from the product management organization. Constant sales support may be acceptable for a new product during a specified period. However when a product manager performs sales support for a mature product, it is a symptom of organizational dysfunction. Here are some actions which you can take:

  • Have each PM time their activity in strategic vs. tactical buckets so they come to their own conclusions.  Identify the tasks which could be handled outside of the group and define obtainable goals to outsource them.  Pre and post-sales activity as well as product support should be good candidates for an owner outside of the team.
  • Prioritization of resources and communication of the choices internally and externally.
  • Define what product management does and does not do and negotiate with outside teams how to handle a transition. That’s the hard part since many organizations think of product management as the place that does whatever is not accomplished by the rest of the company. You can use this as a first step.
  • Foster healthy competition between product managers by establishing fair rules and creating a climate of internal coopetition.

You should expect strong resistance from other groups who may not understand why all of a sudden you stop helping them. Your ability to focus on the strategic depends on your ability to convince them that it is not the role of your group.

3) Consistency of interfaces via process improvement: By enforcing a consistent interface between the product management team and each other department, the rest of the company will know over time what to expect when they interact with any member of your team.  Because your Product managers use the same types of documents, the same tried-and true-processes to accomplish well identified goals, the trust in your group‘s professionalism will improve. Here are some items which can benefit from better consistency:

  • All documents using a similar format
  • Rules about when and how to engage with sales, finance, billing, support, corporate, R&D, product marketing and customers
  • Business case process
  • Partnership management
  • New project prioritization process
  • Launch process and associated metrics
  • Requirement/Prototyping process
  • Obsolescence process
  • Win/Loss
  • P/L Tracking and Management

Basically, the concept here is that you want a consistent brand, brand message and brand delivery for product management.

4) Preparation: The crisis of the day is what makes you waste time. Anticipating crises is what will make your team get their heads above water and focus on the strategic.  By measuring what your Product managers do today, you can probably identify tasks that could benefit from preparation. Typical examples are:

  • Support, customers or Pre-sales FAQs
  • RFP: Database of answers to the most current questions
  • Product status reporting which includes risk and mitigation
  • Updated roadmaps and strategy presentations
  • Relevant industry and Customer data to present against non-fact-based opinions.

5) Innovation. Your Product managers are paid to be thought leaders who push the company forward. How can they do so? Here are several initiatives which you can drive with your team to be ahead of the curve:

  • Strategic Roadmap process
  • Win/Loss process
  • Idea management/prioritization/business case.
  • Innovation Off-Site Discovery sessions (basically a way to separate yourself from the office hassles to concentrate on innovation.)

Of course, much more is needed to run a group. However, these foundational values: collaboration, accountability, consistency, preparation and innovation should guide your group toward a better future.

So You Got the Product Manager Position – Should you take it?

In this economy, you spend so much time trying to find and land a Product Management position. So what happens when you get an opportunity?  How should you decide if you are going to take a job or not?  There are a few factors that we consider when we look at a possible position.

Respect: When you join, you will get the benefit of the doubt for a while but you will need to earn the respect of your co-workers and this may take a while. But this may never happen if the product management organization is not respected in your company.

P/L Ownership:  The holy grail of Product Management – everyone wants it, but only the senior guys get it.  If you get P/L ownership, then you know that you will be playing a key role in the product and the company.  But what if, like most of us, you don’t get it?  That doesn’t necessarily mean that you should skip the position. You should, however, question seriously how much influence you are going to have on your product.  Are you going to be the one developing the product budget for executive review?  Are you going to be the one proposing prices and sales incentives?  If so, while you don’t own the P/L, you really have a significant influence on it.

One other factor to consider for the P/L: Many companies may not have the data available or accounting processes in place to deliver on the promise of P/L control.  Be sure you understand how they track costs and revenue before you accept a promise of P/L control.

Process: Does this company use any type of process in their Product Management discipline?  This is going to tell you two things:  First, how mature their Product Management organization is.  If they have been around for a while or have some experienced people, they are going to have a process of some sort.  Second, how seriously executive management takes PM.  Process creation and execution is expensive and only pays for itself in the long run.  The only way that you can get a solid process in place is with executive sponsorship.

Risk Profile: You may assume that companies with a well-defined process make product decisions quickly and efficiently, but this isn’t necessarily the case. Each company has a different level of comfort with risk which usually plays out in the speed of their product investment decisions. If the executive team is risk averse and uncomfortable pulling the trigger, you may find yourself in a never ending cycle of information gathering and approval meetings.

Marketing:  What type of marketing department does this organization have? Are they the “entertain customers and drink martinis” type of marketers or are they the “number crunching, graph making, ROI generating” type of marketers?  If they are the former, you are going to be guessing a lot about your product direction, which is going to be a miserable experience.  If they are the latter, then you can bet that a partnership for success is underway.

Chain of Command:  Who do you report to – the head of Marketing or the head of Product Development?  Reporting to the head of marketing tells you that you are going to have a customer focused experience while reporting to the head of Product Development tells you that you are going to have a technical/engineering focus to your position.  Either one is fine, but you want to be sure that you have a solid understanding of which one plays to your strengths. You may also want to consider which parts of the organization hold the most power. Did the CEO rise up through the technical ranks or was he a sales guy? Obtaining some perspective on the corporate power structure will provide you with some insight on whether you will be operating from a position of power or as an underdog.

Idea Generation:  Where do the ideas come from in the company?  Are they generated from the Executive Suite?  Do they come out of Product Management?  Or do you get the standard answer of “Ideas can come from anywhere…” which directly translates to “I have no clue where our ideas come from, they just kind of show up…”  That isn’t to say that innovation is limited only to the geniuses in Product Management, but that is the whole reason that product management exists – to generate and implement product ideas.  If the company’s ideas aren’t mainly coming out of product management, they either (a) aren’t listening to them or (b) hired lousy product managers.

Customer Profile: Does the company have a wide range of customers from a diverse set of markets and industries or is a large percentage of revenue dependent upon one market? One customer? This has a huge impact on the sort of product manager you’ll be able to be. One of the differences between being a consulting organization and a product organization is the ability to produce products that appeal to a large number of customers – not just one particular customer. When a company is dependent upon a handful of customers for its livelihood, it is difficult if not impossible to say no to their enhancement requests. This is proves to be a vicious cycle since the more attention you pay to your key customers, the fewer resources you have available to build a market solution.

Solid Product Suite:  Would you buy the products the company sells?  If not, are they good products that are poorly marketed?  Are they built with quality, but they don’t meet the needs of the end user?  Or are they just bad products?  I wouldn’t necessarily turn down a company with bad products – that is a fantastic opportunity to help a company turn itself around.  However, you really need to understand why the products are failing so that you can properly assess if you can fix the problems and right the ship.

So what if the products are very successful – then you take the job, right?  Not necessarily.  They might be looking for a caretaker product manager to ensure that nothing goes wrong as their product suite matures and sunsets.  That might not present the growth opportunities and challenges that you need.

Culture and Ethics: This is a difficult attribute to consider, but you’ll be doing yourself a favor by doing a little soul-searching to make sure your personality and beliefs are aligned with the company you’re going to join. This may be an obvious for some industries like alcohol and gaming, but some business plans and practices fall into a grey area.  Every company and industry has different set of norms that you must be comfortable with in order to be successful.

These are a few things that we consider when evaluating a possible product manager position.  We would love to hear your take on the subject – what do you use evaluate possible positions and more importantly, what do you wish you used to evaluate a position in hindsight.

Published! Pragmatic Marketing Monthly Newsletter

Thanks for all your comments on our Product Manager Wanted post. This topic really struck a cord with the product management community – in fact, the good folks over at Pragmatic Marketing are including it as part of their monthly newsletter. With new articles for technology product managers and marketers each month, it’s definitely worth a read.

On a side note, feedback and support such as this helps ensure that our posts remain timely and relevant. Consider this a “Call for Topics” if you will. Help us out by dropping your suggestions into the comments section of this post. Thanks!

Innovate in 12 Dimensions

When it comes to innovation, I have been guilty of thinking only in one dimension. I have mostly focused only on new features and functionality changes in my products that differentiate it from the competition. I know I am not the only product manager with this limitation.

However, not envisioning a new initiative as a whole new business process may result in failure. A good product may target the wrong buyer in the right segment, a marketing message could hit the wrong audience, a sales force may react negatively to your new solution.

So it is worth mentioning when a tool is available to help product managers think more systematically at an early stage of their innovation process.

Such is the case with the “Innovation Radar” presented in a complete fashion in “Grow from Within”, a book from Robert C. Wolcott and Michael J. Lippiz published in 2009. The Innovation Radar forces you to look at innovation in 12 different ways and encourages product managers to adopt a comprehensive view of their innovation initiative. The book is tackling a more general topic: investigate what makes an intrapreneur successful and the innovation radar is only a chapter of the book. Great read nonetheless.

The goal of this post is not to extensively discuss the model, as I could not do it as well as the authors.  However, in this post, I will provide a brief description of the Innovation Radar and help you imagine how you can apply the model to:

  • Innovate with your existing products
  • Build a comprehensive approach for developing new products
  • Anticipate avenues that your competitors could take

So in order to discuss the Innovation Radar, please look at the illustration above, which is directly taken from the book. There are 4 major dimensions, Offering (What), Customers (Who), Processes (How) and Presence (Where). The other 8 dimensions are distributed between these 4 dimensions based on their type of impact. For example, the customer experience is obviously between “Customers” and “Process.” Let’s go through each dimension, with a short explanation and a few questions you can ask yourself about it:

1 Offerings: Creating unique products or services that are valued by customers. What unique architecture or feature set can we bring to our customers? That’s the dimension most of us focus on.

2 Platforms: Common components which can be developed and reused for multiple markets or customers. What are the common technologies, architectures and modules which can be shared by my customer base to reduce my costs?

3 Solutions: Customized, integrated set of products and services to solve a customer’s specific business problem. Can I package my offering differently in order to simplify, bring more flexibility, or reduce cost  in order to attract different buyers?

4 Customers: Discover new customer categories, different buyer personas, or unmet/unarticulated needs. Could there be unidentified business problems your customers may be facing?Is there an unserved up- or down-market?

5 Customer experience: Everything each actor in the sales cycle and end users see or feel about your product and your company. What collateral would resonate with my audience? Can I simplify the user interface to address a new segment? What type of support do I need for this new audience?

6 Value Capture: The mechanisms a company creates to earn its share of the market. How can we redesign the sales cycle in increase our margins? What pricing model leads to optimal profit margin?

7 Processes: The configuration of business activities to conduct operations. How can I reorganize support to reduce costs? Can I develop a single methodology which can be reused for a specific class of services?

8 Organization: How the company structures itself to respond to the needs of the customer. Will this new concept benefit from an internal, separate organization that can execute faster? Are the proper incentives in place to ensure that each team member delivers on the strategy?

9 Supply Chain: The method to deliver product and services. What could be automated, or configured by the customer to provide faster delivery, cheaper cost or improved flexibility?

10 Presence: Channels employed by the company to bring the offering to the market. Should I replace my “farmers” account managers by “hunters”? How can I integrate my offering into a partner’s larger solution and use that partner as a new channel?

11 Network: How a company or product can connect to the customer to improve the value of the product. Can different types of users in my installed base benefit from my existing products? What interfaces should I build to leverage a partner’s solution and unleash new value for my customer?

12 Brand: Symbols, words or marks used by a company to communicate a promise or an image to the customer. How can the company’s brand be leveraged to reinforce the new concept? Would my audience feel that the innovation falls naturally within the brand, or would it be considered a stretch?

The true value of the tool is that, when used correctly, it forces you to envision many of your innovative product’s implications upfront.

Gather a multidisciplinary team in one room for a brainstorming session and go through a series of questions which you will have carefully prepared in advance for each dimension listed above. Be careful not to lead your audience or you will kill creativity. Together, in a few hours and under your lead, the team can minimize the surprises your innovation will produce and define what’s needed, rather than forcing you to operate later with a set of options limited by your budget and time-to-market imperatives. That could mean the difference between success and failure. And maybe you may even find new ways to innovate in the process.