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Developing
a winning
product offering
Customer experience
The second element in a product offering is the customer experience.
This refers to how the customer experiences learning about, buying,
implementing, using, maintaining and eventually transitioning from
the product. Defining a good customer experience addresses the second
category of customer needs, their buying needs. As discussed in our
markets
paper, customers do not buy until both their core needs are
satisfied with the whole product solution, and their buying needs are
satisfied with a good customer experience. As such, it is as important
to think through and explicitly design the customer experience you
deliver as it is to design the right product itself.
Designing a good customer experience requires you to walk through every
touchpoint (web site, phone, personal meeting, email, etc.) that a typical
customer experiences doing business with your company. It is very important
to do this from the perspective of the customer, and based on this research,
to think through the different stages of the customer’s buying and ownership
cycle. A good description of this approach was given by Shapiro, Rangan
and Sviokla in their Harvard Business Review classic Staple Yourself
to an Order3.
Once you have identified the current customer experience at each stage
of their buying and ownership cycle, you can begin to define the preferred
experience that you want to give customers. By speaking with customers,
brainstorming internally, and looking for lessons from a wide range of
companies who deliver superb customer experiences, you can define the
myriad details that collectively will provide the right experience to
your customers.
Implementing this customer experience design is a matter of identifying which of the core processes in your business, particularly in sales, marketing, operations and customer service, need to change in order to deliver the desired experience. We will explore this in more detail in our upcoming paper on the processes component of the innovation business model.
Pricing
The third element of a product offering is pricing. Pricing is obviously
a critically important variable, and a key determinant of market success
for a new innovation. For many products, relatively small variants
in pricing can have major impacts both in winning customers and in
product profitability. How do you go about defining an optimal pricing
model?
The first step is to understand the real value you deliver to your customer.
The value you deliver is a function of your product, the whole solution
you enable, and the customer experience you deliver. Each of these elements
has potentially quantifiable value to the customer.
Your primary goal in defining the value you deliver should be to calculate,
as specifically as possible, the actual dollars and cents benefit your
customer enjoys as a result of buying and implementing your solution.
Ideally, you should do this in discussion with actual customers and prospects
using their data, so that they agree with and endorse your calculation
of the value delivered. This analysis is fundamental to being able to
develop a good pricing model.
On top of these tangible, bottom line benefits, there also may be a number
of other ways in which the customer gets value from your solution. You
should carefully identify and make explicit each of these, supported
by actual customer testimonials wherever possible. However, in our experience,
customers define value for purposes of pricing largely as tangible value
that they really can see and believe, and all the intangible benefits
are seen as incremental to that.
The total value to your customer sets the ceiling for the price you can
charge. Your goal in pricing is to capture a reasonable proportion of
this total value for your company, while ensuring your customer still
enjoys sufficient net value (total value less the price) to make the
purchase a good decision.
Once you have a clear, demonstrable sense of the value you deliver to
your customer, the next step is to understand competitive pricing – more
specifically, the cost to your customer of the other options available
to them to solve the problem. This may be as simple as reviewing available
market pricing for competitive solutions. Often though, it is more difficult
to get this kind of information, as competitive pricing may not be readily
available, or the alternatives may include internally developed solutions.
Through a combination of online research, speaking with customers, channel
partners, salespeople who used to work for competitors, and other industry
players, and reasonable assumptions, over time it is normally possible
to construct a pretty accurate read on the true cost to your customer
of each option.
Competitive pricing typically sets a strong benchmark in a market, and
shapes customer expectations. You need to set your price relative to
competitor pricing, based on the difference in value delivered to the
customer of your solution versus competing solutions. Once you understand
competitive pricing and the relative value of your solution, you can
determine whether your solution warrants a premium or a discount relative
to these other solutions. With that, you have now arrived at a total
price you could charge for your solution.
The next step is to consider what payment model makes most sense for
your product offering, particularly a one-time versus an annuity payment.
Many technology solutions are migrating towards an annuity model, as
this makes the solution much more affordable for customers, and tends
to lead to higher total lifetime pricing. However, an annuity pricing
model typically requires the business to have a much higher level of
funding to finance the initial sales.
In recent years, a range of other pricing models have evolved in various
technology markets, particularly for Internet businesses with very low
marginal product costs. Our paper on “free”
pricing identifies four of
these models: the subsidy model, upgrade model, advertising model and
asset model.
Your pricing strategy should reflect your overall business goals. In some cases, it may make sense to price low to gain market share. Invariably, however, pricing in technology markets falls quickly over time, so many technology products seek higher initial price points to capture more value and help repay some of the upfront development costs before competitive conditions drive pricing and margins lower.
More than most elements, pricing, particularly with new innovations, needs to be approached as experimentation. A number of different pricing options should be explored and tested in relatively short order, until enough learning has been gained to converge on an optimal pricing model.
Collaboration
The fourth element of a product offering is collaboration – how your solution fits with other solutions to provide the whole solution to the customer. For most technology-based companies, this is an extremely important part of the product offering. Your solution needs to meet industry standards so it can integrate generally with other products and technologies, and it may need to have specific integrations developed for dominant market solutions, which are particularly important to your product gaining market acceptance and traction.
To define your collaboration model, you need a deep understanding of your target market’s value chain, as well as the broader value network comprising the value chains of all the complementary solutions in the industry. For some companies with whom we’ve worked, the list of potential partners and collaboration opportunities has comprised hundreds of companies.
Once you’ve developed such a list, you need to be guided by the priority needs of your target customers, and the whole solution you want to provide, in order to determine your priorities for developing specific integration capability with selected complementary products in your market.
In some cases, particularly with early stage markets, there is an opportunity to gain a dominant market position though a well-designed and aggressive collaboration model. This involves identifying and securing the support of major industry players for your solution, on the basis of a very clear value proposition to each of them. In the best case scenario, your solution becomes the industry standard, a very desirable and valuable position to occupy in a rapidly growing market.
Differentiation
The final element of a product offering is differentiation – defining how your solution is superior to other options, and sustaining that superiority over time. For customers, partners, influencers and other market players, differentiation is achieved through positioning – how your solution is positioned relative to other solutions, and the extent to which your solution meets customer needs compared to their other options.
This positioning should take account of the total of the other four elements of the product offering – the product itself, the customer experience, pricing and collaboration. You need to position the sum total of these four elements as a seamless whole, relative to the sum total of the same four elements of competitive product offerings, in the mind of your customer.
Whether you do anything or not, customers will position your solution in their minds relative to other solutions. It’s a human tendency to do so in order to make sense of our options and decide what to purchase. Given this reality, rather than just leaving it to the customer to position your solution based on incomplete information, you are far better off proactively positioning your solution through a clearly articulated value proposition.
Value proposition
A value proposition is a summary of the total value to the recipient, where total value is defined as total benefits less total costs. Note that only those elements of your product offering – product features, customer experience and collaboration - that meet customer needs are benefits. All other elements offer no benefits, and may even be a negative and thus part of total costs. Total costs include pricing and other factors such as time and risk. An effective value proposition must offer substantially greater total benefits than total costs.
You value proposition must be developed in light of buyer alternatives - your offering must not only be of value, but of greater value than all other options available to your target market. In order to create a proposition that meets your market's needs better than all other options, it may be necessary to explore adding or removing both benefits and costs.
In some cases you offer more value by increasing benefits at a similar
or lower cost - compare the cost of a PC today versus five years ago.
In other cases you increase value by eliminating many features and even
some benefits - but at a dramatically lower cost. Southwest Airlines
is a well-known example of this. Sometimes you can increase benefits
significantly at a premium price and still deliver substantially more
value - Starbucks is an obvious example.
A good value proposition, in addition to offering value, must be effectively
communicated to your target market. Strong value propositions should
be clear, concise and compelling.
While you begin by defining the value proposition to your customer, you also need to define value propositions to other key players, particularly your various categories of partners, including channel partners, vendor partners, technology partners and strategic partners. In each case, the total benefits of your product offering must exceed the total costs to them in order for your offering to create net value to them.
Equally importantly, your product offering needs a clear value proposition to your own company. The total benefits to your company – such as long term revenue, profitability, market reputation and customer relationships – must exceed the total investment and operating costs incurred in creating, marketing and delivering the product to the market.
Value protection
In addition to a value proposition, differentiation includes the need for value protection, to ensure you can sustain your differentiation and competitive advantage for as long as possible, and resist competitive value erosion. While intellectual property protection is frequently the first thought that comes to mind in this regard, there are in fact a number of approaches to consider in defining the value protection element of your product offering. In our paper on mitigating competitive erosion, we identify a dozen different approaches grouped into two broad categories: limiting competitors’ ability to offer a similar product and/or price, and encouraging customer preference for your product other than through features or price.
* * *
In summary, this paper has presented a framework and set of guidelines to developing a winning product offering, the second component of designing a successful business model. A winning product offering comprises a well-designed, seamless blend of five elements:
- a superb product definition, enabled by your technology innovation, to provide the whole solution to the customer’s core needs and nothing that the customer does not need;
- an excellent customer experience throughout the customer’s buying and ownership lifecycle that meets their buying needs completely;
- an optimal pricing model that captures the maximum possible value for your company while ensuring sufficient net value is delivered to the customer;
- a well thought-out collaboration model, to ensure your product integrates effectively with complementary products and technologies across your industry’s value network;
- sound, sustainable differentiation, through effective positioning and value propositions to your customers, partners and your own company, and a strong value protection model.
References
- Christensen, Clayton. The Innovators Dilemma: When New Technologies Cause Great Firms to Fail. Boston: Harvard Business School Press, 1997
- Moore, Geoffrey A. Inside the Tornado. New York: Harper Collins, 2004
- Benson P. Shapiro, V. Kasturi Rangan, John J. Sviokla. Staple Yourself to an Order. Harvard Business Review, July / August 1992.
About the author
Michael Lurie is Founder and CEO of Blue Mine Group in San Diego, CA. Blue Mine Group provides courses, workshops and consulting in business model design for technology innovation.