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ProductCamp Vancouver 2019 Value to the Customer

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Price and value are central to the user experience. Ignoring them leads to poor design decisions. Ask how does each stakeholder receive emotional and economic value? How is that value distributed over the customer journey?

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ProductCamp Vancouver 2019 Value to the Customer

  1. 1. Pricing as part of the user experience Vancouver, Saturday March 9, 2019 karen@ibbaka.com steven@ibbaka.com March 9, 2019 1 I Ibbaka © 2019
  2. 2. Session Goals The key product management metric is Value to Customer (V2C) • Understand value and the role it plays in pricing • See how value informs market segmentation • How to design pricing based on value • Managing value and pricing over the customer journey 2 I Ibbaka © 2019
  3. 3. 3 Meetup March 21 at VentureLabs Pricing and Value Case Studies from London and Vancouver London – how the Financial Times is transforming its B2B value proposition with Karen Chiang Vancouver – how understanding economic impact transforms pricing and go-to-market strategy at a precision agriculture company with Brian Kahnert
  4. 4. DEMONSTRATE VALUE TO YOUR CUSTOMERS Without value there is nothing to price. To price on value, one has to create and communicate differentiated value to the customer. TARGET THE BEST CUSTOMERS Targeting the most attractive customer segments that will respond to your pricing and value proposition is a key component of go-to-market strategy. Targeting is about prioritizing, as well as generating the most return on your marketing and sales investment. CAPTURE A FAIR SHARE OF THAT VALUE Customers will only accept value claims and pricing if they think you are being fair to them. What does it mean to be fair? In pricing, the perception of fairness is based on three things: transparency, consistency and value. OPTIMIZE FOR REVENUE, PROFIT OR MARKET SHARE Pricing is a powerful lever to maximize either revenue, profit or market share, but not all at the same time. Effective pricing requires alignment around pricing goals and managing critical trade-offs. About Ibbaka 4 I Ibbaka © 2019
  5. 5. Pricing in product management 5 Offer Cost Price Customer Value? What we often see
  6. 6. Pricing in product management 6 Offer Cost Price Customer Value? Customer Value Offer Price Cost What we often see A better approach
  7. 7. Pricing Goals and Value Pricing is a powerful lever to improve revenue, profit or market share ➔ However, without value there is nothing to price Price should reflect value ➔ Pricing and value are closely connected ➔ When there is a value-price disconnect, people are unhappy 7
  8. 8. Value and Differentiation What is value? 1. Is for a specific customer (or segment) ➔ Does not depend on costs ➔ Is not the value of the customer to the vendor 2. Is relative to the alternatives ➔ There is always an alternative ➔ The alternative is not necessarily your direct competitor 3. Has economic and emotional components ➔ Today, both B2C and B2B requires economic and emotional value drivers ➔ If either are nil or even weak, pricing power evaporates 8 I Ibbaka © 2019
  9. 9. Self Esteem Community Security Basic Functionality Emotional Value 9 I Ibbaka © 2019 PricingPower Maslow’s Hierarchy Provides a good way to frame emotional value Basic functionality (that drives most economic value) is not a powerful way to frame emotional value The higher up the hierarchy you can position your offer the more pricing power you will have Self Actualization
  10. 10. Emotional Value Drivers 10 I Ibbaka © 2019 Emotional value drivers frame the conversation with the buyer and determine pricing power They are one factor in market segmentation Consider the emotional value drivers for each person in the stakeholder map Stakeholders Maslow Business Economic Technical Procurement Influencer Gate Keeper Self Actualization Esteem Belonging Security Basic Functionality
  11. 11. Economic Value – Economic Value Estimation (EVE) 11 I Ibbaka © 2019 Economic Value Estimation (EVE) Developed by Tom Nagle Value drivers measure the impact of your solution on your customer’s P&L relative to an alternative Always consider your own shortcomings (competitors’ differentiation) and unique costs (switching costs) relative to the alternative Next Best Alternative Positive Value Drivers Negative Value Drivers Differentiation Value Normal Price Range
  12. 12. Positive Economic Value Drivers 12 I Ibbaka © 2019 ECONOMIC VALUE DRIVER EXAMPLES Increase revenues Increase market size Increase market share Improve pipeline metrics Decrease operating expenses Reduced employee turnover/cost of recruiting Streamlined/automated administration Decrease operating capital Reduced inventory Faster collections/accounts receivable Decrease capital investment Get more productivity from existing assets Defer capital investments Decrease risk Better compliance Increase options Flexible benefit packages tailored to individual needs Ability to scale usage as required Economic value drivers measure how your solution impacts your customer’s financial statements compared to the alternatives There are six types of Economic Value Driver
  13. 13. Negative Economic Value Drivers • Your shortcomings compared to the next best competitive alternative (that is, your competitor’s differentiation) • The unique costs associated with your offer, such as switching costs 13 I Ibbaka © 2019
  14. 14. Value and Differentiation 14 I Ibbaka © 2019 Your Offer Alternative Unmet Needs Commodity Your Differentiation Competitor Differentiation Irrelevant Functionality Irrelevant Functionality Potential to Innovate Customer Needs
  15. 15. Your Offer Alternative Commodity Your Differentiation Competitor Differentiation Customer Needs Pricing and Differentiation 15 I Ibbaka © 2019 The price of the commoditized component is set by market forces Your pricing power comes from your differentiation
  16. 16. Your Offer Alternative Unmet Needs Commodity Your Differentiation Competitor Differentiation Irrelevant Functionality Irrelevant Functionality Potential to Innovate Value and Differentiation 16 I Ibbaka © 2019 Price of Alternative Options Risk CapEx OpCap OpEx Revenues + Value Drivers Shortcomings - Value Drivers Unique Costs Customer Needs
  17. 17. Customers with similar demographics can be very different from each other Market Segmentation and Targeting 17 I Ibbaka © 2019 70 years old Lives in a castle Wealthy
  18. 18. Market Segmentation and Targeting Customers with similar demographics can be very different from each other 18 I Ibbaka © 2019 Prince Charles Ozzy Osbourne 70 years old Lives in a castle Wealthy
  19. 19. Market Segmentation and Targeting We segment markets in order to find customers 1. Who get value in the same way 2. Who buy in the same way 3. Who drive your performance in the same way Segmenting markets is the first step in value-based pricing 19 I Ibbaka © 2019
  20. 20. Customer 1 Customer 2 Customer 3 Customer n Economic Value Driver - Lower operating costs XXX X XX … - Global risk management X XXX XX … Emotional Value Driver - Treat employees equally XXX XXX … - Support employees needs X XX X … Market Segmentation by Value Driver 20 I Ibbaka © 2019 It can be difficult to see how customers cluster just by eye-balling the data One needs to identify deeper patterns that can combine economic and emotional value drivers
  21. 21. Consideration Trial Negotiation Purchase Adoption Market Segmentation and the Buying Process 21 I Ibbaka © 2019 Awareness of Solution Awareness of Need Offer Functions Proof Points Proof Point In most buying processes the Emotional sets the context for the Economic but this is dependent on the buying process the stakeholder +
  22. 22. Market Segmentation and the Buying Process 22 I Ibbaka © 2019 The buying process is defined by two questions: 1. What are the trusted sources of information 2. How are decisions made Consideration Trial Negotiation Purchase Adoption Awareness of Solution Awareness of Need Offer Functions Proof Points Proof Point +
  23. 23. Value and Pricing – Pricing Model – The Basic Pricing Models 23 I Ibbaka © 2019 Model Advantages Disadvantages When to Use Cost Plus Simple Seen to be fair Pushes pricing down over time Does not relate to value For services with little differentiation When the client controls the deliverables Market Following Simple Loss of control Market risks For traded commodities with little differentiation Value Based Supports marketing and sales Leads to higher prices for differentiated offers More complex Requires understanding of customer’s business and competitors offers For differentiated offers Performance Based Shared Risk Realize higher price points when successful Risk Transparency When it both parties agree to the risks and the financial benefit can be measured
  24. 24. Value and Pricing – Pricing Model – The Basic Pricing Models 24 I Ibbaka © 2019 Model Advantages Disadvantages When to Use Cost Plus Simple Seen to be fair Pushes pricing down over time Does not relate to value For services with little differentiation When the client controls the deliverables Market Following Simple Loss of control Market risks For traded commodities with little differentiation Value Based Supports marketing and sales Leads to higher prices for differentiated offers More complex Requires understanding of customer’s business and competitors offers For differentiated offers Performance Based Shared Risk Realize higher price points when successful Risk Transparency When it both parties agree to the risks and the financial benefit can be measured
  25. 25. Value and Pricing – Pricing Model – The Basic Pricing Models 25 I Ibbaka © 2019 Kare Model Advantages Disadvantages When to Use Cost Plus Simple Seen to be fair Pushes pricing down over time Does not relate to value For services with little differentiation When the client controls the deliverables Market Following Simple Loss of control Market risks For traded commodities with little differentiation Value Based Supports marketing and sales Leads to higher prices for differentiated offers More complex Requires understanding of customer’s business and competitors offers For differentiated offers Performance Based Shared Risk Realize higher price points when successful Risk Transparency When it both parties agree to the risks and the financial benefit can be measured
  26. 26. Value and Pricing – Pricing Model – The Basic Pricing Models 26 I Ibbaka © 2019 Model Advantages Disadvantages When to Use Cost Plus Simple Seen to be fair Pushes pricing down over time Does not relate to value For services with little differentiation When the client controls the deliverables Market Following Simple Loss of control Market risks For traded commodities with little differentiation Value Based Supports marketing and sales Leads to higher prices for differentiated offers More complex Requires understanding of customer’s business and competitors offers For differentiated offers Performance Based Shared Risk Realize higher price points when successful Risk Transparency When it both parties agree to the risks and the financial benefit can be measured
  27. 27. Pricing Design – Value Metrics and Pricing Metrics Pricing Metric = The unit of consumption by which you charge (Liters of Paint) Value metric = The unit of consumption by which your customer gets value (Square Meters Covered) 27 I Ibbaka © 2019
  28. 28. Pricing Design – Value Metrics and Pricing Metrics 28 I Ibbaka © 2019 Power by the hour Value Metric ≈ Pricing Metric Does your pricing metric track your value metric?
  29. 29. Value and Pricing – Pricing Models – Fences and Pricing Metrics The pricing model is the combination of pricing metrics and fences used to price different packages or offers and to guide customers to the most appropriate offer Pricing metric – the unit by which things are priced Fence – limits to the offer that guide customers to the right offer In most cases, a pricing metric can be converted into a fence and vice versa Pricing Metrics and Fences are the building materials for pricing models and packaging Let’s look at Salesforce as an example … 29 I Ibbaka © 2019
  30. 30. Value and Pricing – Pricing Models – Salesforce as an example 30 I Ibbaka © 2019 ‘Users’ is the pricing metric ‘Lead/functionality ‘ are a fence Number of leads is an alternative pricing metric ‘Campaigns’ is another fence
  31. 31. Value and Pricing – Pricing Models – Salesforce as an example 31 I Ibbaka © 2019 0 50 100 150 200 250 300 350 Essentials Professional Enterprise Unlimited Price per User • Check the shape of the pricing curve, it is concave or convex? • Concave curves are associated with more opportunities at the bottom end of the market • Convex curves are more common when the upper end of the market is more important Ask also 1. What is the target offer? 2. What frames the price (makes a specific offer appear to be expensive or inexpensive)?
  32. 32. Value and Pricing – Pricing Model – Types of Pricing Metric Pricing metrics need to be measurable And can be combined • Time and materials (cost plus) • Number of users (of different types) • Number of transactions • Value of transactions • Access controls (geography, organization, industry) • Performance based (percentage of economic benefit) … New ways of collecting and analysing data make possible many new pricing models 32 I Ibbaka © 2019
  33. 33. Choosing a Pricing Metric 33 I Ibbaka © 2019 Tracks difference in value across segments Tracks with difference in cost to serve Easy to measure and enforce Facilitates positioning Aligns with value Pricing Metric Choosing the pricing metric(s) is the critical step in pricing design Different segments can (often should) have different metrics Economic value drivers map to value metrics The pricing metric should be chosen from the value metrics (other value metrics are often used as fences)
  34. 34. Pricing Design – Pricing and Value over the Customer Journey The buying process in the beginning of the customer journey The Customer Journey Map is used to show the journey • A core tool for service design • A way to map all of the touchpoints with a customer from first awareness to after they have stopped engaging • Often looks in two directions – at the person receiving or using a product or service and at the person providing the product or service • Generally focuses on the emotional response 34 I Ibbaka © 2019
  35. 35. Pricing Design – Pricing and Value over the Customer Journey 35 I Ibbaka © 2019 Journey map is a visualization of an experience of a person over time Assumptions vs. Research Often combined with: - Service blueprint - Stakeholder map - Value network map
  36. 36. Pricing Design – Pricing and Value over the Customer Journey 36 I Ibbaka © 2019 • When is value understood? • When does value resonate? • When is value delivered? • When is price communicated? • When is price claimed? Understanding customer journey mapping and pricing Touchpoints -> Stakeholder Channel Artifacts Emotional Response Value Communication Price Communication Value to Customer (V2C) Customer Acquisition Costs (CAC) Cost to Serve Value of Customer (LTV) LTV/CAC V2C/LTV
  37. 37. V2C and LTV – Value and Unit Metrics 37 I Ibbaka © 2019 The key unit metric Value to the Customer (V2C) How much value do you create for different stakeholders over time? How does value delivery map to price?
  38. 38. V2C and LTV – Value Over Time 38 I Ibbaka © 2019 Value Time Value can build steadily over time
  39. 39. V2C and LTV – Value Over Time 39 I Ibbaka © 2019 Value Time Sometimes a gestation period is needed before value builds rapidly, then levels off
  40. 40. V2C and LTV – Value Over Time 40 I Ibbaka © 2019 Value Time For some offers most of the value is delivered early on
  41. 41. V2C and LTV – Value Over Time 41 I Ibbaka © 2019 Value Time Does it make sense to have the same pricing model for each of these value distributions?
  42. 42. V2C and LTV – The foundational question 42 I Ibbaka © 2019 Long term viability requires that Value to the Customer > Lifetime Value of Customer And that Value Delivery leads Value Capture
  43. 43. Discussion Discussion – Wrap Up Are you designing based on value? How does value unfold over the customer experience? Is V2C > LTV? 43 I Ibbaka © 2019
  44. 44. Pricing changes over Moore’s technology lifecycle PRICING CONCEPTS – PRICING OVER THE LIFECYCLE 1 44 I Ibbaka © 2018
  45. 45. Innovators and Early Adopters Buy for Different Reasons PRICING CONCEPTS – PRICING OVER THE LIFECYCLE 2 (Initial Phases) 45 I Ibbaka © 2018 Innovators tend not to pay but influence Early Adopters Early Adopters pay a premium for a competitive advantage
  46. 46. Value Driver Structure Changes Between Bowling Alley and Tornado PRICING CONCEPTS – PRICING OVER THE LIFECYCLE 3 (Early Majority) 46 I Ibbaka © 2018 Bowling Alley Buyers Reference Each Other Value Drivers Specific to Their Vertical Tornado Buyers Buy Because Everyone is Buying Switch to Horizontal Value Drivers
  47. 47. Main Street B2B Buyers Are More Economic Value Driven PRICING CONCEPTS – PRICING OVER THE LIFECYCLE 4 (Late Majority) 47 I Ibbaka © 2018 On Main Street Solutions Proliferate Targeted at Tight Niches Without Differentiation Commodity Pricing Prevails
  48. 48. Laggards Buy Technology Bundled Into Other Solutions They Already Have PRICING CONCEPTS – PRICING OVER THE LIFECYCLE 5 (Laggards) 48 I Ibbaka © 2018 Laggards Don’t Buy Technology Solutions They Buy Solutions They Are Familiar With and Already Have
  49. 49. Pricing consultancy and technology company built by experienced entrepreneurs We understand innovation because we live it Our passion is improving product launch and in market success through better strategic pricing and execution Understand the larger picture of segmentation, targeting, value modeling, value propositions and pricing architecture Twitter LinkedInWebsite Steven Forth Managing Partner steven@ibbaka.com +1 604 763 7397 Karen Chiang Managing Partner karen@ibbaka.com +1 778 628 4085 Rashaqa Rahman Consultant rashaqa@ibbaka.com

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