Businesses can prevent over-engineering their solutions and capture more of the value that they create when they build their solutions to value-based price points. The value-based approach to product management provides product teams with guidelines to focus on building the differentiated products and features that the firm can sell at higher margins than its competitors. However, differentiation alone cannot guarantee a strong competitive position in a market.
4 Guiding Principles for Making Product Management Trade-offs and Decision
For product managers, there are four requirements for achieving higher than average margins and in most cases, all four of the conditions must be met:
1. Developing differentiated solutions that increase buyers' willingness-to-pay
2. Aligning their product and offer structures with different types of buyers
3. Delivering the offering with a low cost structure
4. Aligning their roadmap development with their primary, segmented growth targets
Armed by the larger organizational goals around margins and adoption, product owners can better prioritize their roadmap and prevent the over-engineering of their features and functionality. They also would be better off knowing the market-informed price points in relation to the true benefit of a particular differentiation that they will build. Thomas Nagle and Reed Holden stated it best, in their Strategies and Tactics of Pricing:
“Value-based companies challenge their engineers to develop products and services that can be produced at a cost low enough to make serving that market segment profitable at that target price.” - Nagle and Holden
When product teams evaluate their product roadmap on the basis of the economic value that the new feature and functionality will add, they accomplish two things. First, they utilize a quantifiable framework for their decision-making on the product development tradeoffs. This is very important because, in most organizations, the different stakeholders may have different ideas about what matters most or which feature will be of most value. Determining which differentiated features will be built at which price point in the very beginning of the product journey will enable all your teams to align on taking a new solution to market successfully.
Second, starting the product journey with pricing requires that all your teams are involved with your strategic direction from the get-go. Your marketing team will be able to evaluate the competitive and market dynamics while your sales team has your current customers’ ears on what additional offerings they would value most, as your finance team makes sure the cost and partnership structures of the new direction are aligned with the long-term organizational goals.
Integrate pricing and monetization early in your product cycle. It’s the only way to execute a market play with a more competitive and profitable cost structure than your competitors. As always, we're here to help to do that.
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