“When you’re ready to take your product or service to market, you have to set a price for it.” This is probably one of the most mistaken notions in product management and marketing.
In part, thanks to the industrial companies of the last century, traditional product development process primarily focused on the product performance. Consequently, the product-led innovation process created increasingly superior solutions that were in search of a problem to solve. Since those companies formulated their value-propositions just before the solutions launched, they systemically missed on the opportunities for building the solutions that both maximized the customer adoption and met higher profit margins.
Developing the solutions that people want to buy
Product-led innovation began by R&D creating a new solution or an improved product. R&D then handed the product to finance to decide on its price, since finance owned the cost and supply relationships and the capital requirements. Next, marketing was asked to “figure out” a value proposition. It was only at this stage in the process the notion of “value” came into play, and it was generally viewed more as a "creative" process than an analytical one. The process of generating a value proposition was primarily about crafting a message which proficiently matched the customer segments with certain attributes of a solution, rather developing the features and functionality of "quantifiable value" for which people actually were willing to pay.
Acquiring pricing power over competition
The problem with his model of innovation is that you’re pricing a solution that’s already built! Pricing becomes a competitive advantage only when you build an offering with a more advantageous cost structure than competition. Product managers can achieve higher profitability if they can focus on a set of features and functionality knowing their buyers' willingness to pay for them. Because only then they can engineer a profitable solution with targeted cost structure. Otherwise, pricing a solution after it’s built may blindside the product development process as teams may have used up their resources on features that are table stakes or, as in most cases, over-engineered.
Pricing becomes a competitive advantage only when you build an offering with a more advantageous cost structure than competition.
Monetization-first product development
Once you determine why and how much value people put over your solution, only then you can determine the price point at which you must deliver your solution. Informed by the quantified benefit that your solution delivers and the price point at which your buyers perceive to be just, you can better develop the solutions that are profitable in the long run.
Here are a few questions for your product team(s) to consider when aligning your product development process with the value that your solution delivers:
What benefits does your solution provide to the way your buyers work, play, and live their lives?
How can you quantify the benefits that your solution delivers?
What’s the economic value of the gains, benefits, and experiences that your solution provides, for each type of customer, on a daily, monthly, or annual basis?
How do your different buyers vary in their willingness to pay for certain features and attributes?
What is the cost structure you need to achieve to build your solution to the price point(s) of adoption and at your margin goals?
Value-based pricing can help align your product development, marketing, and sales tremendously – only if you integrate it sufficiently early in the process. Visit our Pricing Resources to learn how.
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