Pricing Digital Products and Data - Part 3
In part 3 of our series, we look at why 7 out of 10 digital innovations fail to make it in the market, and we reimagine the innovation process for creating digital transformations that actually make it in the market.
Before we dive in, for those of you who are just joining in the conversation, this is part of a series where we talk about the Third Wave of Digital Transformation and how companies should create new digital opportunities and successfully monetize them. In Part 1, we looked at the driving forces behind this transformation. In Part 2, we introduced a few new ways of thinking on how companies will take advantage of this $1.7 trillion opportunity and what types of opportunities gives them most opportunities for monetization and pricing power.
Product Development and Management Association – PDMA reports that on average, 65% of new products that launch fail. Just in 2010, the cost of failed products to the US economy was estimated to be $260 billion dollars. In a different study, Harvard Business School reported that only 25% of the 2,000 venture capital-funded startups made it between 2004 and 2010. And finally Accenture recently reported that 94% of businesses aren’t profiting from digital.
So while we’re all very excited about riding the next wave of digital transformation and bringing new products, services, and experiences to life, these numbers are incredibly alarming. Because there’s absolutely no doubt that a large ratio of these innovations were amazing products and services that came out of reasonable research, customer intimacy, market know-how and flat out brilliance – yet they couldn’t make it. 75% of them were even venture capital backed – by the people who know what to back, and they still flopped.
There’s something going on here, don’t you agree? Collectively, we’re doing something fundamentally wrong. It’s not hard to imagine that there may have been quite a few products in these failed categories that would have changed our lives in significant ways and we don’t have access to them anymore.
Here at Pricing Innovations, these are the kinds of things we think about every day, and today we’d like to share a few new and different ways of thinking about making it in the market. Here we introduce the 4 key concepts around creating “valuable” products that you can successfully monetize into “viable” businesses: value gap, value innovation, value stack, and value metric. We’ll dive deeper into each of these concepts, throughout the rest of our series.
1. Value Gap
The future digital offerings will be born out of the gap in value that customers have at a point in time. Contextual, behavioral, and immersive analytics will lead the process by which we identify and quantify that value gap. But in order for us to identify and quantify that value gap, we need to be looking for it.
2. Value Innovation
We call the notion of innovating for the gap ‘value innovation.’ The process for creating value innovation is significantly different than the process for creating product innovation. A minimally viable product does not necessarily lead to a minimally viable business, and you simply cannot agile your way into successful monetization.
3. Value Stack
Successful – both valuable and financially viable – products of the future will be those that align their offer structure with the value stacks of their different types of customers.
4. Value Metric
The innovations that meet or exceed their revenue targets are those that align their pricing and monetization metrics with the value metrics of their buyers.
So let’s peel this onion, shall we?
What’s a value gap?
The notion of a value gap refers to something very specific. A value gap exists between what a customer needs or expects, and what they are likely to get. As this gap widens the customer sacrifice increases because customers end up settling down for more or less than what they expect.
The value gap shrinks over time as your company interacts with its customers and learns more about their context. Even a simple interaction can teach you about a dimension across which your customers sacrifice for more or less than what they expect. Particularly, those value gaps which were previously thought to be outliers may help to uncover the needs and expectations that an average customer cannot articulate.
The value gap is a quantitative measure not a qualitative one
Identifying the value gap is not merely a qualitative exercise. Innovating for the gap requires measuring and quantifying what that gap is, in a systematic way. Your metrics must be designed in such a way to the eliminate the value gap, over time. In the digital products space, usability, engagement, and adoption metrics can help you, tremendously, to learn and expedite how much faster the value gap can be reduced or eliminated altogether.
Innovating for the gap requires measuring and quantifying what that gap is, in a systematic way.
If you’re in an already established space, metrics such as key feature adoption rates or conversion analytics can tell you exactly where your customers find value and where the benefit they receive falls short of their expectations.
When you quantify the economic value of each of the options for solving for the gap, you can make more informed decisions for managing your product roadmap. You can focus on prioritizing those features that customers have a value gap and therefore are willing to pay for.
If you’re developing a new-to-the world solution and don’t have an established audience, then you should look for the gap in how your customers addressing their needs today. Here’s one way of doing that.
Stop journey mapping and start value mapping
The best way to find the value gap for developing new-to-the-world solutions is to look at what your users/buyers are doing while using their current solution, today. In that sense, innovating for the value gaps will increasingly lie in offering the new ways of experiencing things. Identify the drivers of value from the value that they currently don't have and the importance of filling those gaps to them. From there, you can determine what's monetizable and their willingness-to-pay for all the possible solutions to bridge the gap. Here's an example value map:
When you’re working on your next innovation, if you’re not building to solve your customer’s value gap, don’t build at all
Innovating for the value gap increases your pricing power and profitability, as you systematically reduce the customer sacrifice, which in turn increases their willingness to pay. However, not all your customers are the same either. Understanding how your customers cluster with respect to their preconditioned expectations and context of experiencing your offering is key to innovating for the gap. And that’s where the notion of “value stacks” come in to play. In Part 4 of our series, we look into how different types of customers value key features and attributes differently, how you can quantify their willingness to pay and how you can align the two with your offer structure.