Pricing Digital Products and Data - Part 4
Today, we look into how different types of customers value offerings differently – thus have different value stacks. Understanding your customers’ value stacks and quantifying their willingness to pay for each stack are key to aligning your offer and pricing structures. In this light, segmenting your customers by their value stacks is the most organic and monetizable way of segmentation for product development, marketing, and sales.
Who really is your customer?
Most product owners are too close to their product to answer this question accurately. Because they tend to overrate the benefits of their solution to all of their potential customers while they underrate the differences between them. In order to find your customer, you must clearly understand the differences between them.
In the past decade, we’ve come a long way in identifying the differences between our segments. Today, most marketers research and construct their buyer personas by their needs, use cases, or buying processes, among other attributes. While persona-based segmentation still works fairly well for new customer acquisition, it doesn’t sufficiently inform the innovation and monetization processes – and it should.
Specifically, which customer’s gap will you prioritize in your innovation roadmap and how will that impact your monetization? How would you ever make that decision? Here we introduce a new take on answering questions like these which we call a “value stack.”
What’s a value stack?
We call the quantified perceived value of a particular customer type a value stack. And following this logic, customer segments differ in their value stacks, more than how they differ in anything else.
A value stack has three components. First it clearly identifies the needs and wants of a specific customer group by separating those attributes for which customers are actually willing to pay for, from all others.
Next, it measures the relative perceived value of each of those attributes in relation to one another, to determine what’s more valuable and most valuable. And finally, the size of the value stack itself – the sum of the perceived value of all the attributes for which the particular segment is willing to pay – makes up this segment’s overall willingness to pay.
Value stacks help you in developing the products that you can monetize
From a product management point of view, there are few different value stacks out there for which you can develop your product. But only when you know what the value stacks of different customers look like, you can actually decide what to develop. Similarly, you can price profitably, only when you know the cost structure that you must target with respect to a willingness to pay.
So let’s take the case of going from Point A to Point B. You have many modes of transportation to choose from and you will make a decision and pick one. Think of all the reasons to choose a mode of transportation: convenience, minimizing the distance you walk, risk of being in heavy traffic, comfort, price, privacy, emissions, habits, total trip duration etc. Think all of those and put down the most important ones that drive your decision for a particular trip. That makes up your value stack. And if your value stack looks like the first figure in the below picture, you may choose a taxi cab.
But if you had a different value stack, perhaps you could have chosen an hourly car flat fee ride. Maybe you have luggage to haul, or perhaps there’s one parked right by your house, perhaps you care about emissions more than any other parameter. If you wanted to pay less and have company, you’d forgo your privacy and do a ride share.
Then something like Uber comes along and changes not only how your value stack looks like but the shape and the size of it. It changes a few of the experiences that happens before and after getting on a transportation mode itself and makes some of your value attributes irrelevant. And in the future perhaps there will be things such as ride as a service or Uber with predictive pick-ups etc. to further change the size and the shape of the value stack.
Different value stacks lead people to making different choices and paying accordingly
Our point is this: why customers acquire goods, services or experiences and how much they pay depend on the shape and the size of their value stacks. When you think about the new digital products, services, and experiences that you will create in the future, remember in order for people to acquire your solution, your solution must meet their value stacks and their willingness to pay.
A multi-tiered offer structure is the best way to align your offering with your segments
Today, more and more businesses develop offer structures that meet different types of customers’ value stacks and meet their varying points of willingness to pay. They do so by fencing multi-tiered offer structures across a specific value metric - which brings us to the topic at hand: how does one identify the right value metric? Well, that’s what we talk about next in our series. In Part 5, we first take a look at how a value metric works and why getting your value metric right is key to successful monetization and therefore to making it in the market.