What is value-based product management?
Tl;dr: Develop the offerings that people will buy, for a price commensurate with the benefit delivered, at a cost structure more favorable than the competition.
The value-based approach to product management provides product owners with guidance to focus on building the differentiated products and features that the firm can monetize with more favorable margins than their competitors. 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. Here are the five guiding principles of value-based product management:
Pricing the value delivered
Focus on pricing the benefits – not features and attributes. Quantify the value to be delivered to the segmented buyers and their willingness to pay for it
Pricing the segmented value
Align your pricing structure with by how different types of buyers benefit from your offering, differently
Pricing by the right metric
Identify the primary metric that scales your revenues as your customers’ benefits scale
Pricing for each product/service level
Optimize the caps and triggers for your product structure to fence the amount of value delivered at each product tier, service level, and price point
Pricing the future
Focus your product discovery and roadmap on solving for the value gaps that buyers have in your solution domain
At the heart of value-based product management is to have segmented adoption and margin goals so that product owners can better prioritize their roadmap and prevent over-engineering the solution with features and functionality that do not drive buyers’ willingness to pay. They also would be better off knowing the market-informed price points for building differentiation. 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.”
When product teams evaluate the product roadmap based on 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 trade-offs. This is important because, in most organizations, different stakeholders may have different opinions about what matters the most or which feature will be most valuable to buyers. Determining which differentiated features will be built at which price point at the very beginning of the product journey will align your team on building the right solution and taking it to market successfully.
Second, starting the product journey with pricing requires that all your larger team is involved with your strategic direction from the get-go. Your marketing team will be able to evaluate the value gaps in the market while your sales team has customers’ ears on what innovation they’d value most, all the while your finance team makes sure the cost and partnership structures of the new direction are aligned with the long-term revenue and profit goals.
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