How to make it easy for the user to say yes, & make it difficult for the buyer to say no
Bridging the gap between product development and commercial thinking
An interesting part of my day job is to think through how best to innovate to incentivize user migration to the cloud, and scale by attracting new customer segments. In concrete terms, that comes down to working cross-functionally across Engineering, Marketing, Finance and Sales teams to define the “what”, the “who” and the “how”:
What: The features you need to build
Who: The audience you will serve
How: The business model required to convince a customer to buy your product
As a customer, I’d always want the Tesla but be willing to pay only for the Toyota. On the other side of the table, it is part of my job to optimize for these inherent tradeoffs between adoption and monetization, or what a customer (i.e., the user) desires and what a customer (i.e., the buyer) is willing to pay for it. Some key takeaways have stayed with me in walking this tightrope:
1) Pricing is not an afterthought - think upfront about how your business model ties into the product you are developing.
Even if you have a fantastic product that solves a critical unmet need, having the wrong business model can result in a negative feedback loop from your customers. When this happens, it is easy to panic and keep tweaking the product so that more customers bite the bait, but the reality might well be that you should consider tweaking your pricing and/or business model.
For example, I have often seen the argument to package early stage, relatively feature-light products targeted to highly price sensitive customers in a freemium model (i.e., one where there is a free base tier (or an extended trial period) and a more premium paid tier that one upsells customers to, or atleast hopes to, over time). However, these models carry the inherent risk of causing churn in a growing user base by asking customers to pay for what they have become accustomed to getting for free.
If a freemium model doesn’t float, this can lead to a series of tough post-mortem conversations with leaders scared to lose adoption in the name of monetization. Alternatively though, thinking through product and business model decisions in parallel (instead of sequentially) in a scenario like this might result in a different decision - one where teams evaluate which aspects of their product to offer on a subscription basis, which segment of their customer base to sell this to, and which part of their product value proposition should remain free. Having a monetization mindset early on allows pricing to inform your product roadmap and packaging as you go-to-market.
2) Understand what the customer will really pay for.
It is not unreasonable to assume that the more a product offers for a given price, the happier a customer is. But loading a product with features that a customer would like, versus those they would truly need (and pay for) comes at a cost to the product’s bottomline without necessarily a corresponding revenue upside.
[Source: Afonso Franco]
Customer and market research often effectively reveals the competitive landscape and what a customer looks for in a product. But understanding what features a customer will truly pay for can help decide how the bundling of features can unlock different pools of value.
Leveraging statistical techniques (such as a MaxDiff or conjoint survey, or a Van Westendorp analysis) gives you a view of customer preferences in a ranked, prioritized list. Pairing this analysis with traditional qualitative customer exploration helps better understand why customers prioritized the features they did, and how much they would be willing to pay for the addition of these specific features, and how different customer segments may perceive the relative value. Apart from helping set the optimal pricing strategy, this can help inform which features are table stakes and true value-driving differentiators as part of the product development process.
3) Align monetization with overarching strategic goals.
Every pricing strategy comes with inherent tradeoffs. But a deep rooted understanding of customer behaviors and priorities, and an articulation of broader strategic goals (e.g. profit maximization, market share dominance, acquisition, etc) helps achieve the right balance between both user and revenue growth.
For example, for a product aiming to balance user and revenue growth, a tiered pricing model (with no free tier) might help unlock most of the user base and target different customer segments with different pricing aligned with their willingness-to-pay. On the other hand, a product trying to not leave money on the table by risking that some customers choose a lower-priced tier in a tiered pricing strategy could try to win over the broadest swathe of customers with one competitively priced integrated product offering, or take the high road by investing to have the best product and then charging a premium accordingly. Eventually, this decision is a function of the growth patterns you are optimizing for - in the number and type of customers, in the average revenue per customer and in the rate of customer churn.
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Although often thought to be a dirty word in larger-than-life product visions, monetization matters - it is the reason you are in business. When product truth and business model decisions go hand-in-hand, setting the right pricing strategy early on can be a decisive factor in creating long-term value. Of course, needless to say, real-time analysis of current and potential buyer behaviors will still be needed to iterate based on changes in market behavior and customer needs with the appropriate refinement of product and pricing strategy.
(Hustle Fuel represents my own personal views. I am speaking for myself and not on behalf of my employer, Microsoft Corporation.)