Customer Value and What Things are Worth (DIT Product Mgmt)

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Information about Customer Value and What Things are Worth (DIT Product Mgmt)
Business & Mgmt

Published on March 14, 2014

Author: RichMironov



From my Feb 2014 class time in Dublin Institute of Technology's product management certificate program: a module on quantifying customer value (esp B2B) and how to price software/technology solutions. In-class exercises removed.

CLICK TO EDIT MASTE R TITLE Customer Value and What Things Are Worth Rich Mironov Diploma in Product Management 15 January 2014 1 © Rich Mironov, 2014

• Veteran product manager/exec/strategist • Business models, pricing, agile • Organizing product organizations • 6 startups, including as CEO/founder • “The Art of Product Management” • Founded Product Camp ABOUT RICH MIRONOV

In three modules today, we will: • Learn to quantify customer value • Understand how pricing models and pricing units contribute to a business model • Explore how Software-as-a-Service changes pricing, marketing and operations LEARNING OUTCOMES 3W W W . M I R O N O V . C O M

• Business customers buy most products to make money or save money • How do they describe value? • Quantify it for them • They won’t spend the time to analyze this fully • Assume you can capture a fraction of value (5% to 15%) • Consumer purchases typically less analytical, more emotion/fashion-driven START WITH THE CUSTOMER VIEW W W W . M I R O N O V . C O M 4

• Why will customers buy? • Tell a story in customer’s own language • What’s the natural unit of exchange? • How do they derive value? What does the competition do? • Can you split off a profitable segment? • How much of customer value can you capture? • Test, trial-close, get your hands dirty PRICING YOUR NEW PRODUCT W W W . M I R O N O V . C O M 5

• Our super-special credit scoring application will reduce the number of credit checks you run. • You currently do {insert number} credit checks per year at {insert price}. We’ll reduce that by {insert percentage} for a savings of {computed}. • We will only charge you {insert price} for a net savings of {computed} and ROI of {percent}. A GENERIC B2B VALUE STORY W W W . M I R O N O V . C O M 6

• Hotel • University • Commercial real estate • Automobile manufacturing line • High-end retail • Hospital visit • Software development NATURAL ECONOMIC UNITS?

• Pricing drives customer behavior • What do you want core customers to do?  No-brainer renewals (small monthly fees)  Big up-front license (lock up marketplace)  Lust for upgrades (cool features are extra)  Freemium model (1% upsold into paid services)  Install latest version (free updates, increasing service fees)  High-status product (tell their friends) SUPPORT THE BUSINESS MODEL W W W . M I R O N O V . C O M 8

• Pricing models (units of value exchange) can create strategic advantage • Change basis of competition • Better meet needs of sub-segment • What does your pricing measure? • Per upload, per GB, per message, friend, newsletter, clickstream, virtual garden gnome… • Not just “€ per copy” or “€ per month” • Netflix (concurrent movies), Zipcar (hourly rentals), SalesForce (hosted per seat), Airbnb (unused sofas), Uber (unlicensed taxis) CREATIVITY AND STRATEGY

• Hardware has natural costs • Materials, production, shipping, disposal • Commodities tend toward production costs • Software is “free” to distribute • First copy costs €5M • Infinite flexibility in tying value to use • What do we sell, what do we give away? • Charge for e-books, discount e-readers (Amazon) • Free social networking, sell ad demographics (Facebook) • Free software, paid support (open source) • Pay for performance (OpenTable) HARDWARE VS. SOFTWARE 10

Pricing is almost never about the number. It’s about the model.

CUSTOMER COMMITMENTS No commitment High variable costs Lower volume Uncertain usage Optional Actively manage costs CONTINUOUS MARKETING Big commitment Low/no variable costs Higher volume Predictable usage Required (cost of business) Low cost control effort HARD INITIAL SELL

• How would an evil customer rip us off? • Licensed software… • Per-Seat SaaS… • Hardware token… • Licensing versus enforcement • Who are the cheaters? • How much are we willing to spend to reduce losses? • Diminishing returns • Bad will among legitimate customers HOW WILL PEOPLE CHEAT? W W W . M I R O N O V . C O M 13

• Your last start-up just closed, so you are now a consultant • A prospective client needs market analysis, MRD, pricing • What are your pricing objectives? • How to structure a project? • Risks for you? For client? EXERCISE: CONSULTING SERVICES W W W . M I R O N O V . C O M 14

• Work at any price • Food on the table • Loss leader • Underprice first assignment, get follow-on work • Good reference for other clients • Become indispensable • Push for a full-time position later • Gain pricing experience • What will the market bear? OK to lose assignment POSSIBLE OBJECTIVES W W W . M I R O N O V . C O M 15

• Per hour, no limits • Per project • Per hour with project ceiling • Fixed price for initial sizing (pay me to estimate) • Milestones (progress payments) • Equity (pre-IPO stock) • Customer sets value at end • Shared savings (portion of ROI) • Free (experience, reference, try & buy) SOME CONSULTING PRICING MODELS W W W . M I R O N O V . C O M 16

Client’s Risk Consultant’s Risk Straight Hourly Unlimited cost, quality, completion None Fixed project price (pay on completion) Timely completion Unlimited effort, defining “done” Fixed price milestones Partial work not valuable, how to inspect work? Upfront analysis Equity, portion of ROI May overpay later No immediate cash value RISKS IN CONSULTING MODELS W W W . M I R O N O V . C O M 17

• “Why are we doing this program?” • Shortest possible description of business motivation • Clarity of thinking • Much less than a forecast for Finance • Short enough to remember • Encourages consensus with internal customers • Revenue software: sales team agrees with rough estimate • Internal users: agree with savings or incremental services revenue • Simplifies later prioritization of projects “REVENUE STORIES” W W W . M I R O N O V . C O M 18

• “Product X will earn €10-15M in direct revenue this year...” • And Sales has signed up to that target • “This feature should boost subscription conversions 3-5%, for €15M+/year…” • Based on Marketing’s A/B tests • Estimating Tool T will let us bid projects more accurately, boosting margins by 10%” • And Professional Services is funding the tool • “Product K supports €9B of revenue from product L. Otherwise, we’d lose 25-40%.” • And L’s product manager wants to fund my work instead of his REVENUE STORIES 19 Incremental Revenue = add’l units * avg price +20 seats/qtr @ €4K/seat = €80K/qtr

• “Manufacturing Process P will reduce raw materials by €7-10M/year” • And Manufacturing Ops will measure it for the CFO • “Merging our customer databases will reduce lost invoices by 5-10%, cut write-offs by €2-3M/year” • According to Accounts Receivables team • Faster MRI scan will boost system utilization by 4% (=€600K/year) and reduce patient radiation exposure” • Appointments group has patients waiting 25 days COST SAVINGS STORIES 20

• Large software spend 13%-18% of revenue on R&D • So revenue at/above 6x development cost • Silicon Valley headcount math • $1M/year = 5 people in North America • $1M/year = 6 people worldwide • Dev, test, docs, product management, project mgmt, release ops… • Dublin headcount math in €? A FEW NUMBERS 21

• Startup goal: repeatable way to engage customers and generate revenue • Sometimes, R&D > revenue • Larger private tech firm: accelerate revenue • Move toward IPO-worthy ratios. 3:1  6:1 • Internal IT for non-tech company • 3x return on investment • What is your company’s target R&D return? COMPANIES HAVE DIFFERENT GOALS 22W W W . M I R O N O V . C O M

• Market pricing starts with audience’s pain • Pricing model aligned with pain • Units make sense • Savings >> price • KISS • Must support a business model • “How do we make money?” TAKE-AWAYS W W W . M I R O N O V . C O M 23

CLICK TO EDIT MASTE R TITLE CONTACT Rich Mironov, CEO Mironov Consulting 233 Franklin St, Suite #308 San Francisco, CA 94102 RichMironov @RichMironov +1-650-315-7394

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