You’re building the wrong product, and that’s leading to some pretty dire consequences.
While that’s not the most uplifting thing you can hear as someone working in product management, it’s also essential to both your individual success and the viability of your entire company. Got your attention yet?
These words of warning are courtesy of Price Intelligently’s CEO and co-founder Patrick Campbell, who delivered them during his session at UserVoice’s BASiS conference last fall. But this data scientist turned entrepreneur with Google and the Department of Defense on his resume isn’t just preaching doom and gloom, he has hard data to hammer his message home and some solid recommendations as well.
The root of the problem, according to Campbell and their research, is that products are too often being built based on what companies THINK their customers want and not what people are actually willing to pay for. While “trusting your gut” had a decent chance of success during the gold rush days of Software as a Service in the previous decade, there is now too much competition chasing the same customers, which is driving down price points and raising the bar on the basic table stakes required to satisfy customer needs.
None of us think we’re building low-value features and are creating shaky roadmaps; 75% of companies are confident they’re building the right thing. We think the vast majority of the features we’re building fall into the “Highly Differentiable” category, where customers have a strong relative preference for them and a strong willingness to pay for it.
But while we may believe that 68% of what we’re building falls into that category, when you ask actual customers, a mere 13% of features are viewed that way by buyers. Instead, we’re largely building Core Features (high value but with a low willingness to pay) or Trash (low value and a low willingness to pay).
How are companies so far off the mark? How can our entire lives revolve around customer-centric product development yet we’re falling short more often than not?
“What’s scary about this in particular, is that most of this is our fault,” says Campbell. “We’re not actually reacting to the market the way that should we be and instead we’re building the product the same way we did five or ten years ago.”
Blame the competition… and our obsession with customer acquisition
A quantifiable sign that the times have changed are the number of competitors companies face at inception; while in 2012 you might have had two or three other companies in the same space, but in 2016 a startup was facing ten. Meanwhile those older companies now have a dozen or more firms all vying for the same customers.
With all that competition, any particular feature simply isn’t worth as much as it used to be and a buyer’s willingness to pay is trending down. A few years ago you might be able to charge $1,000 per month for Salesforce.com integration, but now that is simply an expected default offering and companies not only can’t charge for it—they can’t even close a deal without it. What we consider a Differentiable Feature is simply a Core Feature to the customer.
Meanwhile, the cost of acquiring customers is skyrocketing because companies have to outfox, outmarket and underprice all that competition instead of just bringing their product to market and enjoying their “if you build it they will come” moment. Unfortunately, companies are still completely overvaluing the importance of acquiring new customers.
This is partially because companies are raising more money than they need to and are putting all that extra cash into customer acquisition. While this might get you a lot more logos on your website, it’s not driving revenue or long-term growth.
For each percentage of improvement a company makes in customer acquisition, it drives a two percent increase in the company’s bottom line. However, a one percent improvement in customer retention improves the bottom line by nine percent and a one percent increase in monetization moves the bottom line needle by a whopping 16%. This clearly indicates that companies are often focused on the wrong—albeit sexier—metric of customer acquisition instead of the far more lucrative aspects of growth.
Price tags are temporary
Pricing exercises (not just figuring out the dollar amount customers must pay but deciding what should be included for that dollar amount) are few and far between at most companies, who usually only adjust pricing every three or four years.
To be truly responsive to the ever-evolving buyer personas you’re pursuing, pricing should be changing every six-to-nine months for established firms and even more frequently for those still finding their footing. This ensures you’re delivering value that customers are willing to pay for and doesn’t let customers get into the bad habit of expecting to keep paying the same amount for more and more features as you improve your offering.
Your business is about driving a buyer to the point of conversion and then justifying a specific product at a specific price. If you’re going blind, you’re not going to know what to build or how to price it. Building first and hoping to find a true customer later simply doesn’t work anymore.
And for all the talk about A/B testing and experimenting around pricing, in reality it’s not happening all that often. 48% of companies aren’t doing any, while another 38% are only doing one-to-three per month. Without the inputs from these tests, we’re all flying blind.
So what’s the solution? First of all, don’t be afraid to ask your customers what they’re willing to pay. Be sure to present things in an arranged format on a spectrum (asking them what’s the least/most you’d pay for each feature). This might feel awkward, but they’re not going to mind and it’s the only way to truly figure out what they actually value.
Beyond that, Campbell has four takeaways:
- Stop being a maverick—You don’t have enough money, enough runway or enough uncolonized territory to wing it. Your gut instincts must be informed with actual data.
- Do actual customer development—68% of companies are having fewer than ten non-sales capacity customer development conversations per month. You will never know what your buyers want if you don’t actually talk to them.
- Quantify buyer personas on a quarterly basis—Include lifetime value, willingness to pay and customer acquisition costs, then map the features that higher value buyers want to the roadmap.
- Reevaluate how much time you’re spending on monetization and retention—Hint: you’re not spending nearly enough on this given its relative impact on the bottom line.
“Pricing is the true exchange rate of the value you’re creating,” says Campbell. “If you’re not extracting that value by adjusting you’re price, you’re missing out.”