As the VP of Marketing for the gaming device start-up Sifteo, I’m helping to transition the company from a product centric point of view (that is most typical of high tech start-ups) to a customer centric one. By thinking from our target customer’s point of view, we can build a bridge to help them relate to our product.
As an example, when I started all of our brand photography looked something like this:
It looks very cool but who is this product for? What do you do with it? Why should I care?
Compare that to my most recent lifestyle shoot for Sifteo:
Notice how the first photo is making the product the hero, and my lifestyle photos are making the customer the hero? Product beauty shots play an important role (especially for technology products), but what’s most informative and inspirational is when you make it easy for a customer to imagine how using your product with transform their lives. In my case we’re showing how Sifteo cubes facilitate fun family interactions. This is the bridge.
Switching your POV to welcome in an early majority audience is tough, particularly when your marketing to date has been successful in capturing the attention of early adopters (in our case I call them “adventurous technologists”), and tech press. But to re-purpose wise words from Marshall Goldsmith, “What got you here won’t get you there.” You need to build a bridge to help you Cross the Chasm.
Laurie’s note: this article was selected as a guest post for onproductmanagement.net
In business school they teach us to set prices by plotting the demand curve and then choosing an output level and price where your marginal costs are equal to your marginal revenue in order to achieve profit maximization. HUH?
I should have lost you at “demand curve” because in real life nobody has detailed enough data to create this sort of graph (Amazon is an exception).
So if micro-economics is letting us down, what can we turn to instead to guide our price setting? Our customers’ EMOTIONS!
Below I’ve highlighted a handful of consumer behaviors and related price setting tactics. I was lucky to learn from the best: world renown Pricing Professor Teck Ho. I am happy to pass along a few tidbits of his wisdom.
1. Your customer uses reference prices to determine if they are getting a good deal
How your customer values your product is relative to the products they have previous experience with that they consider to be similar.
For example, tonight I was trying to book several airline flights, both departing from SFO. One flight was going to Las Vegas, and the other to Los Angeles. The trip to Vegas was going to cost me $200 more, so I didn’t book it. Why? Because it didn’t seem fair that the price was so much higher than the one to L.A. Even though I value the trip to Vegas more, (who wouldn’t? Vegas, baby!) I can’t stomach paying more because the service provided seems about the same. My reference price is both similar products currently available (other flights, like the one to L.A.) and my past experience with this product’s pricing (cheaper prices I’ve paid on past trips). Even though it’s perfectly rational for the airline to charge more for Vegas based on the demand, my emotions tell me, “Don’t book. You are not getting a fair deal!”
What this means for product managers is that you should identify what products/services your customers consider to be your references. You can try to influence this (like generics do by placing themselves right next to the branded version in the grocery store isles), but ultimately you need to listen to your customer to determine who your references are.
Next, calculate the additional (or negative) economic value you provide to your customer compared to your references. For example, if the flight to Vegas was twice as long as the flight to L.A. I could justify paying a higher price because it’s taking me twice as far.
2. If you do too many price promotions customers will only buy when you have a sale
If you are a frequent shopper at Macy’s like I am, than you know this to be true. Macy’s has so many great sales you would have to be a moron or independently wealthy not to wait to shop during one.
This relates back to reference prices. It’s not just your competitor who is setting them. By discounting your product you may be setting a new reference price that is lower than the ticket value.
If you are having a sale be sure to present higher alternative prices alongside the actual selling price. Or, display your regular item alongside a more expensive item to frame high.
3. For some goods, price = quality
There are some goods that you have to experience in order to place a value on them. For example, you can’t read the ingredients on a perfume bottle and know if it is going to smell good, attract a date for Saturday night, and not result in hives. For these “experiential” products, consumers use price as an indication of quality. The higher the price, the better the quality. If your product falls into this category you may actually hurt your sales, and reputation, by pricing too low.
4. Sometimes, $100 doesn’t equal $100
The mind is tricky. A $100 discount on an ipod touch seems like an AMAZING deal! But give me that same $100 discount on a Toyota Corolla and I will be less than impressed. When a customer evaluates markdowns it’s in relative percentage terms based on the overall ticket price, rather than absolute dollars.
This works the other way around as well, for price increases. For example, upgrades on cars are more likely when ticket price is high. “sure, throw it in!”
Similarly, if you are in the B2B world, consider how much your product or service costs relative to your customer’s overall buy. If it’s a small percentage of the overall buy the customer will be less price sensitive.
5. It’s hard to raise prices, but if you do, make sure your costs have increased as well
Customers can be influenced to believe a price increase is “fair” if it is known that your cost of goods have increased (publicize your cost increases). As an example, just recently the chocolate maker Hershey’s stated it was raising prices by about 10% across the board, due to price increases in raw materials, fuel, transportation costs etc.
6. Odd is best, unless your product is the best
$24.99 is perceived as MUCH more affordable than $25. But don’t use this tactic for high quality image products where price is an indication of quality. It will make your product look cheap. You’ll never find Louis Vuitton selling their own handbags for $749.99.
7. The middle of the road is the safest
If given a choice of 3 service options customers will often choose the one priced in the middle. For example, if a car wash offers three service levels, most people will choose the mid priced one. The least expensive one seems like you are missing out on key washing services, and the highest one seems like you might overpay. The one in the middle feels just right…
Consider if you can increase upsells by adding something expensive to your product line, even if you never sell it.
“Success isn’t in the concept. It’s in the execution.”- Pleasant Rowland, founder of American Girl dolls
Several years ago I was asked to speak at my high school’s 75-year anniversary as an “amazing alumni” for my achievements in the toy industry including winning the coveted industry awards “Best Educational Toy of the Year”, “Most Innovative Toy of the Year”, and “Best Toy of the Year”. It was an honor being grouped with accomplished alumni such as the Executive Producer of the Amazing Race, and a world class rock climber. My talk focused on the path that lead me from Fountain Valley School to my position as a toy producer for LeapFrog, and how I thought we could be making even better toys by employing my high school’s educational values.
Sitting in the front row was an incredibly vocal audience member who challenged me to rethink LeapFrog’s distribution strategy. She had interesting ideas, but I openly disagreed with her viewpoint. Afterwards, a man approached me and said, “You know who that is right?” He gestured toward the vocal audience member. “That’s Pleasant Rowland, the creator of American Girl!” I was stunned. I deeply admired her products and knew of her legendary status for having built half the buildings on campus.
I spent the next hour with Pleasant; hearing about her own career path and challenges, and getting advice on how to make the most out of mine. She was strong, determined, and smart-she instantly became my role model. My favorite quote comes from the first time Pleasant shared her American Girl concept with a focus group. The moderator explained that the dolls teach history through period clothing and an accompanying book. All the mothers thought it was a horrible idea. Their little girls wouldn’t be interested in period pieces! Pleasant’s heart sank as she imagined a year’s worth or work being thrown out. Then, the moderator brought out the prototype and the focus group flipped. They loved the doll! That’s why Pleasant said, “Success isn’t in the concept. It’s in the execution.” It’s a motto I try to apply to all my work.
Are you considering developing a new product, or perhaps even starting a company? Wanna explore if your business idea has a shot at success before you get too far into development?
Try using the 5 opportunity screens listed below to analyze the viability of the opportunity. If your idea doesn’t get a green light in each of the screens, and you can’t think of a creative way to overcome its limitations, proceed with caution (or not at all).
#1 Burning Need
This is the most important screen. Ask yourself — Who is your customer, and what do they need? Is someone out there biting his or her nails desperate for the solution you provide? What are their major pain points that you are going to fix? Are they going to think to themselves “thank goodness!” and clamor to be early adopters?
The best way to assess the burning need for your product is to talk to as many potential customers as possible. Focus the conversation on their needs and desires. Only once you have fully grasped their needs should you ask their opinion on the desirability of your product. Don’t let your focus on your product/solution cloud your ability to understand the customer.
#2 Large and/or Growing Market
Are there a lot of potential customers for this product/service? Are their needs already being met by someone else, creating a crowded competitive environment?
Identify and quantify a specific segment, and how much of that segment you can expect to capture. Be specific in terms of the demographics, and psychographics of your customer. And get granular – who will be your first 50 customers, and why?
#3 Scalable Business Model
Is there a viable business model? Do the unit economics make sense (for example, when considering the costs and revenue for an individual product being sold, will you make a profit)? With each customer you add, will it become easier and less expensive to serve them? Is there a possibility to grow exponentially in the first few years?
This screen is particularly important for ventures that will require outside financing. Venture capitalists, in particular, expect huge returns and a highly scalable opportunity. Speak with potential customers to check their willingness to pay, look at proxies, and check prices with suppliers to determine your economics.
#4 Right Time
Is the customer ready for this solution? Is the industry or market in its infancy and starting to take off? Is the necessary infrastructure in place to support it (such as broadband being critical to much of the recent internet technology adoption). Are there Macro-economics at play that make this time particularly attractive (such as changing regulations or exchange rates)? Is there a window of opportunity to get in and block future competitors? How defensible is that position?
This can be one of the trickiest screens, because you want to be on the leading edge, particularly with technology products, but you can lose big if you are too early. Even the best and brightest can miss this one. Try talking to as many experts as possible in the industry, particularly those who have tried the same thing and failed.
#5 Right Team
Be honest with yourself. Are you the most qualified (in the world) to succeed at this endeavor? Do you have the passion and the experience to make this work? If not, is there a way you can supplement your team?
Having the right team is critical, particularly if you are looking for outside funding. Many Venture capitalists invest in people, not projects.
Remember – these are just 5 universal screens. An individual business opportunity and even an individual entrepreneur should devise additional screens to determine if an idea is worthwhile. The more you screen an idea, the more solid your business plan will become.
I encourage you to make this a fluid creative process. By analyzing your idea using these screens, you will be best served if you let your vision evolve to meet the market need.
Thanks to Professors Zafar, Star, and Fuchs at the HAAS school of business for their entrepreneurial insights that inspired this post.
We’ve all been there…two intelligent executives arguing over who’s right and who’s wrong. Both with smart compelling arguments that are diametrically opposed, and neither one budging on their position. Or perhaps its the bright eyed product manager trying to sell through their idea to a stakeholder who questions every assumption they have made. When you’re working with smart people, smart responses are never enough. You’ve got to know whose opinion counts. Don’t let your company make the mistake of deferring to the highest paid person’s opinion. IT’S THE CUSTOMER WHO COUNTS.
During my five years of leading new product development initiatives at Leapfrog, a children’s educational software company, we never presented to an executive until we had customer feedback. LOTS of customer feedback. Our frequent interactions with children and parents to test our ideas, prototypes, and functional products led to higher quality products that hit the mark (and won awards), as well as a more streamlined approval process. In the making of “FLY THROUGH MATH: Multiplication and Division” for the FLY Pentop Computer we worked with nearly 500 tween toy testers throughout the year long development cycle and made adjustments according to their feedback. Most of these interactions were casual – one or several kids coming to the office to check out a prototype and answer some questions in exchange for a gift card. Other interactions were more formal using an off-site facility with a two way mirror and a professional facilitator.
The result was the same – when presenting to executives, we didn’t use theories and persuasive presentations to back up our ideas, we used data. And when data alone didn’t work, we showed video examples of testers interacting with and commenting on the product. There’s no better way to shut down the “I think…” statements that can chip away at the integrity of a product concept than to be able to say, “well, I talked to the customers and this is what they think…”
So, use focus groups and usability tests not only to make your product better, but to ease executive approval. Don’t make up excuses that you have no budget (you can always facilitate it youself and give away swag or $25 gift cards – everyone can afford that), or that you don’t have enough time. You’ll be amazed how much time it will save in the end to rid your executive staff of doubt.
After all, no one, not even the smartest highest paid person in the room, can argue with the customer…
In the “the social network”, Mark Zuckerberg’s friend is interested in a girl and wants to know if he has a shot. Mark’s reply is something like, “I don’t know. It’s not like girls walk around with a sign on their forehead that says if they are single.” Then a light bulb goes off (ding!) and Mark runs to his dorm room to add “relationship status” to facebook.
In business, we don’t have the transparency that facebook has brought to our dating lives. Wouldn’t it be nice if our customers walked around with signs on their foreheads (or a digital status indicator) stating their willingness to pay?
If we could tell what each customer was willing to pay, we’d be able to customize prices in order to grab additional surplus from those with a higher willingness to pay, and still sell to those with a lower willingness to pay. In short, we’d be rich. Gloriously rich.
But let’s come back down to earth for a minute and realize that the customer is not going to give up this information so freely. Knowing that, how can we estimate willingness to pay (WTP) for a new product?
Determining the “Economic Value”
The Strategy and Tactics of Pricing suggests that determining the “economic value” of your product is a good place to start.
Economic Value Formula:
The value of the product to your customers = reference value + differentiation value
STEP 1: Identify Reference Values
Identify the reference prices that exist today (the last price they paid for the same product, or a substitute product). Obtain price points directly at point of sale, if possible. For B2B products and services, you will likely need to get creative. Try interviewing your competitor’s customers.
Step 2: Calculate Differentiation Value
Determine your positive of negative differentiation value (is your product worth more or less than the references?) Identify value drivers and assign quantified estimates to support pricing decisions. If value is tied to financial outcomes (saves time or money, increases revenue), it is straightforward to justify price increases over the competitor’s offering.
For more psychological values you need to understand how important the attribute is to the customer. If you are dealing with just a few features, you may be able to get a good sense for this from talking to the customer. But if there are many product attributes you are trying to test, you may be best served by doing a conjoint analysis. When done properly a conjoint analysis will give you quantitative data on how “happy” each feature in consideration makes your customer. Prices can increase with consumer “happiness” (also known as customer utility).
Using Conjoint Analysis
I recently performed a conjoint analysis for “triple play” offerings (phone, TV, internet). It revealed that customers value internet service much higher than phone service, and that no single premium service is a dominant influencer (if we give them high speed internet it makes them about as happy as premium TV channels).
The graph below shows the utility / “happiness” customers reported for various service levels by price point. It was no surprise that all customers preferred the highest level services for the least amount of money.
You must give your customers a positive utility for them to be willing to buy. The higher their utility, the more likely they will be to buy. You also want to make sure that your product gives them a higher utility than your closest competitors.
Of course, you have to balance making your customers feel warm and fuzzy with charging a price point that will bring you sufficient profits. Note that at a utility of “1″, all customers would have bought our “high end” triple play service for $30. But as marketers, we would never have offered that.
There are many firms that provide conjoint analysis services. With a little training, and a lot of excel skills, it is also possible to do yourself.
Translating the Economic Value to Pricing
Calculating the economic value is just a starting point. It should give you a good idea of how your customer should value your product, but not necessarily, how they will value it on first take.
Especially if you are introducing a product in a new market, you will need to educate the customer on the benefits in order for them to understand your value, and justify your price point. Before running to market, test out your messaging and price points with your target customers.
Testing Willingness to Pay
Once you’ve used the economic value exercise to identify your target price point (or perhaps a range), you should test your pricing hypothesis on your customers.
If you are the average marketer, you will conduct a survey, or perhaps conduct focus groups and at the end you’ll ask them the open ended question: “how much would you pay?” Trouble is, the answer usually isn’t accurate. Consumers tend to lowball.
It’s even worse if you give them a list of pricepoints and have them choose. People tend to choose one in the middle, so the set you provide will influence the outcome more than their actual willingness to pay.
It’s better to do a contingent evaluation. Ask: “If I price at $20, will you buy? How about $30? How about $40?”
It’s BEST to to have them get out their wallet. Want to really know how much your customers are willing to pay? Get them to purchase prototypes, or become beta customers.
For consumer products, try an auction! At the end of a focus group, offer to auction off the product to the highest bidder (I recommend using 2nd price sealed bid format). This idea isn’t so far fetched. When designing new products for Leapfrog, many of our focus groups ended with the participants asking if they could buy the product today because they didn’t want to wait. Unfortunately, we said no. If I could do it again, I would have auctioned off the prototypes…
By the way, ebay is sitting on an incredible database of knowledge about consumer’s willingness to pay. Particularity since they added the autobid feature where ebay will continue bidding for you until you’ve hit your maximum bid – also known as your willingness to pay.
For business to business products, test your price points with “early adopters” by signing them up as paying customer BEFORE your product has released. Not only is this a great way to test your pricepoint, it will test your overall product validity. Particularly for high-tech products, select visionary customers may be willing to fund the development of your product through early purchases, and may be willing to buy an incomplete or minimally viable product.
Factors Impacting Willingness to Pay
Be aware that there are factors at play making WTP more or less critical to a customers purchase decision. I won’t go into these in detail at this time, but be sure to consider the following:
- Substitute awareness effect: How easy is it for customers to identify similar products that are less expensive?
- Difficult comparison effect: Is it difficult to evaluate competing products? Perhaps becuase they have different pricing schemes (such as charging by the hour versus a set rate for service)?
- Switching cost effect: Are customers somehow locked in to your product or service? If so they will be less price sensitive
- Price/quality effect: Does price signify higher quality? Is it a product you have to experience to know the quality?
- Price elasticity: If you increase the price, will fewer units be sold?
- New market education: If you are a “brave new world” company or product, you will need to educate the customer for them to know how to value you. Your messaging will help shape their willingness to pay.
At the Open Forum conference yesterday, there was a lot of debate on how/if HTML5 would be a mobile and tablet game changer. HTML5 could provide a way for developers to create platform agnostic tools and content through a return to web (apps), thereby leveling the playing field (versus what we see today where developers must pick which platforms to develop for, such as the ipad).
Below I’ve cited a helpful post from Gervis Menzies Jr., an up and coming social media strategist, for understanding how HTML5 may change in the landscape of mobile development in the coming year(s).
Twitter’s quiet move to revamp its mobile web app using HTML5, may be the most prescient decision the company has ever made, and eventually be seen as both a turning point for the adoption of the markup language, and the beginning of the death of the native mobile app. The purpose of the new HTML5 standard, is to have the markup language handle and manage multimedia and graphical content on the web without proprietary plugins and APIs..
If you are still scratching you head, here is an article from webmonkey comparing web versus native apps.
Also, this video is a straightforward presentation reminding us that Android and Blackberry are significant smart phone platform players, and that HTML5 is a solution for reaching all the platforms.
I personally think the current ecosystem led by Apple native apps is a crutch on the way to something more sustainable that can work across platforms. Perhaps HTML5 is the solution, or more likely its the first step towards our platform agnostic future standard. Of course, if Apple had their way, there would only be Apple native apps.
Congrats to EVB for being the 10th agency inducted into the prestigious FWA (Favorite Website Awards) Hall of Fame. Previous Hall of Famers include Goodby Silverstein & Partners, AKQA, North Kingdom, Firstborn, and Big Spaceship.
Since being founded in 2000, EVB has won Site of the Day 30 times, Site of the Month twice, and Mobile of the Day once. Here is a list of the sites that were awarded: http://www.thefwa.com/profile/evb
I contributed to this effort by producing the Fly Pentop Computer website (seen to the left, no longer online) which won both Site of the Day and Site of the Month for its innovative use of interactive video in flash. You can learn more about that project and see additional screenshots here.
P.S. prior to joining EVB, I worked for Leapfrog and helped to launch the Fly Pentop Computer. I produced two published software titles for Fly: Fly Memorizer, and Fly Through Math. Both the product, and the promotional website won top industry awards.
Student commencement speaker Hector Javier Preciado at Haas School of Business 2011 commencement concluded, “Though we’ve grown by leaps as leaders, our greatest leadership challenges are ahead of us. It would be much easier for my nephew Andres and the next generation of leaders to follow in our footsteps, if we leave a lasting footprint.”
1) And, while commencement marks the end of your formal studies, it marks the beginning of a different kind of learning – where the only syllabus is the one you set and the only one who can determine if you’ve passed or failed is you.
2) Let your degree, all that you’ve learned and experienced strip away the boundaries of what you think you can achieve. Don’t stay in a lane that’s too well-defined. Dream boldly and you may surprise yourself and find the last thing on Earth you ever thought you’d be doing is the one thing that brings you the greatest fulfillment.
3) “I stopped pretending to myself that I was anything other than what I was, and began to direct all my energy into finishing the only work that mattered to me. Had I really succeeded at anything else, I might never have found the determination to succeed in the one arena I believed I truly belonged.” (quoted from another author)
4) There is a horrible modern phenomenon that I am going to beg all of you not to fall prey to – multi-tasking. Focusing your mind, time and energy – to bring the full value of what you have to offer to the task at hand, to your passions, your family, and your community. To be fully present in all your endeavors. To make courageous choices – deciding in the face of competing demands where you will get and give the most value.
5) Because, what really matters in life is connection – not connectivity. Relationships – not quantity of facebook friends. Investing in people and communities – not investments. Maya Angelou said: “I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”
I will miss you Haas School of Business! Read the full speech here.
Author Laurie Peterson (a.k.a sfgirl) graduated from UC Berkeley’s Haas School of Business in May of 2011. She is an experienced Product Manager with a knack for new product development and marketing for interactive consumer startups.
With tools and advice for everything from SEO to project management to funding, this website is worth bookmarking:
Steve Blank put this list of tools together. He is a successful entrepreneur and now investor. He also happens to be my professor for “Customer Development in High Tech”. Thanks for inspiring me Steve!
I was fresh out of college just after the internet bubble popped and looking for a job to get my foot into the door of a Bay Area company when I heard that a former classmate of mine was working for a startup that makes toys. “That sounds like fun,” I though, and gave him a call.
Thirteen grilling interviews later I accepted a position as a Producer for LeapFrog, a quickly growing educational electronic toy company based in Emeryville.
Looking back, interviewing with thirteen people over the course of five company visits only seems appropriate. After all, LeapFrog’s design process was based on each product surviving intense scrutiny. We may have been building toys, but it was serious business. The rigorous product development process resulted in LeapFrog winning top industry awards year after year, including my three consecutive wins for “Best Educational Toy of the Year” from the Toy Industry Association. Much of the scrutiny came directly from LeapFrog’s founder and CEO, Mike Wood.
Mike Wood created a passionate driven culture where employees go above and beyond to ensure they are building the best products possible to deliver on the mission. The intensity was palatable, and the quest for quality was uniting.
I knew that before I presented to Mike I better be aimed with feedback from dozens of parents and kids, else I increased the risk my hard work would be thrown out in a 30 minute review session. Although the company was growing quickly (within a few years of my joining we hit 700 employees), Mike’s involvement never slowed, and I found myself sweating on at least a monthly basis as I sat across a desk from him pointing out features on prototypes.
Mike stated in an interview: “I am a really hard taskmaster. It’s not good enough for our products to be good. They have to be spectacular. Because at the end of the day, if a kid won’t play with it, we haven’t succeeded.”
I worked long hours and long weeks to deliver on his expectations. Why? Because Mike made us believe in what we were building.
The intensity Mike projected in a small room softened when he presented at all company meetings. Yet his softness conveyed even more passion and a greater sense of authenticity. Mike would often begin the meetings by reminding us why we were all there with the telling of his own leadership story. He would describe how his son had struggled to read, and how he searched for a product to help him learn the sounds each letter makes. When he couldn’t find anything to help his son, he decided to build LeapFrog’s first product: the Phonics Desk.
As Mike told the story of his son’s struggles, and the importance of helping kids learn, he would occasionally pause and look down, collecting himself after being carried away by his emotions. It was authenticity at its best.
Mike also told stories collected from customers to convey the importance of the mission. One that stands out nearly 10 years later is a letter Mike read from a mother of a disabled child who had been told her son would never read. After using the LeapFrog products for several months, he began reading.
As Mike read the letter and neared the end where the mother thanked us for giving her hope, Mike began crying, and many of the employees (myself included!) cried with him. There was no doubt we were working hard for something very important. We were not just building toys. We were changing children’s lives.
By revealing his softer side, Mike won us over. We knew he was the real thing: someone who was going to make decisions for the company not based on selfishness or riches, but based on wanting to make outstanding products to help kids learn. It made his yelling (and occasional throwing) during product reviews more palatable.
Mike Wood’s Leadership Best Practices:
Mike’s intensity and passion spilled over to the LeapFrog culture at large. No detail was too small for him to care about; therefore every aspect of the business was taken seriously by employees.
Mike’s hard driving leadership style was made more palatable when he revealed his softer side. We were drawn in by his sincerity and passion.
Mike used his own leadership story to convey the company mission, and stories he collected to make employees proud of their contributions.
4) Clear Mission
Mike united and energized employees by clearly explaining the mission, and emphasizing product quality.
Unfortunately many of the leadership characteristics that led Mike to be a successful entrepreneur were the same ones that likely contributed to his replacement as CEO following LeapFrog’s IPO. As is the case with many founders, Mike’s intensity, clarity of vision, and passion were essential for motivating employees and building great products to get the company off the ground. But in a growth stage, a passionate founder can weigh a company down.
Initially Mike transitioned into a visionary product role where I was still working closely with him. At the time he stated in an interview: “I could have retired, but I love doing this.” Today he has a new startup with a very familiar mission: helping kids learn to read.
Shortly after my husband and I got engaged, my parents bought us a beautiful and very expensive bedding set. It was far nicer than anything else in our small one bedroom San Francisco apartment. I immediately had a vision of a large old world natural wood and fibers headboard to complement the bedding. I searched for my vision in stores and online for about a year, when I finally gave up and decided I would just build the thing. Did I have experience as a carpenter? No. But I had done enough arts and crafts (and science fairs) in my day that I had confidence in my skills, and my husband’s power drill. It took several months to come upon the right natural fibers for the headboard paneling (in the form of grass based table runners from Cost Plus), and another week or so and several trips to Home Depot to build it. And it looks great. I knew we had pulled it off when a friend of mine said, “Did you have a professional decorator do this room?” and especially when my mom said, “Beautiful headboard, where did you get it?”
This was the semi-perfect “build” decision, in the buy versus build dilemma. It was a custom job that could not be purchased to meet the specifications. I call it “semi-perfect” only because making headboards, or carpentry of any sort, is not my expertise. As a product manager, the decision isn’t always this straight forward. There are often investments in previous solutions that sway you one way or another. When weighing the decision of buy versus build, ask yourself these questions:
- Is it a commodity?
- Do viable solutions already exist?
- Do the existing solutions benefit from economies of scale and/or a learning curve (thereby reducing the cost)?
- Is there a competitive market that creates efficiencies (driving costs down)?
- Will it be easy to plug in and go (can you integrate the solution with minimal investment)?
- Is ongoing maintenance/upgrades guaranteed and straightforward?
- Does your team have limited time/bandwidth?
- Are there things you’re much better off focusing your efforts on?
- Is it a “me too” feature?
- Is it your core business?
- Is it highly customized?
- Is it complex requiring significant coordination?
- Is it tightly integrated into your system?
- Do you risk hold-up from a supplier (a change of terms after you’ve sunk costs in relationship specific assets, see footnote for details)?
- Do you have the expertise to complete the task well?
- Would it be costly to switch in the future?
- Is quality at the very top of your list?
- Will it create unique value for your customers?
Whichever category you answered yes in the most is the decision you should lean towards. Some people refer to this decision as “in the firm or outside the firm” or “the market or the firm” since it is not always a product based building decision.
“The team is excited to build it”, “You like that existing solution? I guarantee we can build something identical”, and “We’ll we’ve already spent time on our own custom solution, so we better continue with it”, are not compelling arguments to build. Buying may not seem as sexy to your development team, but it may be the right choice for your product and the company. Plus, I have a feeling building won’t seem so sexy when the team is neck deep in bugs or doing ongoing maintenance for the next year.
Footnote: Jonathan S. Leonard of the Haas School of Business warns that if a relationship requires an investment that has little to no value outside the relationship, it may be hard to maintain the value inside the relationship, once the costs are sunk. This is referred to as hold-up. For example, if my friend tells me she’ll sell me her ipod for $20, but before I purchase it I go out and spend $50 on an ipod specific speaker set, my friend is likely to increase her initial price quote. Why? Because the ipod is worth more to me now! I just sunk relationship specific costs on a speaker set. Now I really need that ipod… (P.S. if your friend uses hold-up on you, you might want to consider finding a new friend)
If you are in the B2B world and are scrambling to win customers, you are often elated when an RFP for an attractive project hits your inbox. But before you hit reply, consider the strategic implications of competitive bidding.
If you bid low (relative to your target pricing):
- Consider short-term pros (winning the contract) versus long term cons (lack of consistent pricing policy and damage to quality image)
- Be aware that you are setting a reference price that will influence all future bids (not just this customer)
If you bid high (relative to your target pricing):
- Consider short term cons (you may lose contract) versus long term pros (you will maintain your quality image and consistent pricing policy)
To determine how big of an impact placing a high or low bid may have on your future business, consider the following risk factors:
- Quality leadership and image (price can reinforce quality image, if you offer a discount it may harm your brand)
- Number and nature of competitors (are you in danger of a price war? What strategy are competitors likely to take? Does a competitor already have a relationship with the customer?)
- Buying criteria (how important is price?)
- Follow-up bid opportunity (your current bid price will impact what you can set prices to in future – same or lower)
- Lock-in effects (once you get foot in door, will they continue to use your business?)
- Potential spillover to other customers if you give a discount for a “Strategic” account
Hidden costs of bidding:
- When you win its often at a price so low you lose money
Win or lose, you establish a lower price
Bidding is time consuming
- The customer may include you just to get the incumbent company to reduce prices (no chance of winning, and you drag the industry profits down by participating)
Sets a bad precedent (existing and future customers will want to negotiate price)
I want the business. What can I do instead?
Sometimes its better to say, “these are my standard prices, take them or leave them.”
What if the RFP includes the target budget (and you want more)?
- Assume there is more money that can be grabbed (it’s unlikely they told you their true ceiling)
- Provide a reduced service option for their specified budget (so you don’t price yourself out of consideration), but then provide a deluxe service package for a higher price (your recommendation)
2010 marked the 25th year of the commercial internet. Happy Birthday Internet! In that time the internet has captured a 1.7 billion audience (25% of the world’s population), and generates $1.5 trillion in economic benefits.
Here are a few fun facts about where the internet stands today:
1. 668,000 new dot com domain names are registered each month!
2. The ten most popular webites (worldwide are):
(ps – twitter is #13)
3. Amazon, Google, AOL, and Yahoo are dominating in terms of internet revenue generated.
4. Emerging markets are a major contributor to internet growth. For example, China added 73 million internet users in 2007. The U.S. added less than 10 million.
(related fact: There are almost as many native Chinese speakers on the internet as English speakers)
5. According to the American Consumer Satisfaction Index, consumers are more satisfied with online retail than offline retail.
Data provided by the Information Technology and Innovation Foundation. For a full report on the last 25 years of the internet, see: http://www.itif.org/files/2010-25-years.pdf
I was scheduled to visit Toyota’s factory in Japan tomorrow, along with a dozen of my Haas School of Business classmates as part of a week long international seminar. Instead I am sitting at home feeling sad for Japan as they struggle to recover from the earthquake, and disappointed to miss out on an opportunity to see such an interesting city (tokyo) and learn about the way Japan does business.
In honor of that trip, I created this post on Toyota’s emerging market strategy, the topic we were scheduled to speak to them about tomorrow.
The recent global financial crisis and string of recalls stressed Toyota Motor Corp.’s long history of profitability and sales growth. Under the previous president, Toyota sought a 15-per-cent market share in global vehicles sales by 2011. Following the U.S. recession and nearly nine million vehicle recalls between Dec. of 2009 and Feb. of 2010, Toyota abandoned its bullish market share goals and reset their strategy, identifying emerging markets and environmentally friendly cars as “the way forward.”
In the 2009 financial presentation to Investors, Toyota stated that their new strategy was to, “Thoroughly analyze customers’ needs in each region – shifting to resource-rich and emerging countries” and to, “Develop products responding to changing demand structure – shifting to compact and hybrid vehicles.” By increasing sales in emerging markets Toyota plans to balance their profit structure and diversify their risk. While image problems linger in their existing markets, their Asia business has continued to boom, helping to offset recent operating losses. In fact, during the recalls Asia, Central and South America, Oceania, and Africa were still profitable. Commenting on Toyota’s 2010 results, Senior Managing Director Takahiko Ijichi stated: “Strong vehicle sales, especially in emerging markets such as Asia, Central and South America, and Africa, contributed to the increase in operating income in the nine-month period. These regions are now increasingly representing one of the pillars supporting our earnings.”
In addition to balancing Toyota’s portfolio, emerging markets are seen as an area for growth: “Vehicle markets in developed countries have little room for growth, while those in emerging economies, including India, look certain to expand,” said Kazuo Okamoto, Toyota vice chairman.”
REGIONAL FINANCIAL DATA
In 2010 emerging markets made up 40 percent of Toyota’s sales and helped to offset operating losses in established markets, such as Japan and Europe. Comparing 2007 and 2010 data, Asia and “other” emerging markets have held remarkably steady, particularly in terms of profits, while the established markets have taken a huge hit from the recalls:
Toyota developed its most affordable car thus far, the Etios (see image to the left), for entry into India in 2010. An Etios can be bought for as little as 900,000 yen (approximately $11,000 U.S. dollars). The Ethios is expected to attract demand from middle-income consumers. Toyota plans to make and sell compact cars based on the Etios in Brazil and Mexico as well.
The original Ethios is just a starting point. In order to be competitive in emerging markets Toyota and group firm Daihatsu plan to introduce a smaller lower cost entry-level car, based on the Ethios. Rumor has it the new model will be will be priced around 800,000 yen to 900,000 yen. Toyota is working with part suppliers to slash costs, in part by asking for large price reductions “for the first time in a decade”. Toyota plans to start selling the new compact in Indonesia and neighboring countries as early as 2013.
A 2007 report also indicated that Toyota is going after the high end market in emerging markets with its luxury brand Lexus. Toyota was attempting to boost sales in Russia to 20,000 units by 2010, and expanding luxury sales into Brazil, China, and India. No recent articles were found to confirm this strategy survived Toyota’s recent churn.
EXCHANGE RATE IMPACTS
The strong position of the Yen makes Toyota’s exports less competitive (more expensive) overseas and erodes the value of its international earnings. This position is especially challenging for their emerging market strategy which relies on low-priced vehicles. Rivals with lower cost structures, such as South Korea’s Hyundaia Motor company, are going after the emerging markets as well. The expense of exporting from Japan may explain why Toyota has been building manufacturing centers worldwide. They are now building (and selling) a majority of their cars overseas. It may also help to explain the operating losses in Japan, since a little less than half of the cars manufactured there are exported.
Toyota reports their earnings both before and after exchange rate impacts, for more transparency into the operating conditions. Toyota hedges these risks by engaging in interest rate swaps.
Investor financial reports:
Agence France-Presse – Wednesday, March 9, 2011: Toyota : Half of sales in emerging markets by 2015
JIJI (Japan) – Thursday, March 3, 2011: Toyota to Launch New Low-Price Compact Car in Indonesia
Lexington Herald-Leader (KY) – Wednesday, February 9, 2011: Toyota reports 39 percent drop in quarterly profits – but automaker has high expectations for year
New York Times, The (NY) – Wednesday, February 9, 2011: A Stronger Yen and Fewer Sales Reduce Toyota Earnings 39%
JIJI (Japan) – Wednesday, January 6, 2010: Toyota Targets 10 Pct Market Share in India
International Herald Tribune-Asahi Shimbun (Tokyo, Japan) – Wednesday, December 23, 2009: Toyota Motor Corp. asked its auto parts suppliers on Monday to slash at least 30 percent off the price of some parts for cars slated to hit the market in 2012 and 2013.
Guelph Mercury, The (Ontario, Canada) – Saturday, August 8, 2009: Toyota abandons sales targets
JIJI (Japan) – Wednesday, July 23, 2008: Toyota to Boost Lexus Sales in Russia
Saudi Economic Survey: NA, March 02, 2011
Laurie Peterson (a.k.a sfgirl) is an award winning product manager for interactive consumer products and websites. She graduated from Haas School of Business in May of 2011.
The article highlights the very creative workspace that contributes to the culture that churns out innovative interactive ad campaigns.
It looks a little different than when I worked there. Instead of a half pipe we had a basketball court and pool table. My desk was about 5 feet behind the court (where the ping pong table is in the picture). Some call that a creative workspace, but I call it extreme work environment training: if you can keep on top of 12+ projects with ridiculous deadlines and a creative director who demands over delivery every time, all with a basketball dribbling right by your head, YOU CAN DO ANYTHING!
Sometimes I miss the craziness. I definitely miss the toga party with the two story beer bong. When the going got tough, we’d add more parties.
“Entrepreneurs embody the promise of America: the idea that if you have a good idea and are willing to work hard and see it through, you can succeed in this country. And in fulfilling this promise, entrepreneurs also play a critical role in expanding our economy and creating jobs.”
-President Barack Obama, January 31, 2011
The plan includes:
- Access to capital (government to match)
- Small business regulatory review (reduce hold-up_
- Mentorship programs
- Tax relief and incentives
I teach a quarterly Marketing Research course to entrepreneurs through Centro Community Partners, and I find this lesson is especially important to teach, and VERY hard to follow. Are you making this common mistake?
You have a great product idea. You tested it with your target audience. Heck, they even said they would probably buy it. You are feeling great, and checking off the “marketing research” box on your start-up roadmap. But what mistake might you have made that MOST entrepreneurs make (at least the ones who actually TRY to do market research)?
You might have put the cart before the horse!
Here is what I mean…Did your interviews with potential customers start out something like this, “We have this great product for you that is going to solve a lot of your needs. It does XYZ. Are you interested? ” If so, you may have jumped too fast to test your specific product/service concept, when you should have been doing exploratory research to learn about your customer and the marketplace.
Why does that matter? It matters because your initial hypothesis as to what your business model should be is WRONG. Yup, wrong. Not because you’re not brilliant (I know you are), but because those are the odds. Entrepreneurship is a learning process. By narrowing your research to only include testing your hypothesis you are missing out on a ton of learning opportunities. To say it another way, you are narrowing the scope of discussion to be about your product idea, instead of being about what the customer really needs.
So next time you approach your market research, initiate your interviews with customers and industry folks by asking them what their pain points are and what they are doing to solve them today. Only when you can demonstrate in-depth customer and industry insights (and have refined your business model based on them) should you begin pitching your specific product/service for feedback.
Are you in an industry that is likely to tip towards a standard? Does your product’s technology benefit from a network effect in which the value of the network increases as the number of people connected to it increases? For example, it’s much easier to initiate a virtual meeting with a client, or develop a video game for a gaming console if everyone uses the same technology. When a technology that exhibits a network effect reaches its critical mass (or tipping point), adoption spikes and its place as the standard solidifies.
The takeoff period displayed in the diagram above results from, “a strong desire of users to select the technology that will ultimately prevail-that is to choose the network that has (or will have) the most users. As a result, the strong get stronger and the weak get weaker; both effects represent the positive feedback so common in markets for information infrastructure.”
In order to win the standards game, it’s important to manage consumer’s expectations though the support of influential partners and clients in order to be seen as the inevitable winner thereby capitalizing on strong positive feedback. If you are lucky enough to gain momentum from positive feedback, you will create a self fulfilling prophecy: “When two or more people compete for a market where there is strong positive feedback, only one may emerge as the winner.”
The network effect is equivalent to an economy of scale of the demand side. The chart below shows that a market is most likely to tip towards a single standard if it displays economies of scale as well as a low demand for variety.
Figure 3: Likelihood of a Market Tipping to a Single Technology:
If you are in a market where there is low demand for variety and high economies of scale on the demand side, the market is likely to tip. In order to influence the market to tip in your favor, develop key partnerships and influential clients who will help to promote the product and influence the industry’s expectations. You should be willing to operate at zero profit to try to win this game, as it’s often an all or nothing scenario.
Examples of Products & Industries that naturally move towards a standard:
- Video game consoles / titles (such as x-box versus Playstation)
- Recording formats (such as Blue Ray versus HD DVDs)
- Instant Messengers
- Social Networks
- Data storage devices (such as zip drive versus CD-R)
- Broadband technology
Reference: INFORMATION RULES, Carl Shapiro and Hal R. Varian, 1999.
Name 3 things wrong w/ the following question…
“Are you a boring person who doesn’t like to eat cupcakes?”
- “mostly not”
- “I’m not”
- “definitely not”
If you said that it’s a: 1) leading question, 2) loaded question, and 3) has unbalanced / leading answers, then you are on your way to reducing bias in your marketing research!
Be weary of…
Self Selection Bias: People who self select to be included in your research probably either love you or hate you. They don’t represent your average customer.
Politeness Bias: Some respondents will feel the need to please, and are concerned about hurting your feelings. Reduce this bias by letting participants know up front that you are looking to hear both the good and the bad. A little white lie that you are not directly involved in the development of the product always helps too.
Picking the “right” answer: People may be inclined to choose what seems like the best answer when its not obvious to them how they may actually act in the moment. This may cause overestimation of things like willingness to buy.
Remember, garbage in, garbage out.
- Info is only as good as your sample. Make sure who you target representatives of customer base.
- Consider bias when analyzing data. Think about who self selected into your study, and how they might differ from your target population.
- Conduct it impartially (reduce impact of your bias)
- Scrutinize source of secondary data. Who funded the research? Did they have an agenda? Is it outdated?
When designing survey questions…
- Ask Yes/No questions
- Ask questions that require detailed recall of past behavior
- Ask questions that imply the answer
- Ask questions that gauge the extend of something:“On a scale of 1-5, how likely would you be to purchase this service?”
- Assist with recall by reconstructing memory: “In a typical week, how many dinners do you eat out?”
- Allow for a candid response: “How would you describe this service to your friends?”
I had the honor of taking a Pricing class at Haas School of Business from a world renown pricing expert, Teck ho. The following is a list of the top takeaways that I feel every entrepreneur should consider when pricing.
1) Pricing is a powerful tool to increase profits
2) It’s really hard to raise prices. They tend to go down over time, rarely up. The prices you set are establishing a reference price for the future. (It may be better to start high and adjust if necessary)
3) Don’t just set prices based on your costs (cost plus pricing). If you do, you will be leaving money on the table. Prices should be set based on the value they create for your customer. Use costs just to ensure you are selling for a profitable amount (sets pricing floor).
4) Don’t charge just one price. Customize prices for customers (“price discrimination”) in order to grab additional surplus from those with a higher willingness to pay, and still sell to those with a low willingness to pay. You can do this through versioning, bundling, discounting. Consider different prices based on: location, time of purchase, quantity, or product design.
5) If you are in a competitive pricing situation, figure out how to change the game so you aren’t comparing apples to apples. Use differentiation, bundling, etc
Here is a video featuring Teck ho, my pricing mentor: