We all know that a very effective way to increase our profits, is on one hand to be able to sell more units of or products or services, and on the other, to charge more per unit.
But that’s easier said than done, right?
The thing is that if we want to maximise our sales, there are 3 things that must be at the core of our product development and product management strategies and failing to address any of the three will hurt your business.
And that’s why I refer to it as the revenue maximization triangle. Together, these three activities form a basis on top of which our product sales can grow. Fail to build a solid foundation in terms of any of the three, and the house will be unsteady (and can’t grow).
So, without further ado, let’s see what these are.
So, this is the obvious one, and unfortunately, often the only one that people focus on. Building a better product. One that creates more value. And still… they manage to get it wrong.
The biggest mistakes regarding this one stem from not conducting market research prior to product development. This may result in:
Value creation mistake number 1: building a product that nobody wants (or nobody is willing to pay for)
And one thing that often confuses product creators, is that because you think people need a product, it does not mean they do, or that they realize they do (and these are two very different things).
And then, even if they do need a product, and the even realize that they even realize that they need it, that does not mean that they want it.
You can’t sell people something they don’t want, regardless of whether they need it or not (for example, you probably would agree that a lot of people would benefit from personal finance, or goal setting courses, but we usually don’t want to hear that our bad habits suck, unless we have a strong motivation to make changes (in other words, unless we want it).
Even if that’s something we really need.
So, make sure you’re developing something that is wanted, and not just needed.
Value creation mistake number 2: Not segmenting the market and building a product that tries to please a generic “avatar”
The biggest problem with this one, is that you may end up developing a product that has a mishmash of features that don’t really target anybody.
Apart from not having a combination of “yes” features that makes at least a customer segment desperate for you to take their money, you may end up including a feature that is a “no go” for an excessively large portion of your target customers.
And even if you do not commit any of the previous major sins, your product may end up just having too many features, which isn’t any less dangerous (I know this one is a bit counterintuitive, but for more about how having too many features and providing more value can be the death of your product, I suggest you read the post on that topic)
Value creation mistake number 3: Not taking into account willingness to pay when developing the product
Or, failing to identify what increases willingness to pay (or is a minimum requirement to make a sale), vs. what people say they want, but don’t value enough to open their wallets to get it.
If you fail to distinguish what can be turned into revenue and what can’t, you may end up with a product that people aren’t willing to pay for at all, or one that’s so expensive to develop and manufacture, that it can’t be profitable at the price at which you later find out that you can sell it for.
Anyway, since the launch of books like the Lean Startup, I get the impression that people are paying more attention to customer feedback prior to full product development (I may be wrong, but I do get that impression). I’m not sure that it’s as widespread as it should, but things seem to be moving in the right direction.
But let’s move on to the second side of our foundational revenue maximization triangle:
Unfortunately, you can’t control people’s perceptions. You can’t “get them to see”. But… you can try to influence them. And you do that through your value communication strategy.
Because let’s face it. Your product won’t sell itself. No matter how good it is. And unless you communicate to your potential customer how your product will improve his life, he may never find out about how awesome your product is on his own.
You really shouldn’t expect customers to do all the work of researching your product’s features, figuring out how these features will improve their lives, how it can get them closer to fulfilling a dream, and basically selling it to themselves.
You need to give them a hand, because they may not be motivated enough to put in that sort of effort (some might, but not all).
Keep in mind that the expectation the potential customer has regarding how much value your product will create is what will determine how much he will be willing to pay for your product.
It’s your job to try to raise that expectation to match the level of value that your product indeed creates, through your value messaging, and through your value communication strategy.
But let’s move one to the 3rd activity that you must make sure you get right in order to maximize your sales:
So, the captured value is what you are able to charge for your product, plus how it impacts your brand value.
I don’t think there’s a need to explain why this one is important. It’s obvious your profit depends on it. Price too high, and people won’t buy. Price too low, and you forego of profits that you might otherwise have gotten.
Obviously, this one is closely related to how the potential customer perceives your product before purchase. And as we’ve seen, that depends to a large extent on how much value your product creates, and how you manage to get your customers to expect that value through your value communications strategy.
But having a good product and good communication is only a part of being able to capture the value your product creates. You must also have a good pricing strategy.
The right price level, the way you charge (as in pricing model, not payment processing), the pricing structure, and even the way you communicate your prices, can all have a dramatic impact on your ability to capture the value your product creates for the customer.
So, you can’t just put an arbitrary number on a price tag without any strategy behind it and hope that that price just happens to be the best one to maximize your profits. That’s crazy, right?
Now… I do realize that quite often, the reason why you don’t price your product to capture the value it creates for the client is simply because you have no idea of how much that is.
Unless your product generates an easy to assess monetary benefit (that is savings or increased income), it can indeed be hard to get an idea of its value. After all, how much is for example the happiness you get from learning a new hobby worth?
And then, a common reason for pricing too low, stems from the fear of raising your product’s price, and never making another sale. Even if you are fully aware that you are underpricing your product.
Unfortunately, for businesses in industries or markets where the negotiating power lies heavily on the buyer’s side, this fear may make a lot of sense. But not in all.
If you’re selling an undifferentiated product in an industry with strong competition, or there are a lot of potential substitute products, this fear does make sense. But don’t just assume that customers are comparing your product based on price. Do your research before you act on that assumption.
In any case, you can’t possibly know what your profit maximizing price is without conducting a value research with target customers.
So, make sure that when developing your product, you ask them at least the five questions that are essential for pricing a product. It isn’t an exhaustive list of questions, but it does cover the main points.
Your ability to create a revenue maximizing product rests on how successfully you can do 3 things
- Develop a product that creates value to a customer segment that is willing to pay for it. Needless to say, that segment must be large enough to allow the product to generate a profit. You need a value creation strategy.
- Communicate your product’s value properly, so that your target customers understand the value it will create for them and want the product in their lives. In other words, you need a value messaging and value communication strategy.
- Price the product in a way that does not deter too many people from buying, but that does not leave too much money on the table either. In other words, you need a value capturing strategy.
And a note of caution here, is that when it comes to pricing, the goal isn’t to maximize revenues, it is to maximize profits. Always keep that in mind.
So you need to pay proper attention and actively manage not only the value creation achieved through your product’s features, but also the value communication, and the value capturing aspects of your business, so that you build a solid foundation to avoid missing out on revenues and ultimately profits.
Underperforming on any of the 3 will prevent your product from reaching its full potential.
And this is it for today. In my next post, I’ll go over how having a lot of product options can damage the chances of making a sale. Because although there are situations in which having more options is beneficial for business, that’s not always the case (even if it seems a bit counterintuitive).
See you in the next one! Bye!