Problem-Solution Fit — developing value proposition around the price

The path of achievement that the entrepreneur must pursue is known as “Customer Development” (defined by steve blank) and is divided into 4 main steps. To take a glimpse at the consolidation of the company in the last step, we need to go through the Problem-Solution Fit, the Product-Market Fit, and the Business Model Validation, in that order. I found the best representation of the process in the book Value Proposition Design (see presentation).

The process below presents how I came to the “Problem-Solution Fit — developing value proposition around the price” by adapting the methodologies of Problem/Solution Interview from Running Lean book by Ash Maurya, the Value Proposition Design (VPD) from Value Proposition Design book by Alex Osterwalder and the Discovering of Willingness to Pay (WTP) from Monetizing Innovation book by Madhavan Ramanujam. I highly recommend reading the 3 books that together teach how to reach the “Product-Market Fit — developing value proposition around the price”.

Product-Market Fit and Running Lean

In order to achieve the Product-Market Fit, the Running Lean method follows 4 steps:

1. Understand the Problem
2. Establish a Solution
3. Validate Qualitatively
4. Verify Quantitatively

Each of these steps aims to gradually reduce the 3 main risks (each one represented by a color in this post):

• Product Risk (P)
• Customer Risk (C)
• Market Risk (M)

This way, we present the expected results of each step relating the risks:

1. Understand the Problem

• Make sure we have a problem that is worth solving (P)
• Identify who has the pain (C)
• Identify competition through existing alternatives (M)
• Choose a price for the solution (M)

2. Establish a Solution

• Define the smallest possible solution for learning (MVP) (P)
• Refine the segment up to the initial adopters who want the product now (C)
• Test the price by measuring what customers say or do (M)

3. Validate Qualitatively

• Build and validate MVP in small-scale (P)
• Start with outbound channels (C)
• Test price by what customers do (M)

4. Verify Quantitatively

• Verify on a large scale (P)
• Gradually develop inbound channels (C)
• Optimize the cost structure to make the business model work (M)

Using Canvas in this process

The Running Lean process uses the Lean Canvas, but we use the adapted Business Model and Value Proposition Canvas to segment the information even better.

Here is how to work from steps 1 and 2 to the Problem-Solution Fit:

Value Proposition Canvas

Business Model Canvas

In Running Lean, the steps Understand the Problem and Establish a Solution revolve around interviews with the desired customer segment, where in the first we work with Problem Interviews and, in the second, with Solution Interviews.

The book describes in detail the process of each step-by-step interview, so that we will focus on the adapted points.

In these steps, we have adapted the Willingness to Pay (WTP) methodology of Monetizing Innovation book, by Madhavan Ramanujam, to better work on the stages of Market Risk from the beginning.

The purpose of the methodology is to develop a value proposition that the client values and wishes to pay for it a satisfactory price in order to create a profitable business.

Problem Interview

In this step, we interview potential clients until we can clearly determine the following points:

• Identify a must-have problem (Product Risk)
• Identify customer segment (Customer Risk)
• Identify existing alternatives (Market Risk)
• Determine how much the customer would pay for a solution (Market Risk/WTP)

Here is the basic Problem Interview script with WTP questions:

• Contact Information:
• Demographic information that identifies the customer segment
• For each problem / desired gain, ask:
• — Priority ranking: 1, 2, 3, etc.
• — Pain level: do not have / nice-to-have / must-have
• — Other specific issues about the problem
• …
• — How the problem is solved today:
• — Flow of this task performed:
• — To resolve this problem (WTP):
• — —What would be an acceptable price?
• — — What would be an expensive price?
• — — What would be a prohibitively expensive price?
• — — Why these values?
• Notes
• Recommendations

Prioritize and refine the issues on which you will be working following the order:

1. Priority ranking — people focus only on their Top 1–3 problems
2. Pain Level — people seek solutions only for must-have problems
3. WTP — not worth developing solution if people would not pay

First, considering the refined market segment, analyze the WTP for each problem or desired gain and determine whether a solution for it would be justified. Then, analyze the WTP for the final product by adding the solutions to all the problems that are justified and analyze feasibility and forecasting. I demonstrate that below.

First, analyze segment acceptance separately for each feature that solves a problem. Then analyze the acceptance of a final solution considering the strategy you intend to use (Maximization, Penetration or Skimming).

This way, for each functionality or solution, create a graph with a Y-axis representing the totality of the interviewed target public and the X-axis representing the values considered acceptable, expensive and prohibitively expensive.

In the example below of a solution to solve a certain problem, 48% of respondents considered WTP of $ 120.00 to be “acceptable” and would pay with low resistance, $ 200.00 to be “expensive” and would pay in case of greater need and $ 300.00 to be “prohibitive” and would not pay in any way.

Considering the strategy you intend to use (maximization, penetration or Skimming) the values used will be between “acceptable” and “prohibitive”.

Then, for each functionality and final solution, create elasticity curves and analyze whether it is worth exploring each one. In this case, the Y axis represents the profit by discounting fixed and variable estimated costs, the X axis represents the sales prices and the calculation must consider the acceptance percentages for each value where:

value = [(selling price)x(percentage of acceptance of price)]-(fixed costs + variable costs)

In the example below, if we look for a Maximization strategy, the chart shows that the best acceptable sale price for a product would e R$ 200.00, reaching the maximum profit of $ 10,000.00. If we go back to the graph above, this Maximization strategy shows us that such a product at $ 200.00 would be targeted at a segment between 24% (acceptable) and 67% (prohibitive) of this market.

If we were looking for Penetration, the graph above shows that a price of $100 or less would be better for the same product acceptable to more than 50% of the market.

With this information, we conduct Problem Interviews by adding or dropping problems and refining customer segments until we have determined the risk criteria.

Solution Interview

In this step, we interview potential clients until we can clearly determine the following points:

• Identify the smallest possible solution for learning (MVP) (Product Risk)
• Identify initial adopters (Customer Risk)
• Determine how much the customer would pay for this feature /solution (Market Risk/WTP)
• Determine if we can build a business around this solution (Market Risk/WTP)

Here is the basic Solution Interview script with WTP questions:

• Contact Information:
• Demographic information that identifies the customer segment
• For each feature or solution, ask:
• — Do you value these features? No / A little / More or less / A lot
• — Why?
• — To acquire this solution (WTP):
• — — On a scale of 1 to 5, where 1 is “I would never buy this product” and 5 is “I would definitely buy this product”
• — — Would you pay $ X? (scale 1–5)
• — — — If you get 4–5 stop, otherwise lower the price a few times. If lowering the price does not improve the grade, the solution is not attractive.
• — — Why?
• For the final product (complete solution), ask:
• — Do you value the overall solution? No / A little / More or less / A lot
• — Why?
• — To acquire this solution (WTP):
• — — On a scale of 1 to 5, where 1 is “I would never buy this product” and 5 is “I would definitely buy this product”
• — — Would you pay $ X? (scale 1–5)
• — — — If you get 4–5 stop, otherwise lower the price a few times. If lowering the price does not improve the grade, the solution is not attractive.
• — Why?
• Which part of this demonstration affects you the most?
• What don’t you need?
• What features are missing?
• Notes
• Recommendations

In WTP questions, we can also use “Build your product” simulation (shopping cart style), “more or less” questions with different features or “shopping simulations” with different characteristics and prices to determine which features the respondents prioritize and for what price.

Rate the features and solutions like Leaders, Fillers and Killers for the interviewed segment:

• Leaders — valued as a lot by 70% or more of the segment
• Fillers — everything between Leaders and Killers
• Killers — valued in any way by up to 20% and not valued by 20% or more of the segment

At the end of the cycle, prioritize and refine the functionalities and solutions that will work following the order:

1. Ranking of Priority — Leaders, Fillers and Killers
2. WTP — refining feasibility forecast

To analyze feasibility, first analyze each feature/solution presented by determining which are justified. Then analyze the final solution/product for the segment of interest and determine the psychological boundaries. (Example: a segment may be interested in paying 10 for each of the 5 features, but only accepts to pay 40 for the whole set)

First, for each feature and final solution presented, create a WTP graph with the Y-axis representing the entire target audience interviewed, the X-axis representing the possible sales prices and the curve pointing the accepted values for a given percentage.

Again, analyze the acceptance of the segment considering the strategy you intend to use (maximization, penetration or Skimming), always trying to stay within the boundaries (cliffs).

In the chart below, 50% of the interviewed segment reported accepting a price of $ 200.00 with grades 4 or 5 (on a scale of 1–5).

Finally, define the elasticity curves for each functionality and final solution presented and analyze the expected viability and profitability. Again, the Y-axis represents profit by discounting fixed and variable costs, the X-axis represents sales prices, and the calculation must consider the percentage of price acceptance for each value where:

value = [(selling price)x(percentage of price acceptance)]-(fixed costs + variable costs)

In the example below, if we are looking for a Maximization strategy, the graph shows that the best acceptable selling price for this intended solution would be $ 150.00, reaching a maximum profit of $ 5,000.00. If we look at the graph above, such Maximization strategy shows us that such a product/solution at $ 150.00 would be accepted by 58% of this segment.

With that information, we conduct Solution Interviews by adding or dropping functionality or solutions and refining initial adopters until we have determined the risk criteria. At the end of this stage, we reach the “Problem-Solution Fit — developing value proposition around the price”.

Second step: Qualitative Validation of MVP around the price

https://medium.com/@giuks/qualitative-validation-of-mvp-around-the-price-ae7da5f118bf

About the author:

Giuliano Barros is the Founder and Consultant of Control Plane — Network Services: https://controlplane.com.br

He graduated in Computer Science in UFPR, is CCIE certified by Cisco Systems and has worked for 15 years with IT Solution Integrators in projects for medium-sized and large companies. https://linkedin.com/in/giulianobarros