Qualitative Validation of MVP around the price

This article shows the second step of the process that I started on the text Problem-Solution Fit — developing value proposition around the price. I recommend reading the first article to better understand the process that I adapted.

As a reminder, 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).

BEGINNING TO VALIDATE THE MVP AROUND THE PRICE

The process below presents how I came to the “ Qualitative Validation of the MVP around the price” by adapting the methodologies of MVP 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 (objective of this article)
4. Verify Quantitatively

Each of these steps aims to gradually reduce the 3 main risks (each one represented by a letter 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. Below, you can see the main points to work on the 3rd step during the MVP Validation:

Value Proposition Canvas

Business Model Canvas

In RunningLean, the “Qualitative Validation” step revolves around “MVP Interviews” with the desired segment of clients. The book goes into detail about the step-by-step interview process, so we will focus on the adapted points.

Just like in the previous ones, we adapted the Willingness to Pay (WTP) methodology in this step, from the book Monetizing Innovation by Madhavan Ramanujam, by further working on the Market Risk steps.

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. In this step, we mainly focused in Value Communication and Behavioral Pricing.

MVP Interview

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

• Home Page gets the client’s attention (Product Risk)
• Clients can follow the activation flow (Product Risk)
• Usability issues (Product Risk)
• MVP exhibits and develops UVP (UniqueValueProposition) (Product Risk)
• We can bring more clients in using existing channels (Client Risk)
• Clients pay for the solution (Market Risk/WTP)

The interview with potencial clients may be conducted in different ways depending on the product and the client segment. We can present a website or online tool, analyze how the potential client browses it and ask the questions as they reach certain steps.

In our case, we present an online Demo we conducted ourselves, because the flow isn’t simple and the time with corporate clients is scarce.

INITIAL MVP INTERVIEW SCRIPT WITH WTP QUESTIONS

• Contact Information:
• Demographic information that identifies the customer segment
• Communication of Value (Acquisition Funnel + Value Communication):

— 1. Landing page (UVP)

— — Is it clear what the product is?

— — Is the Unique Value Proposition clear and appealing?

— 2. Tour — some way for the client to understand how it works (video, pictures, test, etc)

— — Is there enough information? Would you change anything?

— 3. Benefits

— — Are the final benefits you want to reach using the solution in the list?

— — Are the benefits simple and clear?

— — Are the benefits appealing?

— — Are the benefits in line with the values you seek?

— — Is there a final benefit you want to reach that is more important than these?

— 4. Monetization Model and -P-r-i-c-e-

— — Explain why the model benefits clients and why it is in line with their performance. “HOW you charge trumps WHAT you charge.”

— — Is there enough information? Would you change anything?

In our case, we did this step differently, by presenting the monetization model without informing the price. Only after presenting the Activation Flow and confirming that the client was interested in the solution did we show the price, thus isolating this variable. That way, we confirmed that the client was interested in the solution itself, before being influenced by the price. In case the client wasn’t interested in the solution even before knowing the price, then obviously the issue was with the solution.

— 5. About us / Our story

— — Is there enough information? Would you change anything?

— 6. Terms of Use and Privacy

— 7. What would you do next?

— — After going through the entire Acquisition Funnel, would the client buy it? Would they sign up? Etc.

• Activation Test

— Conduct a test with the client through the entire activation flow of your product/solution and analyze how the client behaves through the flow. (In our case, we conducted the flow during an online Demo).

— What did you think of the process?

— What could we improve?

• Interested in buying/hiring the product/solution? (without influence from the price) Yes/No
• Inform Price in the monetization model:

— Informed value: X $ / No interest (in the Solution Interview)

— Accepted value: X $ / No interest (successfully negotiated)

• Interested in buying/hiring the product/solution? (with influence from the price) Yes/No
• Notes
• Recommendations

DETAILING THE INTERVIEW’S MAIN POINTS

Below, we show you the directives and detail the main points of the script above to be further explored during the MVP Interview. This way, we may adjust the script and focus on the weaker points during the interview cycles.

BENEFITS (VALUE COMMUNICATION)

1. Is the benefit simple, clear and in line with the value the client seeks?

• What is the final benefit the client wants to reach with a feature?
• How would the product help solve the client’s pains? (this helps to better describe the benefits)

2. How do clients measure each benefit’s performance? What are their assessment criteria?

• Determine the purchase criteria;
• Quantify the relative value (performance) of each benefit compared with the alternatives, from the client’s point of view;
• How does the product stand out?
• The relative value must justify the price (client’s ROI).

3. Refine the messages if the client’s don’t think them clear and appealing.

4. Some directives:

• Put them in order of priority for the clients;
• Use language and terms that are meaningful for the clients;
• Practice limitations:
• — Communicate the benefits as soon as you can;
• — Communicate messages only for the benefits that are most important for the clients.

ACCEPTABLE PRICE

In the previous post, when the “Solution Interview” is over, we’ve already determined the best acceptable sales price for this market according to our strategy (be it Maximization, Penetration or Skimming).

We’ll call this best price “acceptable price” and the price informed by each potential client “informed price”.

Even after the Solution Interview, the values accepted by the clients may still vary depending on the MVP’s performance. If they vary upwards, we may have activated triggers that we hadn’t yet realized (emotional, etc) and we should analyze them, because we can use them to our advantage.

So when talking about the price, we have to make sure the MVP delivers the promise of our UVP.

The order of the MVP Interviews should be based on the values informed during the Solution Interviews. Start with the potential clients that informed higher prices (they see more value in the solution) and make your way in descending order through the ones that informed lower values. If you start by negotiating higher values, you will obviously end up with a higher acceptable market price.

NEGOTIATION FLOW

A few directions are important to establish a negotiation flow.

Strongly use Behavioral Pricing techniques — Those techniques make the choice easier for the client and allow us to charge more for it. You need to test which ones work better with your product and market. Below are the 6 more common tactics:

• — Compromisse effect
• — Anchoring
• — Using price to signal quality
• — Razor/razor blades
• — Pennies-a-day pricing
• — Psychological price thresholds

Negociation flow:

1. Start with the potential clients in descending order from the “informed price”
2. Negotiate prices only with those who have purchasing power.
3. If you’ve already successfully negotiated the prices, always work your way up from an “anchor” and above the lowest price, so as to maintain this minimum price (as long as it is above the price informed by the client in the Solution Interview). If you can maintain a certain value, you can confirm a new market price.
4. If you can’t maintain:

a) If the “informed price” is higher than the “acceptable price”:

• — Work with this price and accept this value to establish a deal.
• — — If the client is satisfied, close the deal.
• — — If they don’t accept it, negotiate the price until the next “price cliff” according to the Solution Interview, not lowering beyond the “acceptable price” (remember that the “acceptable price” is the ideal price determined for your strategy). Ex: Values: 240->180->150->130

b) If the “informed price” is lower than the “acceptable price”:

• Work with the “acceptable price” (already determined in the “Solution Interview” step).

In sum, we test the market’s resistance:

Anchoring ==> Successfully keep the lowest negotiated price ==> Price informed by the company ==> Lowest stipulated price

ABOUT CONTROL PLANE

In our case, we make Demos and make sure our MVP is capable of delivering the main benefits you expect (and therefore our UVP).

We made it clear for our clients that the Demo was in a test environment and that some nice-to-have features promised still had not been implemented, because we focused on the must-have features. Starting with the more interested clients and following this flow, we sell our solution to some clients before the production environment is operational, as well as fix a new price 33% above the “acceptable price” determined in the Solution Interview.

We also managed to negotiate this new price with clients that had informed values below the “acceptable price”.

Some reasons:

• We developed the value communication;
• We were able to add more value by pressing more triggers (pains/gains/tasks) that we hadn’t previously analyzed. For instance, our solution ended up being user-friendly in a way that clients denied needing a “guide” to use it. It also manages tasks and specific information in a centralized way that would otherwise become scattered through emails and repositories. These features weren’t considered relevant in previous steps, but were shown to be valuable for clients.
• We were also aware that the values informed in the previous Interviews could be below the real prices, because it is human nature to inform we would pay less for something than what we would actually accept to pay in reality.

From this basic script and these directives, we went on adjusting the solution, communication, price and the script itself, in a way that, when we were able to clearly determine the points informed in the beginning about Product, Client and Market Risk and the “MVP Interview”, we concluded this step “Qualitative Validation of MVP around the price”.

Giuliano Barros is Founder and CEO of Control Plane - The first Platform of Cooperation among IT Partners.

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