The obvious and non-obvious ways to think about product value.
Note: I believe this story is useful for anyone involved in a company with products. Engineering, Design, Sales, Marketing — all of us have a critical role in the value of our products.
Rebecca wants to plant a mid-sized tree in her backyard. In order to do this, she needs to dig a hole roughly the size of a five gallon bucket. She has a few options she’s considering:
- Buying nothing and using her hands
- Buying and using a shovel
- Buying and using a tractor
How does Rebecca make this decision?
One of my favorite things to do is mentor new Product Managers who are excited to dive head-first into the world of Product Management. I can’t blame them — it’s a wonderful place.
Often times these new PMs come to me with specific questions such as:
- What analytics tool should I use?
- What KPIs should I be tracking?
- What’s the best way to build a roadmap?
- How does Agile work and should I use it?
These are all excellent questions that deserve an answer. That said, I’ve found the most important place to start your Product Management journey is at a more philosophical level. The question I like to ask during a first mentor session:
What is the value of a product?
Before diving into the details of analytics tools or prioritization, you first should dive into a higher level of understanding of what exactly a product is, and how people make decisions to use a product. My goal in this story is to work through those higher-level questions.
Before we begin — functions
I’m going to be presenting the key ideas in this story as functions, although there is one catch: The functions I will be providing do not have clear numeric values. We’re going to be using some basic math operators like addition and subtraction, but the inputs are too abstract to numerically evaluate. If you’re a numerically minded individual, you’ll have to pardon this grievance.
Product value — a function
Let’s start with defining a function for product value. Better yet, let’s start with defining what product value is in the first place. I am in no way claiming the following definition is the only one (definitely not), or the best one for everyone. I just found that many of the existing functions were too restrictive or lacked the user-centrality (aka too business-y) .
For the purpose of this story, I will define as follows:
Product value is the perceived value your product adds to a user’s life
How’s that for abstract? Let’s break it down a little bit:
perceived: This word is important here. Product value is not just the measurable or obvious value of a product. Product value is the value your customer perceives they gain from using your product. It’s important to note that this also means that the value of your product can vary from customer to customer, organization to organization, based on the unique attributes of who they are and what they do. Your product may stay the same, but its perceived value will change from user to user.
value: Value is an abstract term, and that’s a good thing. As we will discuss, the value of a product is composed of many different types of information that don’t exactly reduce to a single number. Instead, it’s more useful to keep the definition of value at it’s highest abstraction. Via Google: “the regard that something is held to deserve; the importance, worth, or usefulness of something.”
adds to a user’s life: I highlight this phrase for a couple reasons:
- It’s important to consider how your product fits into a user’s life, as a whole, whenever you’re thinking about your product. Unless your product is The Matrix, your users will spend a good chunk of their life outside of your product. The value of your product needs to be considered alongside that life, not independent of it. I’ll also bring up that again, this means that value of your product varies from user to user based on their unique situation and identity.
- It’s important to think of value in terms of individual users, not businesses or organizations. Yes, you may sell to businesses, and yes, you may have many different functional groups using your product. That’s fine, but each of those groups are made up of people trying to add value to their lives in their roles. Don’t forget that.
Okay, so let’s dive into the function for Product Value, as defined above. I’m going to present it first, and then we can dive in:
It’s really simple — that’s the point. Product Value can be “calculated” by taking the benefits and subtracting the costs. The function itself is not meant to be ground-breaking — it’s meant to be obvious. Where this becomes interesting is when you start breaking down the two variables: Benefit and Cost.
As we go through these two new variables, I want you to keep in mind our definition for product value:
Product value is the perceived value your product adds to a user’s life.
We spend a lot of time and resources trying to tell people about the benefits of our products. Flashy landing pages, highly-trained sales forces, big conference booths.
Some of your product’s benefits are straightforward and numeric, and those are often the ones we focus on. Others benefits are a bit more opaque — and recently we’ve seen that companies that understand these less obvious benefits can dominate industries despite pressure in other areas.
- Dollar Amount: This seems like one of the most straight forward values to calculate. How much money will your users gain from using this product. Maybe they will now be able reach more customers or charge more for their service because of a new feature you’ve enabled. Maybe your customer will be saving money, and that’s how it will benefit them. You’ll be able to have less employees working on some task or potentially need less material because of some efficiency boost. Out of all the benefits, the dollar amount is the one we seem to focus on the most — and that makes sense. It’s what the modern business world revolves around. It’s easy to use in calculations and to compare. Let me ask you something, though: Are you using the most dollar efficient car available? What about your computer? What about your apartment or house? Why do customers pay for a Lexus, BMW, or Mercedes? Why is Apple a trillion dollar company? Surely the dollar benefit is not the only benefit users are perceiving.
- Time: The amount of time your users gain back is also commonplace for modern products. Many of the products we purchase today promise gains in efficiency; they go faster, do more, and require less. Of course, this can be translated back to a dollar value and often is for many businesses, but it also important to give credit to our own senses of time. We have the common phrase “worth our time”. What does that mean? We use it even when we are not going to be gaining some dollar value as a result of that decision. When we feel like we’re wasting time, it’s painful. We are very aware of time, and are constantly reminded that we only have a set amount. Products that save users time will be perceived as adding value to a user’s life, and not just in a financial way.
- Effort: Often the benefit of effort is conflated with the benefit of time, but it’s important to keep them separate because they are different. Effort can be directly proportional to time spent on a task, but that’s not always the case. When I say effort, I want you to think of the word “strain”. Strain can be both physical and mental. Look around your kitchen — most of the utensils there are meant to both save you time and reduce the physical strain you will have when accomplishing your task. This isn’t just isolated to the physical world, however. Mental strain is a real and measurable thing, and the world of User Experience has flourished in our modern screen-based world because of it. The perceived ease-of-use of a product can have drastic effects on the perceived value of a product, which is why it’s so important to consider effort as its own benefit.
- Emotional Impact: This is normally where I get a few skeptical glances. I admit, it sounds a little fluffy, especially compared to things like dollar amount and time efficiency. Understanding the emotional connection of your product is incredibly difficult and I still have yet to meet someone who has truly conquered the art of measuring emotional impact. That said, understanding the emotional impact of your product is a secret weapon. The way a product makes us feel, the way we perceive ourselves, or the way that we hope others perceive us, is an immensely important part of product value. My favorite example of this is Tiffany & Co. Why do people still buy Tiffany engagement rings? They cost more money than an equatable ring, the dollar value of the diamond is “technically” the same as competitors, they are definitely less efficient than just buying a ring online or from the store down the street… so why is Tiffany & Co still in business? It’s because they have built an entire experience and brand to make you feel a certain way when you buy a Tiffany ring. It’s a symbol of luxury and beauty. Showing someone your Tiffany ring gives you a sense of pride and elegance. The emotional impact of this product allows Tiffany to thrive in the industry, even though they are equatable or even worse in other areas of product value compared to competitors. So I have a question for you: how does your product make your users feel?
Everyone feels pretty familiar with the idea of “cost”. It’s how much money you pay. It’s how much time you spend. These are the ways we encounter cost everyday.
There’s more here, though, and the un-intuitive costs are often the most convincing. You’ll notice a major overlap between the components of a benefit — makes sense, right? For many of these components, the value of a product will be perceived as a benefit or cost based on the components value compared to an existing solution (more on that in a bit).
- Dollar Amount: No surprise here. One of the first costs users look at is the dollar cost. Its an easy cost to compare. Just as much as dollar value can be seen as a benefit, the inverse is true. If your product is more expensive than competitive solutions, then your users will weigh that as part of their perceived product value. One point I want to make here — even something as straight-forward as the impact of dollar value can change from user to user, organization to organization. GoGuardian, the company I work for, has some of the most advanced filtering technology in the world. We’ve built something that has truly revolutionized the way modern internet filtering takes place, and as such we’ve been able to offer our users tremendous amounts of product value in almost every way. That said, the most we’ve been able to charge for this next generation technology is around the price of a Starbucks Mocha, per user, per year. If you compare this price to other internet filters, you may quickly come to realize that this is insanely cheap. So why do we charge so little? This is because we focus on building tools for schools at GoGuardian. Schools have much less money to work with compared to businesses, and as a result, their dollar tolerance is much less than other industries. So although the benefit value of our products is much more than many of the competitive filtering solutions in the market, our price is much lower due to the perception of cost in education.
- Time: Just as saving users time can increase product value, adding more time to a task can decrease product value. If your product makes a task take longer, your users are going to notice and they are going to penalize the product value for it. Not only do you need to consider the amount of time it takes for users to accomplish a task with your product — you need to consider how much time is required for users to switch to your product, learn how your product works, and disseminate that information to any other stakeholders involved. Providing users with great on-boarding, data import tools, and stakeholder communication material can greatly decrease the time cost associated with implementing your product.
- Effort: Another fairly intuitive cost is effort. As mentioned under Benefit, You can think of effort as a measure of the amount of strain someone encounters physically or mentally when using your product. Products that increase strain will detract from product value. If your product has a poor UX that makes it difficult to accomplish tasks or even adds more physical work for a user, you can find yourself with a much lower product value than competitive solutions in the industry.
- Emotional Impact: When we talked about the benefit of emotional impact earlier, it probably goes without saying that a negative emotional impact will be perceived as a cost to your user. If your product makes users feel worse about themselves or hurts your user’s reputation among peers/friends/etc, then users will perceive the emotional impact of your product as a large cost. Take Abercrombie & Fitch for example. The way your Abercrombie & Fitch shirt makes you feel may have completely changed after the CEO’s remarks a few years ago. Maybe you don’t wear it anymore. You may not have bought a new Abercrombie & Fitch shirt since. Surely the shirt didn’t look different, fit different, or cause more physical strain, right? The negative cost of emotional impact is most obviously perceived in things like clothing or accessories. We don’t pick clothing products just based on their utility or cost — often we pick them based on how we feel when wearing them. That said — emotional impact is not just reserved for the physical world. My favorite software example is iMessage’s message coloring. One time I asked a friend why she wouldn’t consider an Android phone for her next purchase. She responded: “Ew — then I’d be green”. My friend was unwilling to buy an Android phone because of its emotional impact. Despite the Android phone costing less and having more features, the emotional impact ultimately lowered the perceived value past that of an iPhone. Again, this varies from person to person. I have an Android phone, and I really don’t care that I’m green when I text iPhone users.
A note about Risk:
When users are looking at the value of your product, they will naturally assess the additional risk they are exposing themselves to as part of the decision. Risk can be associated with any of the components of value we have been talking about. Does this product open the user up to a risk that could have financial impact? Does this product risk someones identity? Does this product risk physical health? The reason I want to highlight it here is that I often see the risk overlooked — especially with complex problems.
One of the first times I witnessed the less intuitive components of risk was when I tagged along with an IT Admin who was rolling out the GoGuardian products to his school. As an IT Admin, he had the responsibility of both deploying GoGuardian and training the educators how to use it. This IT Admin was seen as a tech-hero to many of the teachers in the district, and had built up a wonderful reputation with his peers. I asked him if he had any concerns with GoGuardian, and he replied “I just hope it works well for everyone so they can keep trusting me”.
This user was risking his reputation with his peers by choosing GoGuardian, and as a result the perceived value of our product was affected. What risks do users see with your product?
Building better products
So how do we build better products, that is, how do we build products with higher product value? Hopefully, you have pretty clear intuition about how we can increase product value. We either need to decrease the perceived costs, or increase the perceived benefits. It’s that simple.
You can increase your product value by helping your users save more money (or acquire more), making them more efficient with their time, reducing physical or mental effort, or even making them feel better about themselves or how others perceive them.
Note that these components are not contained to just the Product Management department — every department is involved in the perception of product value. How a user first hears about your product, or interacts with a sales rep, or gets help online, are all contributors to product value. If it takes too much time to find a helpful support article, or the sales rep feels sleazy, or the product takes too long to load, then the perceived value of your product will be affected.
It’s not surprising that the best product makers are the ones who can think about their product holistically, considering every user interaction.
Decisions — a function
Next, let’s look at how a user will make the decision to use our product. We’ll take our shiny new Product Value function and use it to understand a bit more about what makes users pull the trigger.
The decision to use your product is always a comparative process, even if the user is not using a competitive company’s solution. If anyone ever says “we don’t really have competitors”, they are forgetting about the one that has the largest stranglehold on the industry: Status Quo. You are always competing with Status Quo.
So it turns out our function for user decision making is pretty straight-forward:
If this function evaluates to true, then users will use your product instead of the competitive solution (which could be status quo). If it evaluates to false, then they won’t.
An example of competing status quo…
Back when I was a software engineer, I worked on a product that was “the first of its kind”. Sure, there were some products kind-of like it, but they were not even close to what this product could accomplish. It automated this thing and linked that thing. It was such an obvious innovator in the space.
It failed. It failed because it didn’t consider its most obvious and most competitive solution: Excel. Our target users thought our features were neat and they totally understood why it would save them some time and effort. At the end of the day, however, it wasn’t that much better than a spreadsheet. It required a ton of costs (learning a new system, porting data over, having an internet connection, yearly subscriptions) and just a tad bit of benefit. We had made the mistake of thinking that because there was no dedicated solution in the market, the product would have to be successful.
Remember: If the problem your product is solving is actually a real problem for your users, then your users have already been solving it in a different way before your product rolled around.
Again, I can’t stress this enough: this function can evaluate differently for every single user of your product, because the value function we are using will result in different results for every single user. At the end of the day you may have the same decision to use your product across users, but it could be for completely different reasons.
We run comparisons all the time in daily life. Pros/Cons tables, feature matrices, price comparisons — its part of our daily routine in our personal lives and in our business decisions. What’s easy to forget about this comparative process is what lives outside these tables and matrices. What lives outside the numerical world. How our products feel, how we perceive ourselves when using our products, the feeling of risk or discomfort — these all have major impacts on our decisions as well. It’s important to remind ourselves of that.
Changing the outcome of the decision function
The good thing about our functions being so simple is that we can understand how to change their outcomes fairly easily. In order to make someone chose your product over a competitive solution, it needs to have a higher product value.
As we discussed a bit earlier, one of the ways to do this is to increase your own product’s value. You can beef up the benefits; better features, more efficiency, better branding, etc. You can also decrease the costs; charge less, better UX, etc.
However, there is one more tool you have available to you: Decreasing a competitive solution’s value. You may have heard of “switching costs” and “product stickiness” — these are methods of decreasing the value of a competitive product by increasing the competitive solution’s costs. One of the costs that our users consider is “time to implement”, especially in a business product. When products make it difficult for existing users to transfer data to a competitive solution, they are essentially increasing the time-to-implement costs of the competitive solution, tilting the decision function in their favor.
Understanding your product’s value and how it compares to competitive solutions gives you the tooling to increase it, as well as increase the amount of value you can acquire from your users in return. As a business, that’s the whole reason you’re trying to increase product value in the first place.
Advait Shinde, the CEO of GoGuardian, has told me on numerous occasions:
A business is just offering users value and then acquiring some of that value in return
Hands, Shovel, or Tractor?
So let’s take our shiny new functions and apply them to the Rebecca’s scenario I posed at the beginning of this article. Again:
Rebecca wants to plant a mid-sized tree in her backyard. In order to do this, she needs to dig a decent-sized hole, roughly the size of a five gallon bucket. She has a few options she’s considering: Buying nothing and using her hands, buying and using a shovel, or buying and using a tractor. How does she make this decision?
Note here that I didn’t ask what decision she makes. It’s obvious, right? Instead, I asked “How does she make this decision?”. Let’s walk through it.
- Dollar Amount: It’s free — we don’t need to buy anything
- Time: It will take a long time
- Effort: Requires a lot of physical strain. She’s also risking her physical health.
- Emotional impact: her friends neighbors may laugh at her when they see her digging with her hands for six hours. She’s also going to get really dirty.
- Time: It will be much faster than using hands, probably ten times faster.
- Emotional Impact: It’s pretty normal to dig a hole with a shovel.
- Dollar amount: It’s going to cost Rebecca some money to buy a shovel.
- Effort: It’s going to require some physical effort, plus she will also need to find somewhere to store the shovel.
- Time: It’s going to be even faster than using a shovel, probably ten times faster.
- Effort: It’s going to be barely any physical effort to dig the hole.
- Dollar Amount: A tractor costs a pretty penny.
- Time: Rebecca will need to find a tractor in the area. She will also need to have it transported to her house. She will also need to learn how to use it. It’s going to take a lot of time to implement a tractor before she can start digging.
- Effort: Rebecca is going to spend a lot more effort acquiring the tractor. She will need to figure out how to buy one, figure out how to transport it to her house, and then figure out where she is going to store it.
- Emotional Impact: Rebecca’s neighbors probably won’t be too thrilled about having a tractor rolling around their neighborhood. On top of that, tractor’s are loud — it’s going to get a lot of angry looks. Rebecca is also worried about hurting someone with it — she is taking on quite a bit of risk and it’s leaving her with a lump in her stomach.
Notice that a component of product value, such as time, can be both a benefit and con for the same product. There is no trick to this exercise that makes it obvious with a quick calculation which product Rebecca will pick, yet you intuitively already know the answer. She is going to pick the shovel, because it’s obviously the most cost effective, time effective, effort effective, and emotional effective solution available.
Cool, easy. Now let’s throw a wrench in here and see how our functions stand up to the process. Let’s say that we change one thing here, which is the price and resale value of the tractor. Let’s say now that the tractor costs (and sells for) the exact same amount as the shovel. Does Rebecca buy the tractor now?
The analytical side of your brain may be saying “Absolutely! Same cost, less time!”. That’s true, but let’s try to empathize with Rebecca a bit more. She still needs to find a place to store the tractor. She still may get dirty looks from the neighbors as she drives it down the street. She still may hurt someone with a bad turn or misunderstanding of a control. Even without the tractor having a major dollar value cost, the others costs associated with it won’t allow it to compete with the shovel.
This is where defining your target market is so crucial. You’re not trying to convince everyone in the world to use your product — just a specific group of people who you think will evaluate your product value function in similar ways. The perceived benefits of the tractor are minimal compared to the perceived costs of the tractor for Rebecca’s specific situation.
Rebecca is not going to buy a tractor regardless, even if it’s free. It’s not just about the time or money saved here — it’s much bigger than that. It wouldn’t make sense for a tractor company to sell to Rebecca or anyone in a similar living situation. Many people need holes and can afford the monthly payment on a tractor — there is more than one reason they don’t have one.
I hope by this point you’re starting to feel a bit more clear about why its useful to start at a higher level than “What KPIs should I be tracking?”. Getting a higher-level understanding of product value naturally leads you to many of the more detailed areas of Product Management that we hear so much about. Switching costs, price analyses, user experience, marketing, sales, branding, on-boarding — all of these are methods to increase product value by decreasing costs or increasing benefits.
I often say that the best product makers I meet are also the most empathetic. These are the people who can connect with users at a core level. These are people who can tell me what kind of morning routine their users have, how their users feel when they come to work, what their user’s boss expects out of them, and what their user’s dreams and aspirations are. This connection allows them to go deeper than just the dollar costs or the time benefits. It allows them to connect with the the other aspects of product value that are a lot less measurable. These are the product makers that can understand the perceived value a product adds to a user’s life.
The next time you’re thinking about your product, try challenging yourself to think a little deeper than just the measurable benefits and costs. Your users will thank you for it.