The Value of Internet Products
Human-Centered Pricing (1/3) — What is value, how to decompose it, what are the characteristics of an Internet product, and how to measure its value？
Disclaimer: Opinions expressed are solely my own and do not express the views or opinions of my employer.
Previously I wrote a post about calculating ROI of an AI concept, and showed an approach to calculate the value created by a concrete product idea. But what if we need to measure the value created by early concepts, something not launched in the market yet and not used by anyone? How much can we sell an idea for? Does that value change as the concept evolves? What’s the best pricing strategy to use?
Product valuation is no trivial matter. I have been fortunate enough to work on 8 venture products in the past 4 years. I witnessed, learned, and practiced different methods to evaluate concepts and to price MVPs. Subscribe to this publication if you are interested in my thoughts.
I’d like to share my answers to these questions in a series called Human-Centered Pricing — a method of assessing the value of an idea and pricing it for market launch.
This first post is about value — The definition and the decomposition of value with a focus on Internet products, as well as ways to measure it.
Let’s get started.
Understanding Value
We all have an intuitive idea about value. A musical event has value. Attending a musical event has value. Being able to attend a musical event has value. (Yes, they are all different!)
Value is the quantified utility of something beneficial.
People seek value because they want something. The same thing can benefit people in different ways, by various amounts.
Value is subjective. The perceived value of satisfying needs become more and more time- and context- dependent as we move up in the pyramid. Perceived value is closely related to trust and imagination, which becomes the foundation of Marketing.
It’s also impossible to find the universal value of an offering. The best we can do is showing the values on a bell curve.
Decomposing Value
Use value, reference value, differentiation value, and elevated value
If we want to study product value, we need to be able to decompose it and analyze it.
Imagine yourself shopping for a scheduling tool — a tool can help you share your availability with the public and let others reserve your time. Without any research, how much will you pay for it? Let’s call it $U.
$U is use value, the inherent value of an offering to you. It’s the offering’s functional benefits plus the amount of pleasure given to you. It is the value of not having to do the job yourself.
Now imagine you find a product called Scheduly that you really like, priced at $X. You are ready to buy. But then you find that Google calendar is launching a new feature, which allows you to share your time available with others via a public link. It does not have the look you love, but it does the job. You are willing to pay $R for it.
$R is reference value. It is the price of an offering that is the next best alternative to a given product. The difference between $R and $X is differentiation value ($D). It is the difference in use value between a product and its next best alternative ($D=$X-$R). If $D is monetary, we call it monetary differentiation value. If $D is psychological, we call it psychological differentiation value.
A calendar bot is launched to the market. In addition to sharing a public link with a stranger and allowing him/her to reserve your time, this bot recommends different times for different activities. E.g. It suggests weekend mornings for home tours and weekday afternoons for coffee chats.
And you are excited and you are willing to pay $B for this smarter tool. The difference between $B and $X is elevated value. Elevated value is the difference in use value between a product and its next best alternative ($E=$B-$X).
If we rethink product innovation and pricing with reference to the values mentioned above,
Pricing is a method to determine $X through the discovery of $U and $R in the target market. Product innovation is a practice to create or increase $E and reach $B.
Value of Internet Products
How’s internet product’s value different from that of other products?
Internet products are defined as digital products that deliver value through the Internet. Internet products in a red ocean have the following characteristics:
- If the concept is well-constructed, the chance that it is unfeasible from the technology perspective is low, given all the developmental options in the market
- The difference in the cost of software development is small compared to the difference in the value created by different product concepts or value propositions
- Internet products in the same category with a similar job-to-be-done are highly homogeneous. The differences in their functional benefits are negligible
Because of all the above, the price of a newly created Internet product depends largely on its elevated value.
And because of the networking effect and the benefits of the existing product ecosystem, unless a startup has unusual and unique resources in a specific domain, it’s unlikely that its initial product (MVP) can create a bigger monetary gain or saving for users than mature products created by big companies.
Therefore, to compete with other products in the same category,
an Internet product needs to be able to offer a greater amount of pleasure, or more elevated value, than its next best alternative.
Ways to Increase Elevated Value
How can we increase the elevated value of an Internet product?
Without changing the core of what a product does, or it’s value proposition, human-centered design is the most cost-efficient way to increase the elevated value of Internet products.
Elevated value can also be lifted along with the product’s use value, which increases as the product evolves.
Measuring Elevated Value
You can’t change what you can’t measure. What are some ways to measure elevated value?
Since we can’t observe the elevated value, we need tools to measure it indirectly. Two common tools are choice tasks and A/B tests. There are variations of these tools such as conjoint analysis.
The essence of these tools is allowing users to compare products with new features against the original product. The secret of any value test is keeping the test single-blind — the users shouldn’t know what they are being tested on.
Choice tasks are used in surveys to ask people whether they would choose a product over its competitive product at various price points. The difference between the selected price and the competitive product’s price is the elevated value of the new feature.
A/B tests offer a product and its next best alternative at different price points in real purchase environments such as a landing page. It takes purchasing context into account.
Wrapping it up
So far we have discussed value, the decomposition of value, the value of Internet products, the connection between product innovation and UX to elevated value, as well as tools to measure psychological value. Understanding value is the first step of pricing. In the next post, we will discuss:
- The evolution of value in product development
- The main types of pricing strategies
- Human-centered pricing, what is it, and why it is the best pricing strategy for Internet products
Thank you for supporting. See you in my next post. 👋
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This publication is dedicated to venture design. In my future posts, I will share more of my experience building venture products including tools, frameworks, and activities. Please subscribe to this publication if you are interested.
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