(77) How to avoid feature shock for your products with right customer segmentation

A few days ago I shared a talk by Madhavan Ramanujam, General Partner at Simon Kutcher, where he summarized his book, Monetizing Innovation — How Smart Companies Design the Product Around the Price. To begin with, let me start with a strong recommendation to all product managers. BUY THE BOOK.

Simon Kutcher is the world’s largest pricing and monetization consulting firm. The book is the product of the lessons that Simon-Kucher & Partners has learned over the last 30 years.

It states that 72 percent of new products introduced over the last five years failed — either to meet their revenue and profit goals, or failed entirely.

The premise of the book starts with providing four fundamental reasons for monetizing failures.The four reasons are:

1. Feature shock: cramming too many features into one product — sometimes even unwanted features — creates a product that does not fully resonate with customers and is often overpriced.
2. Minivation: an innovation that, despite being the right product for the right market, is priced too low to achieve its full revenue potential.
3. Hidden gem: a potential blockbuster product that is never properly brought to market, generally because it falls outside of the core business.
4. Undead: an innovation that customers don’t want but has nevertheless been brought to market, either because it was the wrong answer to the right question, or an answer to a question no one was asking.

In this post, I am going to summarize what the book proposes to avoid the first reason — feature shock.

Feature Shock — When you give too much and get too little

Feature shock happens when in a sincere effort to have it be “all things to all people,” you launch a product that pleases few. The result is the product’s value is less than the sum of the parts. Due to its multitude of features — none of them a standout — these products are costly to make, overengineered, hard to explain, and usually overpriced.

Signs of feature shock:

These are the subtle warning signs to watch out for feature shocks:

• “But we can also add this…”
• “We want to be on the safe side…”
• “Customers don’t know what they want, so we need to decide what to build…”
• “One size should fit. Our market is not segmented…”
• “Let’s build it, then position it…”
• “Let’s get something out there…”

It is dangerous to say, “let’s add this”, but can’t articulate the new product’s value to customers.

Customers won’t buy a product if they do not buy your story about why that product helps them. Products that are feature shocks cannot articulate a clear value proposition and tend to be a one-size-fits-all approach to customers.

“You can avoid creating feature shocks. You will need to tailor products differently to the needs of different customer segments based on what each segment needs and what they’ll pay for products that solve those needs. ”

Segment Your Customers Because Your Customers are Different

• There is not a single market where customer needs are homogeneous. Yet, time and again, companies design products for the “average” customer.
• The reality is your customers are different, whether you like it or not. They have very different needs, differing abilities to pay, and they vary by the degree to which they value your product’s key benefits. The only way to cope with this variance is to embrace customer segmentation.
• Customer segmentation is the most talked about and at the same time the most misused concept in product design.
• Most companies say they have a segmentation strategy. But about half of the time they don’t use it to guide product development.
• When they do, they generally segment in the wrong way. There are many flavors of segmentation that may be good for customizing sales and marketing messages, such as persona, behavior, attitude, demographics, and more. But when it comes to innovation, there is only one right way to segment: by customers’ needs, value, and their willingness to pay for a product or service that delivers that value.
• Companies that get it right create products customers are willing to pay for.

When it comes to innovation, there is only one right way to segment: by customers’ needs, value, and their willingness to pay for a product or service that delivers that value.

• Most times, businesses segment customers based on customer size — small, medium, large. But such segmentation is not actionable for sales and customer service.

The most effective way to arrive at right segmentation is by doing a survey on two questions:

1. What features and services really mattered most to customers?
2. What they were willing to pay for them?

Three pitfalls of segmentation:

1. Segmenting too late: Many companies start out with a one-size-fits-all approach to product development and use segmentation only to determine their marketing and sales messages. But if they don’t design offerings to suit the needs of each segment, they run the risk of creating products no segment gets excited about. For example, if you have two customer segments and you design offerings for the “average” customer across both segments, you end up building a product neither group is fully happy about. You can try to repair the damage through sales and marketing segmentation fixes — essentially, tailoring messages that appeal to each segment. But it’s too late by that point. You still have only one product to suit a range of diverse and sometimes incompatible customer needs.
2. Segmenting only by observable characteristic: The simple rule for product design is to base segmentation on your customers’ needs, value, and WTP for features you are developing. Period. Revenue size (for business-to-business), age (for consumer segments), ethnic background, and other observable characteristics are often purely uncorrelated to what matters the most in product design.
3. Having too many segmentation schemes: Letting your managers create different segmentation methodologies for marketing, promoting, and selling the same product in addition to your product design will lead to confusion. Ideally, your company will settle on one segmentation scheme used by all your firm’s functions so you have a unified approach to servicing your customers. Worst case, you must reduce your number of segmentation schemes. If you have more than three, you are headed for organizational confusion.

What best in class companies do?

To do segmentation right in designing new products, remember this golden rule: You can act differently.

• Successful innovators build the right product for the right segment at the right price.
• They use segmentation as a guiding influence, starting with the R&D stages of an innovation. They constantly explore how customer needs, value, and WTP differ in the market, and how they can act differently to shape products and versions differently for different segments.
• If there’s capacity to build only one product (for example, in a startup), the company prioritizes and builds that product for the segment with the biggest opportunity (either in terms of size or revenue potential), while creating a plan to introduce future products for other segments. In all these ways, successful companies avoid building a one-size-fits-none new product.
• Segmentation gives you the power to serve customers better by catering to their specific needs. Segmenting in the early stages of your innovation process will help you build products that resonate with customers. Plus, your sales and customer support teams will know how to service them better. Fundamentally, you’ll increase revenue, growth, and profits by serving multiple customer groups, and achieve broader adoption by offering products at multiple price points. Imagine the money Apple would leave on the table if it didn’t offer so many models of iPhones. In only one flavor, the iconic phone would appeal to far fewer people.
• Smart segmentation creates a win-win situation for your company and customers. Like the paper manufacturer we mentioned earlier in this chapter, you make it easier for your customers to find the right product, make the purchase, and get the right level of services from your company.

Five principles to keep in mind for segmenting customers:

1. Begin with customer WTP data — By clustering individuals according to their WTP, value, and needs data, you will discover your segments — groups of people whose needs, value, and willingness to pay differ.
2. Let common sense be your guide in using statistics
3. Fewer is more: One important segmentation task is to decide on the number of segments. Theoretically, each customer could be one segment, which would make each segment perfectly homogeneous. The opposite extreme would be treating the whole market as one segment. The fewer segments you have, the less homogeneous and distinct they will be; the more segments, the higher the complexity. Do not underestimate the latter. Serving each new segment adds significant complexity for sales, marketing, product and service development, and other functions. Smart companies start with a few segments — three to four — and then expand gradually until they reach the optimal number.”
4. Don’t try to serve every segment- You’re not obligated to serve every possible customer. The products and services you develop should match your company’s overall financial and commercial goals. A segment must deliver enough customers — and enough money — to make the investment worthwhile. This part of segmentation is called market sizing. Market sizing doesn’t mean simply counting the segment’s customers. It means estimating how many of them you can acquire and keep, and at what prices — separating the attractive segments from those that don’t make business sense.
5. Describe the segments so you can address them-Investigate whether each segment has observable criteria for customizing your sales and marketing messages to them. For example, if you find that your high-price segment has a disproportionate number of businesses that operate 24x7 vs. normal business hours, you can better describe your segments in your marketing. This is critical. In writing TV commercials, Internet banner ads, or any other marketing and sales messages, companies must describe their target segments as precisely as possible.

To fully monetize your innovations, you need to incorporate segmentation early in the product development process. And you should base that segmentation on customers’ needs, value, and their willingness to pay for a product that delivers that value. If you do, your product development initiative will be off to an excellent start.”