From my Feb 2014 class time in Dublin Institute of Technology's product management certificate program: a module on quantifying customer value (esp B2B) and how to price software/technology solutions. In-class exercises removed.

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MASTER TITLE
STYLE
Customer
Value
and
What
Things
Are
Worth
Rich
Mironov
Diploma
in
Product
Management
15
January
2014
1
©
Rich
Mironov,
2014

2. • Veteran
product
manager/exec/strategist
• Business
models,
pricing,
agile
• Organizing
product
organizaFons
• 6
startups,
including
as
CEO/founder
• “The
Art
of
Product
Management”
• Founded
Product
Camp
ABOUT RICH MIRONOV

3. In three modules today, we will:
• Learn to quantify customer value
• Understand how pricing models and pricing units
contribute to a business model
• Explore how Software-as-a-Service changes pricing,
marketing and operations
LEARNING OUTCOMES
3W W W . M I R O N O V . C O M

4. • Customer View of Value
• Exercise #1: Consulting
• Exercise #2: Top-Secret Tech
• Exercise #3: Revenue Stories
• Take-Aways
AGENDA
W W W . M I R O N O V . C O M 4

5. • Business customers buy most products to make
money or save money
• How do they describe value?
• Quantify it for them
• They won’t spend the time to analyze this fully
• Assume you can capture a fraction of value (5% to 15%)
• Consumer purchases typically less analytical, more
emotion/fashion-driven
START WITH THE CUSTOMER VIEW
W W W . M I R O N O V . C O M 5

6. • Why will customers buy?
• Tell a story in customer’s own language
• What’s the natural unit of exchange?
• How do they derive value? What does the
competition do?
• Can you split off a profitable segment?
• How much of customer value can you
capture?
• Test, trial-close, get your hands dirty
PRICING YOUR NEW PRODUCT
W W W . M I R O N O V . C O M 6

7. • Our super-special credit scoring application will reduce
the number of credit checks you run.
• You currently do {insert number} credit checks per year
at {insert price}. We’ll reduce that by {insert percentage}
for a savings of {computed}.
• We will only charge you {insert price} for a net savings of
{computed} and ROI of {percent}.
A GENERIC B2B VALUE STORY
W W W . M I R O N O V . C O M 7

8. • Hotel
• University
• Commercial real estate
• Automobile manufacturing line
• High-end retail
• Hospital visit
• Software development
NATURAL ECONOMIC UNITS?

9. • Pricing drives customer behavior
• What do you want core customers to do?
Ø No-brainer renewals (small monthly fees)
Ø Big up-front license (lock up marketplace)
Ø Lust for upgrades (cool features are extra)
Ø Freemium model (1% upsold into paid services)
Ø Install latest version (free updates, increasing service fees)
Ø High-status product (tell their friends)
SUPPORT THE BUSINESS MODEL
W W W . M I R O N O V . C O M 9

10. • Pricing models (units of value exchange) can create
strategic advantage
• Change basis of competition
• Better meet needs of sub-segment
• What does your pricing measure?
• Per upload, per GB, per message, friend, newsletter, clickstream, virtual
garden gnome…
• Not just “€ per copy” or “€ per month”
• Netflix (concurrent movies), Zipcar (hourly rentals),
SalesForce (hosted per seat), Airbnb (unused sofas), Uber
(unlicensed taxis)
CREATIVITY AND STRATEGY

11. • Hardware has natural costs
• Materials, production, shipping, disposal
• Commodities tend toward production costs
• Software is “free” to distribute
• First copy costs €5M
• Infinite flexibility in tying value to use
• What do we sell, what do we give away?
• Charge for e-books, discount e-readers (Amazon)
• Free social networking, sell ad demographics (Facebook)
• Free software, paid support (open source)
• Pay for performance (OpenTable)
HARDWARE VS. SOFTWARE
11

12. Pricing
is
almost
never
about
the
number.
It’s
about
the
model.

13. CUSTOMER COMMITMENTS
No commitment
High variable costs
Lower volume
Uncertain usage
Optional
Actively manage costs
CONTINUOUS MARKETING
Big commitment
Low/no variable costs
Higher volume
Predictable usage
Required (cost of business)
Low cost control effort
HARD INITIAL SELL

14. • How would an evil customer rip us off?
• Licensed software…
• Per-Seat SaaS…
• Hardware token…
• Licensing versus enforcement
• Who are the cheaters?
• How much are we willing to spend to reduce losses?
• Diminishing returns
• Bad will among legitimate customers
HOW WILL PEOPLE CHEAT?
W W W . M I R O N O V . C O M 14

15. • Customer View of Value
• Exercise #1: Consulting
• Exercise #2: Top-Secret Tech
• Exercise #3: Revenue Stories
• Take-Aways
AGENDA
W W W . M I R O N O V . C O M 15

16. • Your last start-up just closed,
so you are now a consultant
• A prospective client needs
market analysis, MRD, pricing
• What are your pricing
objectives?
• How to structure a project?
• Risks for you? For client?
EXERCISE: CONSULTING SERVICES
W W W . M I R O N O V . C O M 16

17. • Work at any price
• Food on the table
• Loss leader
• Underprice first assignment, get follow-on work
• Good reference for other clients
• Become indispensable
• Push for a full-time position later
• Gain pricing experience
• What will the market bear? OK to lose assignment
POSSIBLE OBJECTIVES
W W W . M I R O N O V . C O M 17

18. • Per hour, no limits
• Per project
• Per hour with project ceiling
• Fixed price for initial sizing (pay me to estimate)
• Milestones (progress payments)
• Equity (pre-IPO stock)
• Customer sets value at end
• Shared savings (portion of ROI)
• Free (experience, reference, try & buy)
SOME CONSULTING PRICING MODELS
W W W . M I R O N O V . C O M 18

19. Client’s Risk Consultant’s Risk
Straight Hourly
Unlimited cost, quality,
completion
None
Fixed project price (pay on
completion)
Timely completion
Unlimited effort,
defining “done”
Fixed price milestones
Partial work not valuable,
how to inspect work?
Upfront analysis
Equity, portion of ROI May overpay later No immediate cash value
RISKS IN CONSULTING MODELS
W W W . M I R O N O V . C O M 19

20. • Customer View of Value
• Exercise #1: Consulting
• Exercise #2: Top-Secret Tech
• Exercise #3: Revenue Stories
• Take-Aways
AGENDA
W W W . M I R O N O V . C O M 20

21. • Founders: DIT physicists with local funding
• Software plus expensive custom hardware
• Some arbitrary product limitations
• Can not send people
• Under 30 kg, under 1.5m diameter
• 1000 km distance, arrival +/- 3 cm
• High power requirement (15 kW)
• 15 second recharge time
• Non-military, non-government
EXERCISE: TELEPORTATION
W W W . M I R O N O V . C O M 21

22. • Break into small groups
• Pick a target application
• Tell a specific user story
• How does customer define value?
• Competing offerings?
• Justify a pricing unit and list price (quantity one)
• Each group presents its solution
TEAM EXERCISE
W W W . M I R O N O V . C O M 22

23. • Customer View of Value
• Exercise #1: Consulting
• Exercise #2: Top-Secret Tech
• Exercise #3: Revenue Stories
• Take-Aways
AGENDA
W W W . M I R O N O V . C O M 23

24. • “Why are we doing this program?”
• Shortest possible description of business motivation
• Clarity of thinking
• Much less than a forecast for Finance
• Short enough to remember
• Encourages consensus with internal customers
• Revenue software: sales team agrees with rough estimate
• Internal users: agree with savings or incremental services revenue
• Simplifies later prioritization of projects
“REVENUE STORIES”
W W W . M I R O N O V . C O M 24

25. • “Product X will earn €10-15M in direct
revenue this year...”
• And Sales has signed up to that target
• “This feature should boost subscription
conversions 3-5%, for €15M+/year…”
• Based on Marketing’s A/B tests
• Estimating Tool T will let us bid projects
more accurately, boosting margins by 10%”
• And Professional Services is funding the tool
• “Product K supports €9B of revenue from
product L. Otherwise, we’d lose 25-40%.”
• And L’s product manager wants
to fund my work instead of his
REVENUE STORIES
25
Incremental
Revenue = !
add’l units * !
avg price!
!
+20 seats/qtr
@ €4K/seat =
€80K/qtr!

26. • “Manufacturing Process P will reduce raw materials by
€7-10M/year”
• And Manufacturing Ops will measure it for the CFO
• “Merging our customer databases will reduce lost
invoices by 5-10%, cut write-offs by €2-3M/year”
• According to Accounts Receivables team
• Faster MRI scan will boost system utilization by 4% (=
€600K/year) and reduce patient radiation exposure”
• Appointments group has patients waiting 25 days
COST SAVINGS STORIES
26

27. • Large software spend 13%-18% of revenue on R&D
• So revenue at/above 6x development cost
• Silicon Valley headcount math
• $1M/year = 5 people in North America
• $1M/year = 6 people worldwide
• Dev, test, docs, product management,
project mgmt, release ops…
• Dublin headcount math in €?
A FEW NUMBERS
27

28. • Startup goal: repeatable way to engage customers
and generate revenue
• Sometimes, R&D > revenue
• Larger private tech firm: accelerate revenue
• Move toward IPO-worthy ratios. 3:1 à 6:1
• Internal IT for non-tech company
• 3x return on investment
• What is your company’s target R&D return?
COMPANIES HAVE DIFFERENT GOALS
28W W W . M I R O N O V . C O M

29. For your own product or service…
• Write the revenue story
• Who has to agree with the numbers?
REVENUE STORY EXERCISE
29W W W . M I R O N O V . C O M

30. • Customer View of Value
• Exercise #1: Consulting
• Exercise #2: Top-Secret Tech
• Exercise #3: Revenue Stories
• Take-Aways
AGENDA
W W W . M I R O N O V . C O M 30

31. • Market pricing starts with audience’s pain
• Pricing model aligned with pain
• Units make sense
• Savings >> price
• KISS
• Must support a business model
• “How do we make money?”
TAKE-AWAYS
W W W . M I R O N O V . C O M 31

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CONTACT
Rich Mironov, CEO
Mironov Consulting
233 Franklin St, Suite #308
San Francisco, CA 94102
RichMironov
@RichMironov
Rich@Mironov.com
+1-­‐650-­‐315-­‐7394