The Secret to Finding the Perfect Price Market Fit
Figuring out the right price is hard, but plotting a utility map can help
It’s all coming together, after hours and hours of pouring your heart into creating a revolutionary product with amazing features, enormous market potential, and compelling initial customer feedback. But something just doesn’t add up.
You hear a lot about how to develop products to solve your customers’ greatest pain points. Or how to leverage social media to spread the word of your product to thousands of people almost instantaneously. More often than not, however, these articles leave out a key part of the equation to a successful product launch: pricing.
Pricing is one of the biggest headaches for marketing and product management teams, but a small improvement in pricing can move mountains. As one Harvard Business Review writer states, “For a company with 8% profit margins, a 1% improvement in price realization—assuming a steady unit sales volume — would boost the company’s margin dollars by 12.5%.”
“Price is what you pay. Value is what you get.”—Warren Buffett
A product’s economic utility
Economic utility is the total amount of satisfaction or value a customer derives by consuming a product. The fundamental equation is as follows:
Utility = Value (product)–Price (product)
Price subtracts from the overall value of the product. When comparing two competing products, the one with the highest utility (in the eyes of the customer) will be the winner:
Utility (winner) > Utility (loser)
Even if the value of your product far exceeds that of the competitor, the price can create a reverse bias effect, weakening the total utility while your customers run to your competitor. While this equation may look simple, finding the right balance of price and value can be a challenge. As a product manager for a multibillion-dollar industrial technology company, I’ve found a helpful framework.
Arising from a simplified conjoint analysis approach to pricing, the utility map below offers one method for illustrating the value and price relationship on the same graph. Below, I describe the necessary steps to create this map.
Step 1: Identify the dimensions of value
Start by identifying the five product attributes—or the most important features—of value directly from the voice of your customers. With a large customer mix, the map should be constructed for a specific customer segment. A few examples from the fitness watch industry might include battery life, heart rate sensing accuracy, and cross-training options.
Step 2: Map the competitor landscape
Next, identify the products from your top three competitors. These are often called the next best alternatives. If you think about the problem your product plans to solve for your customer—for example, “How do I know if I am improving my fitness over time?”—a competitor’s product is a direct substitution that can solve the same problem. To stay consistent with the example in step one, the competitor landscape for the fitness watch industry might include Garmin, Fitbit, and Apple. Less obvious products might include chest-strap heart rate monitors or a fitness tracking app like MapMyRun.
Step 3: Rank products on value
Rank your product and all identified competitors’ products on a scale of one to three for each feature, with three being the best and one being the worst. For a truly objective analysis, try asking your target customer segment to provide input. For a more sophisticated analysis, perform a structured conjoint analysis.
Step 4: Rank competitors’ products on price
Perform the same one-to-three ranking exercise for your competitors’ products on the dimension of price. In this case, three is the least expensive product, while one is the most expensive. The reasoning is that a more expensive product leads to less value in the hands of the customer, thus receiving a lower rank on our scale.
When finished, the utility map should look something like this:
Step 5: Analysis
The area that a competitor’s shape covers on the map is directly proportional to the amount of utility its product provides to the customer. In this case, Competitor 2 (shown in yellow) is the incumbent for most of the features (Features 3, 4, 5) the customer cares about. However, Competitor 2 is also the most expensive product, dampening the total area (utility) that its product is able to capture. On the other hand, Competitor 1 (shown in green) is able to capture more area (utility) with a better price-to-value ratio. Two characteristics to pay attention to are the colored space and the blank space.
Colored space: How to determine your price market fit. For example, if your product is capturing large amounts of area (Value) for features (Rank 2), you may be able to demand a higher price (Rank 1, 2), as long as the area of your curve exceeds that of the competition. On the flip side, if your product is capturing smaller amounts of area (Value) for the features/product attributes (Rank 1), you may be able to capture more utility by offering a lower price (Rank 3). The area can be compared via visual inspection or numerically through the conjoint analysis approach.
Blank space: Opportunity to fill a gap in the market. For example, you may notice a certain feature has many competitors ranked low (1) and only one ranked high (3). This may be an opportunity to capture the midmarket customers. If you decide to do so, you can refer to the midrange of the price dimension to get an idea of your price market fit.
Final points about the utility map
There are a number of key points to keep in mind through this exercise. First, the utility map is static in that it captures the market vs. price landscape at one moment in time. Today’s markets are incredibly dynamic, so periodically revisiting this exercise is important.
Second, the utility map can be customized to meet the needs of the user. The number of features and competitors can be changed. The ranking system can have ties where two competitors are ranked the same for a specific dimension. Keep in mind, however, that the number of competitors should typically dictate the range of the ranking system. (For example, five competitors should be ranked on a scale of one to five.)
Finally, there are certain phenomena, such as Clayton Christensen’s disruption theory, that require further extrinsic thought around the utility map. That theory states a situation in which a new market entrant with few resources is able to successfully challenge established incumbents. The new entrant does so by targeting the low end of the market with a new low-cost option. The new product is essentially expanding its area on the utility map by stretching the price dimension higher (by offering a lower price) while maintaining or increasing the feature dimensions of value.
The utility map can facilitate identifying the right price for the market while also helping to identify these opportunities for disrupting a market with a new low-cost solution.