I’ve been in the technology industry my entire career. I started as a software engineer but became more interested in how companies turned products into dollars for the business. That led to exploring how customers perceived value and how products delivered value.
As an Engineering Manager, I had product management responsibilities because the company I worked for was Engineering-led and didn’t have a PM role. I’ve held PM roles at multiple levels, including Head of Product. But I didn’t know what I’m about to share with you in this article when I started. My learning curve would have been significantly different if I had understood these aspects of product management earlier.
1. Not All Of Your Customers Are Alike (The Importance Of Customer Segmentation)
During my MBA at Kellogg, a school renowned for its marketing prowess, my marketing professors drilled the importance of customer segmentation into me.
My VP of Product asked me to look at a dropoff in customer retention for a product I didn’t own. I executed a survey to churned customers. The data I received was inconclusive at face value.
Most customers liked the product, support, and ease of use and disliked the price. However, the real insight came when I segmented the responses into two groups, termed “Lovers” and “Haters.”
The “Lovers” absolutely loved the product. They used it for years and valued their relationship with the company. However, these customers left because they got new managers or senior leaders with a favorite vendor. These new leaders mandated a change to suit their experience.
The “Haters” bought the product but were never successful in getting it deployed. Their answers were more in the flavor of “We bought what?” since they failed early in the deployment process (first 30-60 days) and didn’t even remember the product more than a year later.
The cures for these two customer segments were very different.
This situation was before the concept of Customer Success was widely known, so it may seem obvious today, but the cures were:
- For the Lovers - Establish a Customer Success function (it wasn’t called that yet) that could establish deep relationships inside of an account beyond just the end-user champion.
- For the Haters - Establish a Customer Success function (it wasn’t called that yet) that could help ensure successful onboarding and deployment for new customers.
Why is customer segmentation important?
We sense that “more data” will tell us everything we need to know. However, the data doesn’t understand the customers' underlying needs. It’s up to you to slice and dice the data in a way that helps understand how different customer segments are successful (or not) with your product.
Customer Segmentation should be core to your Product and Go-to-Market strategy. If your executives don’t think in terms of customer segmentation, you have some education work on your hands. It makes the lives of every function easier—Product, Sales, Marketing, Customer Success, and Support.
Relevant blog posts:
- 4 Easy Steps To Customer Segmentation For SaaS Pricing
- Customer Segmentation: The Cornerstone of SaaS Pricing
2. You Have To Talk To Your Customers. Carefully.
In my first “real” PM job, I was fortunate that the SVP of Product had a Ph.D. in user experience. He built a competent user research team that I could work with and observe.
I learned this when I was doing research for a customer retention study in the gaming industry. Competitive gamers go to extreme lengths to tweak their performance. In the past, I’ve been a casual gamer, so it was surprising to me how different their perspective was on it from mine.
Specifically, it was essential to understand that how they judged success given their context was vital to understanding why the current product didn’t work for them as we thought it should.
Why is it important to talk to your customers—carefully?
Often in Product Management, you are looked to by everyone else (engineering, design, executives) for “the answer.” However, knowing the answer in customer interviews is a death knell.
I was amazed by my research counterparts' ability to listen to a customer and, when they gave an explanation or asked a question, to ask another question in response to learn more.
Being the expert is counterproductive. Instead, they taught me to be curious and comfortable in not knowing what the customer was talking about. After all, how could I? I wasn’t in the customer’s position and didn’t understand their life or work context.
Understanding your customers' outcomes is key to providing value. You can only truly understand this by digging deep into a customer conversation to understand why they do what they do. Being inquisitive is essential. Having “the answer” works against your progress.
3. Your Customers Buy Value, Not Your Features
I’ve learned a lot about the Jobs-to-be-Done framework over my PM career. I’ve now taught Product Strategy for Kellogg’s Executive Education online program for a year and a half, and JTBD is a core part of that curriculum. This situation has prompted me to spend a lot of time reading from the founders of the theory, among them Clayton Christensen, Tony Ulwick, and Bob Moesta.
One of the critical insights around JTBD I was first introduced to by Dan Olsen’s excellent book, “The Lean Product Playbook.” In his book, he outlined the difference between Problem Space and Solution Space
- Problem Space - Where all the customer needs exist.
- Solution Space - Where any product you design exists.
He uses the example of the design of the “Fisher Space Pen” as a catchy example to illustrate the point.
JTBD helps us empathize with our customers by staying in the Problem Space and understanding that our customers’ needs exist whether or not we provide a solution in that space.
Students in my Product Strategy class consistently stumble when learning about JTBDs. Most software development companies leverage the concept of “user stories” when handling requirements from Product to Engineering. The common roadblock is that when students encounter “job stories” for the first time, they assume they are the same as user stories. But there are critical differences between them.
- User Stories - Start with persona, exist in the solution space
- Job Stories - Start with context, live in the problem space
Why is the difference between value and features important?
Understanding JTBD is essential at any stage of the innovation process - from product ideation through launch and growth.
Too often, PMs and the rest of the company think in “feature land.” However, customers don’t care about your features; they care about their problems.
If you cannot start with a customer's need, your chance of successful innovation is slim. Furthermore, in the go-to-market process, if you can’t connect what you’ve built to how it helps a customer make progress to achieve their desired outcomes, you will have a tough time getting customers.
Successful innovation starts with understanding your customers’ JTBDs and their desired outcomes. Too often, companies are led astray by Voice of the Customer (VoC) programs and systems because they haven’t aligned on what good inputs to the innovation process look like.
Relevant blogs: What The Hell Is Value Anyway?
4. Pay More Attention To Your Customers Than Your Competitors. But Don’t Ignore Your Competitors.
My first PM role was at a company with a high-volume and velocity GTM model (people today may refer to this as Product-led growth (PLG)). One of the key differentiating factors between our company and our competitors was our high-volume GTM. (This was before PLG was the raging topic in PM circles it is today).
While it was always important to deliver features that provide value to customers, Product Strategy follows Company Strategy. In the Michael Porter world, “strategy” is about trade-offs. Successful competitive strategy requires making trade-offs that allow you to leverage a distinct advantage to fulfill customer needs.
This situation required a clear understanding of how we were different and, therefore, where we put our focus. This position often put us at odds with analyst firms or enterprise customers who wanted the “flashy features. At the same time, we needed to focus on ensuring the product was easy to try, buy, deploy and use.
Our consistent focus on user onboarding and deployment greased the wheels of our entire GTM model.
Why is paying more attention to customers than competitors important?
It can be easy to fall into a feature factory model where you deliver ideas based on analyst or customer expectations. Understanding how to provide a result in a differentiated value chain is the key to long-term success.
Customers are incredible sources of insight. However, they are not inside your company and don’t know how to build what they need in a way that makes delivering on their outcomes a win for you and them.
Competing head-to-head to be “the best” often leads to undifferentiated feature factories and sub-par financial results.
5. Freemium Is No Panacea
I did my MBA internship with a successful Silicon Valley startup ten years ago. The company went to market selling mobile apps through four major GTM partners. One of the GTM partners, in a desire to be considered the “low-cost provider,” demanded all of their mobile app partners provide a freemium version. The CEO's question was whether they should roll out freemium versions for all of their GTM partners or just the one.
I worked on this problem, among others, that summer.
In my research, I learned all the ins and outs of the freemium model. When it worked, when it didn’t. It was the wrong decision, except in a few rare cases. Much more often, a 14 to a 30-day free trial is a much better answer.
Why is Freemium not always a good idea?
Freemium is a constant temptation for “easy customer acquisition.” The siren song of the Freemium call can wreck your growth rocketship early in your journey.
Good counterfactual data from self-reported “success” stories are hard to come by. Arming yourself by understanding the fundamental trade-offs can help you avoid the pitfalls.
Freemium causes problems internally. Why?
- It is challenging to move customers from free. There is an infinite increase in price between $0 and even $0.01, often referred to as the “penny gap.”
- While tempting to think that all your free users will convert to a paid subscription, the reality is that best-in-class Freemium companies only convert 1% to 3% of users to paid.
- Freemium creates an internal momentum tax on every feature. A discussion among Product, Engineering, and Executive Leadership is required to determine what is on the free vs. paid side.
- Freemium causes illusory improvement in the Customer Acquisition Cost (CAC) metric. Your CAC may look better, but companies don’t usually treat R&D investment as a Marketing expense. However, R&D focused on acquisition is a Marketing expense in a Freemium model.
To be a viable option, Freemium requires:
- A colossal market since you can only expect to convert ~1% to a paid subscription.
- A specific competitive environment. For example, if the dominant player gives away its products bundled with other offerings. This situation happened to Evernote, a darling of the early Freemium movement, in its competition with Microsoft’s OneNote.
- The product doesn't show value in an average trial period. This situation can happen with Developer-focused products where prospects use a product in dev or staging environments long before use in production. In this case, it makes little sense for Sales to constantly provide trial extensions for these use cases, and a free tier is the better option. Alternatively, if your product has a built-in community where the social aspect of the product is required to provide customers value (e.g., Slack).