What "Goldilocks" Taught Us About Product Strategy

Goldilocks and the 3 Tiers

Not All Buyers Want Value
We all talk about the customer value proposition.  Yet we all come across buyers who do not see the value or downplay the value during the sales negotiation.

The Rise of the Purchasing Department
There’s also a big change in companies with the buying power shifting to corporate purchasing groups.  This group has become so important that the head is at the VP level and purchasing agents’ pay incentives are tied to cost savings.  While the actual user may have researched, determined value, and set a preference for a product or supplier, the end user can’t make the final purchase decision.  He or she must turn over the requirements to the corporate purchasing department who will solicit quotes based on defined specifications.  In fact, 2 or 3 competitive quotes are mandatory for many corporate purchases today and bid requests are posted on the internet.  Everything becomes based on cold, hard facts: does product A meet the written specifications (straight "Yes" or "No") and at what price?  The Purchasng Agent doesn't care to know about how much longer your product lasts if the tender doesn't talk about it.  In essence, the corporate purchasing group’s mission statement is to turn product purchases into commodity purchases. 

You obviously try to sell sole source specifications and get them into the tender beforehand – “lock out” features that other competitors will not be about to meet. However, remember that the purchasing agent is trying to avoid lock-out specifications and make things as generic as possible.

What's the Typical Reaction?
You beat up your sales force and blame them for not getting to the end user. You believe that the sales force did not develop a relation with the user to understand his problems and get your specs in the tender. You may be partially correct but the real reason is that the Purchasing Group has become a gate keeper - sales people are not allowed to speak with the end user to help differentiate and understand the value. Purchasing does not even let you to know who the end user is.

The other desperate reaction is to, in corporate speak, "drop your shorts", to slash your sell price with little or no margin in order to keep the customer and sale. All the features and functionality not listed in the tender are basically given away for free with no "thank you" from the customer.  You also just set yourself up for the next sales situation if word gets out on how low you were willing to go.

The Solution
Create Product Tiers – each with different feature sets and pricing. This allows you to sell only what the purchaser values and is willing to pay. Other features which he/she may value later may be available later at an additional upgrade price.

Product tiers allows you to regain control of the sales process and negotiation. A simple, classic tier structure is Good, Better Best:
Good: Core. Does the job . No bells and whistles.  May be a “me too” versus the competition.
Better: Does the job but has some differentiators that the user will value.
Best: Premium. Does the job and has everything that you can offer. The most differentiators versus the competition.

So in product design and management, you place features or feature options based on your tiers.

As a simple example, a car manufacturer may determine which features to assign to different tiers for a particular car model:

Product tiers allow the buyer to see clearly what he gets and what he does not get.  It also helps determine whether a buyer is truly fixated on the bottom line price or pretending to not value your differentiators.  If he truly only cares about price, the “Good” offering lets the seller gain or keep a customer who would otherwise go elsewhere. The seller can gain more revenue later when the user may see a need for a new feature, e.g. services, a warranty extension, or enable Bluehtooth functionality in his base audio system via a firmware upgrade.  At the same time, the seller has minimized product costs and maximized profitability by including only those features and services necessary to get the order – he did not have to drastically slash his price as he would have with a single tier product offering with all the bells and whistles.

Another interesting example would be Air Transportation:

Singapore Airlines is arguably famous and preferred by many because their “Good” offering is comparable to the “Better” offering for most American airlines. (One of the best ways to delight a customer is to give them more than they expected in their tier.)  One of the many complaints about US based airlines is that they are cutting back on previously standard amenities, e.g. charging for pillows, food, adding seats and reducing legroom. I took a business class flight overseas on a US airline and  was surprised at how bad the food and service was (you had to pay for food & drinks in their lounge) – in effect, they had reduced their  “Better” offering to what one would expect closer to a “Good” offering.   (One of the best ways to upset a customer is to give them less than they expected at their tier.)

On the flip side, you also see some “budget” airlines start getting incremental revenue by moving from a single “Good” offering toward with options from higher tiers, e.g. Southwest Airlines offers a Business Select option for priority boarding and a free drink and Jet Blue offering “even more space” seats with priority boarding for an upgrade charge. Thus, they advertise as having a one tier product/service but in reality have unofficial higher tier(s).

Help Your “Good” and “Better” Tier Users Move Up
"Good, better, best. Never let it rest. Until your good is better and your better is best." - Tim Duncan
Interestingly, In B2B, many start out looking at “Good”, consider “Best” to be extravagant, and get the “Better” tier product.  “Better” can be considered the mainstream offering while “Good” and “Best” capture the extreme ends of the purchase spectrum.

A related strategy would be to allow your “Good” and “Better” product user to move to the next level by offering options la carte, product upgrades, via software, firmware, retrofits, etc.  In many cases, the incremental cost does not appear as large as the initial purchase, can come from a separate maintenance budget, does not face the same scrutiny as a capital purchase, may be easier to justify since the product is being used,  and barriers to entry for competition has been greatly increased.

So think of the story of Goldilocks when you manage or develop products - there wasn't a "one size fits all" for her. Classic product tiers disguised as bears.