Maxim #3 - Prioritize based on customer value

The favorite question engineers have any time you ask them to build a feature, especially when it's a feature they don't want to build, is, "How much revenue will this bring?" And, it’s not just engineers. Revenue focus often dominates prioritization decisions. There are a number of issues with making revenue the primary criteria for prioritization decisions.

1/ Favors projects with higher predictability

2/ Favors short-term thinking

3/ Disincentivizes innovative projects

But the biggest issue with prioritizing revenue is that revenue is an output metric, and it's difficult to make good decisions relying on output metrics. To understand why, we first need to think about what revenue actually is. The reductive definition is that revenue is the money customers pay for products or services. But the more expansive way to think about it is that revenue is the share of the value our enterprise creates that we capture. The benefit of thinking about revenue this way is that the real ceiling to revenue is apparent, and it is how much customer value we create. You can't capture more than you create.

The second important thing when thinking about customer value created is the concept of added value. If you have an undifferentiated product with lots of competition, you don't have added value. An excellent example of a product with zero added value is a banana or any other fruit or vegetable. In such a situation, you are a price taker, and the customer's value is the same whether the customer buys your product or a competitor's product.

A good example for thinking about added value is airline tickets. Airlines are a highly competitive market, often with limited pricing power. If 3 airlines are flying the route you want to take around the same time and you find the experience of the three options similar, none have added value, and you are going to choose based on price. If only one of those airlines has a non-stop routing, then they are not interchangeable, and the additional value you get from non-stop is the added value of that one airline.

Your total added value is how much value your customers would lose if your product ceased to exist. If your customers would switch to competitors' products and get the same value from them, then you have no added value. When products have no added value, they are commodities. The price you can charge for your product is entirely dependent on how much added value you create. Customers choose products based on the value they receive vs. their other options; thus, not only is pricing constrained by your added value, but your share of the market is as well, since more customer value means people choose your product.

Now we can see why customer value is so important. If you are not creating customer value, you'll never be able to create revenue. Product managers can't ignore revenue, and sometimes there will be ways to create customer value that do not have good options for capturing that value as revenue. However, most of the time, creating customer value is what is at the root of a differentiated offering and is what enables us to win customers and revenue/.

This is why customer value is such important to prioritize for. Even if we can't see a direct line to revenue from a particular enhancement, if you are creating more customer value month after month, year after year, you'll be creating a situation that drives revenue and pricing power. If you focus only on revenue instead, you'll miss all the things that are better for customers, where you can't prove there's revenue.

For a thorough treatment ofthe concept of added value, see:

Value-based Business Strategy by Adam M. Brandenburger, Harborne W. Stuart Jr., 1996