Product strategy: how to apply it in your company step by step
If we had to put it in one word, product strategy would be a roadmap.
Basically, it describes the route that companies use to direct the development of their products: from its conceptualization, through the identification of its target consumer, to the distribution channels and the price it must have in order to generate profits and be competitive.
It is the reference document that any company employee can consult to resolve specific doubts about the company's offer or business model.
In fact, 70% of the organizations consulted by Bizfluent say that before making an important decision, they refer to the product strategy to have clarity about the next steps. In other words, they review the roadmap before modifying the route.
Also, the product strategy specifies how the product's attributes benefit the business, and at the same time describes the problem the product seeks to solve for consumers.
Therefore, it is essential for any organization to have a product strategy to which it can refer to know the impact, scope, and desirable results of its product or service in the market.
That is why we have prepared this post, in which we will analyze some of the key elements of a product strategy. We will do this by answering the following questions:
- Who do I want to bring my product to?
- How am I going to get it to my key market?
- How do I competitively price it?
Let's take a closer look at these key elements.
Market segmentation: who do I want to target with my product?
Market segmentation is a methodology used in market research to refer to sets of potential buyers based on their common needs and their response to a brand's calls to action.
For companies, market segmentation allows them to direct their offer to different targets and categories of consumers, as it helps them to identify who perceives the value of their brand differently from other segments, i.e., who prefers their offer over other similar ones.
To do this, companies typically use three segmentation criteria to identify their market.
- Consistency: the degree to which the tastes and needs of a market segment are identical (or very similar, if at all). This criterion allows the marketing area to consolidate a segment under a single solution.
- Distinctiveness: this refers to the attributes by which each of the segments distinguishes itself from the others. This criterion is applied when the brand's offer appeals to different segments.
- Reaction: this is the response of the different segments to the same message. Generally speaking, this is what is measured to know whether a strategy is successful or not.
Market segmentation is an extension of market research that aims to identify which groups of consumers are most interested in which types of offerings, and then tailor your products (through design and branding) to what your key segments find attractive.
Now let's see how they do it.
Types of market segmentation
As we have already stated, market segmentation is a tool that adds to the variety available to find out who to target with a product.
Now, there is no single type of segmentation that is more or less valid or effective than another. The key is to analyze the problem at hand and choose the one that best suits its resolution.
Let's look at some of the most commonly used types of segmentation in the industry.
It involves segmenting the market based on basic demographic data: age, gender, income, and education, among others.
The premise of demographic segmentation is that individuals whose demographic profile is similar tend to have similar needs.
This type of segmentation focuses on the same data set as demographic segmentation, except that instead of analyzing individuals, it focuses on obtaining data on groups or organizations.
Among the data you are interested in are the number of employees or members, the number of clients, their branch offices, or their annual revenues. This type of segmentation is useful for companies that offer services to other companies (B2B).
For many, geographic targeting is an add-on to demographic targeting: one would have to start by delimiting the area that a company intends to impact. However, since digital advertising has become an important part of any marketing mix, this type of targeting has become more relevant.
Moreover, considering it as a dataset in itself adds variables such as weather, terrain conditions, and even public safety issues.
This type of segmentation approaches consumer groups based on how they have engaged with similar products in the past. In other words, it assumes that the purchasing habits resulting from consumption habits and customs are indicators of consumer preferences in the future, bearing in mind that trends are evolving.
Therefore, for behavioral segmentation, the data collected from market preferences, consumer actions, as well as decision-making patterns, are crucial.
Considered the most complex type of segmentation, psychographic segmentation aims to classify consumers based on their lifestyle, personality, opinions, and interests.
The criteria for segmentation of this type are entirely subjective: the way our age changes is successive and constant, but our opinions may vary from one day to the next. The data obtained in these exercises is often limited by these conditions.
However, with great risks come great rewards, as betting on a psychographic segmentation exercise can result in sets that are identified by their internal motivators (preferences, feelings, or tastes).
Now that we know some of the methods for market segmentation, the next thing we need to understand is how to get our product into the right hands.
Distribution channels: how am I going to take my product to my key market?
A distribution channel is the flow of a good or service from its manufacturer to the final consumer. Although they may vary according to supply, generally a distribution channel includes a producer, a wholesaler, a retailer, and a consumer.
It can also help extrapolate the flow of money from buyers to producers or their original points of sale. With this data, a company can generate valuable insights from both its suppliers and customers.
Now, with the exponential growth of digitization in the business environment, the supply of distribution channels has become increasingly diversified.
Types of distribution channels
There are two predominant categories or types of distribution channels: internal and external. Let's analyze their properties.
Direct distribution channel
This is the distribution channel organized and managed by a company that sells its products or offers its services directly to the end consumer.
These companies maintain in-house control of all aspects of getting their product to the buyer's door, so their organization and infrastructure are equipped to ensure the fulfillment of their purchase orders.
Direct distribution channels imply an extra workload and even the setup of a dedicated business unit to handle them. In addition, since it requires warehousing, logistics systems, vehicles, and staff, extra investment is needed. However, this additional cost, if properly managed, generates good returns.
Indirect distribution channel
It involves a network of intermediaries that perform the distribution functions of a company. Businesses that opt for this solution do so in order to save time and reduce the investment required to set up a direct channel.
Likewise, start-up companies often turn to these intermediaries to ensure that their delivery operations are in experienced hands, thus reducing the risk of bad practices that could jeopardize their reputation.
However, in the long —and even in the mid-term—, it may not be the best alternative, since over time and depending on the growth of the business, the cost, paperwork, and delivery times will increase.
What is the right distribution channel for my product?
Now that we have a better idea of how distribution channels operate, let's look at some of the key elements for evaluating the optimal distribution channel.
It is essential to determine which type of channel best suits the target consumer of your product or service. To do this, you must be clear about their buying habits, the added values they are looking for, and even the channels through which they prefer to get information.
Depending on who is interested in your business and your offer, you will have to establish some hypotheses that will allow you to design a strategy to reach them in the best way.
So, you know your potential customer. Now, what kind of relationship do you expect to establish with them?
Of course, it is a commercial buying and selling relationship, but it will be very different if your company is looking to internationalize its offer to the general public (regardless of the stage your organization is in), or if you are targeting a very specific niche.
In the first case, you will need to have a network of contacts or a very solid infrastructure that will allow you to take your offer to different latitudes. In the second case, you will have to evaluate whether a direct channel favors you because you know the niche in detail or whether it might be more convenient for you to partner with a distributor that has already built that relationship.
Either way, your sales targets will always be linked to the choice of your distribution channels.
Each product category has its preferences for certain distribution channels.
For instance, if your product is some kind of perishable, your distribution channels need to be short and generally direct. So your company will most likely manage its own channel.
In another case, if your product is a very specialized hardware component, you're better off looking for a retailer who can provide market knowledge and exposure to your target buyer.
While these three elements are not the only ones you should consider, it is important that you take them into account in order to make an informed decision on the design of your distribution strategy.
Product cost: how much should my product cost to remain competitive?
To determine the product cost, pricing is used, which in economics and finance refers to the establishment of the value of a product or service.
In other words, pricing is what happens when, as part of its strategy and business model, a company determines how much the end consumer should pay for its product or service.
Usually, this is a process that takes place in the finance and product development area of a company, but the final decision usually comes from the general management.
Although each exercise has its own particular traits, the most commonly used approaches to a pricing strategy can be summarized in three.
As the name implies, this approach is guided by an analysis of your competitors' offerings. According to this frame of reference, you can decide whether you match the industry standard, whether you can afford a lower offer, or, alternatively, whether the quality of the product justifies a higher price than the rest.
Unlike the previous one, this approach ignores - in theory, but not always in practice - the price that its competitors set for an identical or similar product. Rather, it chooses to assign a selling price in relation to its production cost.
A model generally used under this premise is known as markup: an industry multiple applied to the final cost of manufacturing the product.
This approach responds primarily to the demand movement, whether it is falling or rising.
If demand goes up, the price is likely to increase, especially if supply is limited. Conversely, if demand goes down, so do prices, with the aim of encouraging greater consumption of the product.
A good example of this model is the real estate market: prices fluctuate depending on how many consumers are looking for a property and how many units are available.
Now that we understand a little more about the approach of some pricing strategies, let's go a little deeper.
Cost/sales price formula
Although there is no industry-wide standard that tells us how to calculate the cost over sales price in each case, this formula is useful to get a starting point from which we can consider other variables.
The formula is as follows:
P = Sales Price
C = Production Cost
Pr = Profitability
An important detail to take into account is that the result of your transaction must always be positive and less than 100.
Why? The closer the profitability approaches the value of 100, the higher the selling price to the consumer will be. On the other hand, if the profitability approaches zero, the price of the product tends to be equal to the cost.
Now, commonly, this formula makes a lot of sense when we are talking about tangible goods because it takes into consideration the sum of raw materials, manufacturing, rent, and wages, among others.
However, the issue of determining a price based solely on the result of this operation is insufficient when intangible assets are included: reputation, intellectual property or brand value, for example.
For this, there is one more factor that you must consider as fundamental and that is the product value to the customer. The luxury fashion industry is a clear example.
Product quality, brand reputation, or the shopping experience are intangibles that certain customers may be willing to pay for, but will probably not appeal with the same effectiveness to the general public.
This is why, while there are models, approaches, and formulas for determining the cost of a product, we do not yet have a general standard.
The process to determine the cost of your product has nuances that are worth taking into account. The following are some that we consider indispensable.
3 essential steps to calculate product cost
The following steps that we recommend you to follow are useful to integrate into your pre-pricing analysis as they will give you the relevant scope for a rounded exercise.
1. Add up your variable costs
First of all, you need to understand the costs involved in manufacturing just one of your products: from the assembly line to the customer's door, so to speak. Given this, there are two possible scenarios.
The first is that if you source your product from a third party (for example, a wholesaler), you will have a very clear estimate of the exact unit cost of your business.
The second is that, if you are directly in charge of the manufacturing of your products, you will have to look in more detail at the chain: raw materials, labor, fixed costs, and so on.
To this, you must add your time and effort: what is the reasonable rate you can afford? Then divide it by the time it takes your company to produce one unit. Your salary should be a variable that is always present in this estimate.
2. Add your profit margin
Now that we've figured out what the amount of variable costs per product sold is, it's time to add a profit margin to the price.
Let's say you are looking for a 20% profit margin on variable costs. As we pointed out earlier, before deciding on this percentage, two issues must be considered:
- Fixed costs, which are independent of variable costs, are not yet integrated into the calculation (we will see this in a moment).
- Whether you want to compete on the basis of low prices, use a multiple, or value the intangibles of your product above the average, base your decision on an acceptable criterion within the category of your product.
If you have already considered the above, the next step is to take your total variable costs and divide them by 1 minus your profit margin.
So, to get a margin of 20% (0.2), you have to divide your total variable costs by 0.8.
3. Check your fixed prices
Unlike variable costs, fixed costs are those that you must pay without exception: whether you sell 1 or 1000 products. They are a fundamental part of the administration of your business, and you should set as a goal that the sales of your products cover this expense.
To sum up:
One last piece of advice
We know: leading a product strategy can be a frustrating process.
That' s because it is based on a principle that is fundamental to the rest of the cycle: iteration and experimentation.
Rarely will we find a product strategy whose segment, distribution, and price are planned to remain fixed. The change will always be the only constant.
The key is to understand that the market is dynamic and that products stubborn about not following that movement will be forced to react rather than propose.