How do you measure the value of a product? As a Senior Experience Strategist, I work with a lot of clients who are tempted to evaluate a digital product by comparing the value it delivers to their business against the value to its users. This is a natural extension of the paradigm shift towards product teams prioritizing users’ needs to drive adoption and growth.
But, as it turns out, it’s not that cut and dry. A product’s value to its makers and users is not an apples-to-apples comparison. For instance, value might be measured in time saved for users, but revenue generated for businesses. You can’t easily put those metrics into an equation to spit out a value score.
So – how do organizations approach measuring the value of a product?
Measuring Value by Profit
Many organizations look at the sheer profitability of a product to measure its value. One approach is to use the simple equation Value = Benefits / Cost.
The plus side to this approach is that it is concrete and quantifiable. You can measure the profit consistently throughout the life of the product, charting changes in value over time. Profit is also a metric everyone understands, as it is the most common unit of measuring the success of a business.
There are some clear drawbacks to this approach, though:
This metric focuses solely on the benefit to the business, not the user.
There are many external factors that can impact profitability, which skews the accuracy of this metric in determining value.
Not all products generate revenue. Common examples are informational websites, internal collaboration software, and FOSS (free and open source software) projects.
Measuring Value by Market Position
Another common metric to demonstrate a product’s value is market position. Looking at the sheer volume of the market your product holds over competitors can give a real picture of the way consumers view the product.
As with profitability, a product’s market share does not necessarily translate into high value. Microsoft Windows is a perfect example of this. In the early 2000’s, Windows held 97% of the operating system market because there were not many options available. Within the next ten years their market share dropped to about 20% because better, mobile-friendly options were introduced. This decline does not necessarily correlate to a decrease in the value of Windows, however.
Measuring Value by Utility
Consumers stay loyal to products that they can apply in their life in a meaningful way. Utility of a product can be measured through a number of quantitative research methods and competitor comparative studies.
Measuring Value through Customer Perception
Your product is a large part of your brand, so the way customers view your product reflects how they view your organization. Measuring customer perception of your product, as with measuring utility, gives you a good quantitative metric that can be measured over time and compared to your competitors.
The other benefit of measuring customer perception is there are a number of existing frameworks can be adopted, such as Net Promoter Score. There is some controversy over some of these approaches, so it is important to engage a qualified research partner to help you think through the most effective measurement option.
Defining Value Collaboratively
Another common Agile approach is a collaborative estimation of value. A product or product feature is assigned a qualitative value that it delivers to the user or business. It is then given an estimated value using inputs such as level of effort, risk, and cost. The products or product features are then prioritized relative to each other.
The collaborative nature of this approach is great. Describing the value of a product and/or its features helps build empathy for the user and better communicate technical requirements.
The drawback of this approach is that the value of the product can be subjective. You are determining value based on consensus and hypothesis. Individual stakeholders may not evaluate the product or its features using the same criteria. As a result, ensuring the accuracy of the value measure over time becomes more difficult.
Define Value Based on What Matters to You
I have come to find there is no cookie cutter approach to measuring the value of a product. It very much depends on the organization, product, and the market the product serves. You need to invest the time to determine what metrics will help your organization demonstrate the value of your product, then come up with a measurement plan to guide how you track that value over time. Consider the following:
There may be more than one metric that can demonstrate the value of your product.
Though you may want to measure more than one, you don’t need to measure a laundry list of metrics to demonstrate value. Just focus on a few to start.
Demonstrate your product’s value to both your business and its users. Neglecting one or the other will not give you a holistic view of your product’s place in the market.
Value is not a constant and needs to be continually re-evaluated. The value your product delivers to your business and its users may change over time as the market evolves.
Metrics to Start With
If you have not invested in measuring the value of your product to date, here are a few metrics you can start with:
While revenue can be deceptive when viewed in isolation, when overlaid with other metrics like market share and customer satisfaction this can give you a good indication of whether you are delivering value to the market.
Some products, such as internal systems, don’t generate revenue. One way to measure the monetary value of the product is looking at how much it saved your organization over time.
Look at the rate at which you are gaining new customers. If you are delivering value consistently, this number should steadily increase.
The number of customers you are able to keep is also a strong indicator of value delivery. If you are losing a large number of customers, this is a clear indication users do not think highly of your product or find utility in it.
In addition to measuring churn, also gather qualitative and/or quantitative feedback to understand how your customers perceive your product.
If customers are using your product, and using it frequently, that speaks volumes about the value it delivers. Companies such as Facebook and Evernote look at customer engagement as a metric of success. This data is also invaluable in informing how to enhance your product over time.
Get Started Today
Understanding the value your product is delivering to your business and customers is paramount to demonstrating its success. If you have yet to start measuring value, start small by measuring a few of the metrics listed above.