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Explainer

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Synopsis

Does your product management process feel like it's lagging behind with the wrong tools? Our Product Management Toolkit (Part 1) collection includes some of the top tools that major companies like Apple, Amazon, Spotify and TikTok use to manage their products. See how these companies target customers, position their product's value, determine when a product is ready to launch, and use strategic viral loops.

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Outcome

With this explainer, you'll see how product managers use common tools and strategies to position, manage, and launch successful products. We'll explain everything from how to create a target customer persona, canvas a strong value proposition, pick the right validation metrics and build user acquisition strategies across multiple channels.

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In Product Management Toolkit (Part 2), you'll find out how to use analytical resources like price sensitivity analysis, total addressable market, product perceptual maps, competitive landscape analysis, product release plans, KPI dashboards and more.

Tool highlights

Target customer

As a product manager, how do you build a product in the first place? You first need to know who your customers are. When Apple launched the Apple Watch Series 3 in 2017, its target audience had a 55% focus on the 25-44 age range. But when Apple launched the Apple Watch Series 4, it went after adults between the ages of 44 and 54. Why the change? The product managers had a different target customer in mind...

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A solid understanding of who you want to target can put your product in the right direction.

You can break down your target customer profile into demographic and psychographic traits. Build the user persona with the help of user stories to walk through what the ideal customer needs. User persona paints a qualitative picture of the ideal user's background, goals, personality, value system, and even frustrations.(Slide 4)

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In Apple's case, the company changed its targeting strategy because of a new feature: an FDA-approved ECG scanner. Apple did its market research and found an open sea of opportunities to target an older demographic that controls nearly 70% of disposable income in the US. Two years later, Apple became the third-most trusted brand among older Americans.

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Value proposition canvas

Now that you know who the product is for, how can you be sure enough customers will love it?

According to CB Insights, the second most common reason startups fail is because the market simply doesn't need what they are building. This was, unfortunately, the case for Quibi, a mobile-focused streaming service that launched and closed shop within six months in 2020. Compare that to the rise of TikTok, another short-form video service -- TikTok launched in the US in August 2018 and by October of 2018 it had surpassed Facebook, Instagram, Snapchat and Youtube in app downloads. Today, TikTok is on track to reach 1.2B monthly active users in 2021. So why did it succeed when Quibi failed? A strong value proposition.

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YTo layout the most important components, you can use a value proposition canvas to hone in on the gains you provide for customers and remember to build something the market actually wants. On the customer side, think about these three questions: what jobs do your target customers want accomplished, what pains do they need relieved, and what gains do they require? On the company's side, list the product or service you provide, how you deliver gains to customers, and how you relieve their pains. (Slide 7)

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Quibi's problem was it was too obsessed with high-quality content made for a mobile-first audience. The company's founders even admitted their idea might not have been "strong enough to justify a stand-alone streaming service." TikTok's value-adds are fast and easy-to-use video creation tools, a massive music library that can be easily integrated into dance or lip sync videos, and a solidly curated For You page to connect creators and their audience. These features relieve creators from long editing time, and the effort to reach an audience who appreciates their content.

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Validation metrics

So you have a strong value proposition. It's time to build your minimum viable product or MVP. But just because it's "minimum", doesn't mean it should be bad or scrappy.

In a sense, MVP is more of a process than a product. In 2003, two product managers at Amazon proposed an Amazon infrastructure that relied on web services for storage and pitched the idea as a separate business model for a "universe" of virtuals. So how did Amazon turn this idea into AWS as we know it — otherwise known as the most successful cloud computing company in the world? And how did it know when the MVP was ready to take to market at a time when cloud computing as a concept virtually didn't exist? An iterative MVP process that focused on key validation metrics.

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After your MVP is ready for beta testers, do a round of testing with users so they can provide iterative feedback before you start a full-on implementation. Here are some common validation metrics to consider when it comes to your evaluation: customer acquisition cost, monthly recurring revenue, lifetime value, average revenue per user, and customer churn rate. (Slide 9)

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As for AWS, Amazon used itself as the first customer with its own internal validation metrics to decide when the MVP was ready to share. The goal was to drop the cost of maintaining a scalable multi-data center from 70% to 30% before it moves the MVP forward. Once it accomplished that, it offered the tech to select customers in private beta. After another round of preliminary validation metrics was met, AWS was rolled out in three phases over 2006 and fully launched to the public in 2008.

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Agile scrum sprints

Now that your MVP has been created and you have your initial feedback, how do you implement the changes and turn your product into reality?

In 2014, Microsoft was a bureaucratic mess that was too devoted to its Windows operating system. It had no substantial smartphone offering to rival Apple's iphone, or social network to rival Facebook. So how did Microsoft revive itself and went on to reach a market cap of over $2.8T? It went agile.

In the agile development process, the responsible team develops possible solutions and releases multiple iterations until final approval or product launch. Agile focuses on customer needs and minimizes the resources and overhead needed to create a product with true market-fit. The increased flexibility and rapid pace also create faster turnaround — the ultimate plus for product managers. Scrum is the most common agile tool that divides work into hyper-focused set durations of "sprints". These sprints are then reviewed and the feedback is implemented into the next sprint as the product becomes better and better. (Slide 17)

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Microsoft developer Aaron Bjork began to experiment with agile in 2008. A year later, several other teams began to jump on board and by 2011, it was implemented across Microsoft's thousands of developers. Three years later, it was adopted across the entire company, building a healthy culture of trust and results with a growth mindset.

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User acquisition

So you've got a good product going on by now, but how do you scale up to a couple of billion users like Microsoft? Let's look into some user acquisition tools.

In 2006, Spotify was created as a legal digital music platform to tackle online music piracy. By 2015, Spotify had over 68 million users, but only 18 million of those were paying subscribers. So how did Spotify grow to 155 million paying subscribers last year?

When it comes to user acquisition, you'll need to know what channels they come from, how many you aim to acquire, and how much it costs. There are a few different tactics you can use, whether it's word of mouth, paid ads, or SEO optimization, with various formulas to calculate each. Ideally, you want to create a viral loop that incentivizes each new user to refer at least one other user. The reality is, Cost of Acquisition (CAC) can't exceed Lifetime Value (LTV) for long.

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To calculate the LTV of a customer, multiply the average order total by the average number of purchases in a given year, then multiply that by the average retention time in years. If your LTV is higher than your cost of acquisition, you're in the green. (Slide 14)

So how do companies scale and grow their user acquisition while keeping their cost per acquisition low?

In the case of Spotify, the company operates on a freemium model, where free access is available with ads. In March 2018, this freemium model accounted for 60% of its gross added premium subscribers. Three years later, the company doubled its customer lifetime value from a 1.5x customer acquisition cost in 2015 to 3x using the ad-supported service as a subsidy program that offset costs of new subscriber acquisition.

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For more tools on what makes product managers from Apple, Microsoft, and Amazon successful, check out this framework. You'll gain analytical resources like customer journey maps, product perceptual maps, competitive landscape analysis, wireframes and mockups, product release plans, KPI dashboards and more to apply these techniques to your own products.

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