If you search for “what is the definition of a product” you get results along the lines of “a product is an item for sale.” This basic definition hints at the idea of value exchange, in this case for money.
I’m not a big fan of this particular definition because I see a product as a solution to someone’s problem. Yes, in most cases, individuals exchange money for a product, but that isn’t always the case. For instance, META builds large open source AI models and distributes them at no cost to the user. Does that mean that META’s models aren’t products?
In my opinion, a product manager should understand all the different ways value can be exchanged between a company and a user. Value has many forms outside of the exchange of money for products/services. It can be in the form of saving time, increasing revenue, or making someone happy.
This article covers the concept of value exchange, why it matters in product development (hint: costs), and how you can balance customer needs with business objectives when delivering value.
Value exchange is a transaction between entities (or individuals) that may or may not be financial. You can create value in many ways, including:
The relative importance of these forms varies according to your user base (usually measured in the form of money). What one person will pay in exchange for an improvement in one of these value categories may vary dramatically from what another person would pay.
One of my mentors once told me “value doesn’t always have to be in the form of a product in exchange for money, it could be a helpful video, article, or connecting a customer with a partner.” This idea really resonated with me. As a product manager, my inner passion is for identifying key customer problems and finding ways to solve them with scalable solutions.
I work at a large, mature company who has an established business model and a lot of products. One of the challenges I have is reducing the complexity around our company, including its processes and its products. We have a large user base and with that comes a lot of responsibility. Our customers expect that our products will be performant, reliable, and delivered on time.
The supply chain is dependent on our ability to ship them products at a certain cadence. We have many different types of customers from different industries. As a result of that, we spend a lot of time curating information and contextualizing it for those industries so our customers within them are able to connect the dots between our products and how they help them solve their problems.
It’s your job as a product manager to understand what forms of value are relevant for your customer base so you can properly position your product. By continually focusing on customer problems you deliver value and drive long-term growth and brand loyalty.
When you first start a new job or start focusing on a new product, you tend to have assumptions about your users and customers. I believe you should throw away your assumptions and start from first principles when starting in a new area.
By doing this, you ensure that you are properly scanning the solution space so you can identify areas of trapped value. Here are some steps for identifying forms of value exchange in your product:
After you’ve gathered all of this information, analyze the data, report it out, and gather feedback on your analysis. Where you have questions you haven’t answered, you have the opportunity to form strategic hypotheses that you will want to validate (or invalidate) over time through conversations with your customers. Throughout these steps, you will begin to form a clear understanding of where value is lost in the customer’s workflow and where you have an opportunity to bring value to them.
The number one way to ensure you consistently deliver value to your customers is by listening to them. You always want to look for a “win-win-win” scenario as John Mackey (founder of Whole Foods) refers to it.
A win for the customers, a win for the employees, and a win for the investors. I believe that when those three are out of balance, you begin to see a deterioration of the product or the company. In essence, you want to ensure that you’re delivering value while achieving business objectives.
As a product manager you inevitably have to make tradeoffs between delivering customer value and achieving business objectives. To that end, here are some sticky situations you may run into and things to consider when you run into them:
This list wasn’t meant to be comprehensive but rather a snapshot. It’s your responsibility to know when you are or are not delivering value to your customers in a profitable way.
Understanding and leveraging value exchange is crucial for driving business success. In this section I explore the different primary sources of economic value that companies deliver to their users and then deep dive into a specific tactic that Spotify uses.
Examples of companies that have effectively utilized value exchange include:
| Economic Value | Company |
| Efficiency | Microsoft, Monday.com |
| Speed | McDonald’s, Amazon Prime |
| Reliability | Toyota, Honda |
| Ease of use | Apple, Slack |
| Flexibility | |
| Status | Hermes, Tumi |
| Aesthetic appeal | Tesla, Airbnb, Warby Parker |
| Emotion | Nike, Coca-Cola |
| Cost | Walmart, Redfin, Spotify |
Spotify, a leading music streaming service, successfully uses a freemium model to boost user engagement. By offering a free tier with limited features and advertisements, Spotify attracts a wide user base. Users can access millions of songs without any cost, which significantly lowers the barrier to entry. The premium tier, which offers ad-free listening, offline downloads, and enhanced sound quality, serves as an upsell option.
After implementing the freemium model, Spotify observed a 20 percent increase in user engagement. This model not only expanded its user base but also converted a significant portion of free users to paying subscribers, driving revenue growth.
Decreasing usage, adoption, and retention are all signs that eventually lead to lost market share or failure to reach product-market fit. Two examples of this phenomenon come from Microsoft’s Windows and Yahoo:
From 1995 to 2008, Windows was the dominant operating system in the computing space commanding over 90 percent market share for many years. The Apple iPhone and iPad introduced new, mobile paradigms into the personal computing space. Things like touch, web apps, and an app store offered users safe, secure and speedy ways to interact with their devices on the go.
Windows was still relegated to the desktop. The team at Microsoft attempted to add new features like touch screens but the market didn’t accept them right away as these features were added on top of Windows which was built for desktop. Over time, Windows became bloated with a lot of features that impacted the desktop experience.
Eventually, Microsoft abandoned the mobile market and “righted” its desktop and laptop PC business by removing much of the bloat in Windows 11. If you compare this to Apple’s iOS and MacOS strategy, Apple created two distinctly different operating systems, one for desktop and one for mobile and neither one was ever described as “bloated” to the best of my knowledge…
Apple is now on a path to merge those two operating systems but it had to invest in silicon development in order to take that approach.
The lesson here is that when you’re delivering core technologies, adding more features may actually make your existing product offerings worse, not better. It may have been less expensive to add more features for Microsoft, but the feature bloat caused a lot of UX issues for Microsoft’s customer base, which, in turn, caused many of them to leave Windows altogether.
At the peak of the internet bubble in 2000, Yahoo was worth approximately $125B. At the time of its sale to Verizon in 2006, Yahoo was worth $4.8B. I believe this dramatic fall happened for a number of reasons but ultimately, Yahoo struggled to move several of its top initiatives from incubation to transformation.
Early on in the internet, Yahoo gained a lot of users because it did the best job aggregating information and summarizing it for users. Yahoo mimicked what newspapers did locally and nationally, but over the internet. Yahoo also provided a search function, as did a number of other companies at the time.
Within a few short years, Google took the majority of the search market and all other search companies fought for the scraps. Yahoo failed to deliver the true market need of delivering on demand information that users wanted. Ultimately, Yahoo’s idea of having a portal of curated information was a good idea but it wasn’t a great idea.
Additionally, Yahoo failed to capitalize on the trend towards social media with its Flickr and Tumblr assets who were arguably early versions of today’s most popular social media apps.
There are a lot of lessons here but one of the main narratives was that senior management at Yahoo wasn’t able to establish product vision, strategy, or execution plans that could compete with the up and coming companies at the time (Google, Facebook, Instagram). Yahoo married itself to a particular design (curated content) and was unable to pivot to new usage models (search, social media) and over time, Yahoo’s usage dropped.
The importance of value exchange goes beyond the exchange of money for a product or service. Economics teaches that there are several ways that value shows up in the world and it is important for you to contextualize them and understand how they apply to your product’s user base.
You need to deeply understand your customers and your customer’s challenges. One way of doing this is by documenting your customer’s workflows and identifying the pain points and opportunities to help them at each of those points.
Value exchange can occur in several forms including saving time, increasing revenue, or even improving a customer’s aesthetics. Balance the needs of the customer versus the needs of the business in order to sustain growth over the long term. The important thing is to always listen to your customers and ensure you have a pulse on what they need.
Featured image source: IconScout
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