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Innovation for Customer Cost Reduction

The diagnoses of current customer decisions tell you how customers decide on benefits that the industry offers today. But a perfect understanding of today's customer decisions does not a prosperous tomorrow make. Your competition will continue to improve its products and services. So must you.

There are any number of time-tested approaches to the development of new products and services. The approach we like best innovates to reduce the costs a customer incurs in buying and using your product or service. This sounds easy, but it has its own little complications. A few examples. A customer is any person who can choose among more than one supplier of the product.

Many markets see two types of customers: intermediaries and final customers. Each incurs costs different from the other. These costs present the opportunity to innovate the product and service package to reduce the costs for the customers. You want to innovate first for the customers who have the greatest influence on the change in your sales volume. The customer's cost is really a broad system of costs, extending well beyond the cost of the product. You may innovate to reduce any of the costs in the system. Then the Company must decide how it would package its innovations into an attractive value proposition.

The innovation itself can assume two separate forms. You can innovate by introducing a new product price point, where you change both the performance and the price of the product. Or you can simply change the performance of the product and leave the price untouched. This section covers all of these issues.

This section of StrategyStreet covers these issues in the following topics:

Two "Customers"
Capsule: There are two customers in many industries. The first is the Intermediary customer who specifies, or sells, the product. The second is the Final customer who makes the ultimate buying decision. A product and service innovation program should consider both customer types but emphasize the one with the greatest influence on future sales.

Customer Cost Systems
Capsule: A product and service innovation program is going to be most effective when it considers the customer’s costs in a broad system. Intermediary customers incur four major system costs: Obtain, Sell, Guarantee and Return. Final customers have their own set of four system costs connected with the product: Acquire, Use, Maintain and Dispose. To set up its performance improvements, the Company searches for the cost activities offering the most promise for cost reduction.

Value Proposition: New Price Point or Benefit Change
Capsule: An industry may have up to four Price Points, depending on alternative combinations of performance and price. You must be careful of bias against any of them. The Company is likely to structure a product and service innovation as a new Price Point if the total costs of the new benefit package exceed a ten percent difference from the cost of the current products and services. Otherwise, the Company complements the innovation within the current products and services and looks to changes in sales volumes to pay for these changes.

Capsule: Value is performance for price. You may change value in one of three ways.

Four Price Points
Capsule: You should group all the market’s products, both yours and those of the competion, into Price Point types, which are combinations of performance and price: Standard Leader, Performance Leader, Price Leader and Next Leader. Then determine the market shares and growth rates of each Price Point.

Price Point Bias
Capsule: A bias against high or low Price Points is a common trait of Standard Leaders. A percentage of sales in these products that is lower than those of the industry’s best performers is a sure sign of this unfortunate trait.

Change within Price Points
Capsule: The Company produces more performance for its customers by Adding Knowledge to them, by Reducing Resources they use with the product or by Improving the Customer's Experience with the product. Where the Company’s costs of the innovation results in a change exceeding 10 percent of the current product costs, the innovation probably requires a new Price Point. Where the innovation might cost less than that, the Company may add the innovation within existing Price Points and rely on sales volume changes to support the cost of the innovation.

Summary Points

Next: Two "Customers"