# WORKSHEET #17: Creating Potential Product and Services

Step 1:

Gather a list of innovations your product and service program needs as a result of Steps 13, 14 and 15. Many of these are imperatives which you should plan to implement soon to avoid failure. A few may be candidates for further evaluation.

Step 2:

Add to this list a set of new ideas. Conduct several brainstorming meetings using the outlines and examples in Improve/Products and Services to create potential innovations for your future.

Step 3:

Reduce the brainstorming ideas to those with the highest value to both customers and the company. Complete the following steps for each innovation requiring further analysis.

• Begin with the customer's Base Case, as identified in Worksheet #16: Estimating the Core Customers' Life Cycle Costs Per Unit.

• With each potential innovation, lay out the new customer costs by cost category (i.e. Acquire, Use, Maintain, Dispose or Obtain, Sell, Guarantee, Return) and revenue differences, if any, to the customer's current Base Case. If potential innovations in the product and service package might alter the customer's revenues and/or investments, include an estimate of revenues and investments with this cost estimate.

• The customer's investments, carried at the cost of capital, should be included with the appropriate cost category of Acquire, Use, Maintain and Dispose or Obtain, Sell, Guarantee and Return.

• To make the customer's investments comparable to other costs, you might calculate the cost of each investment as the cost of an annuity that would exactly liquidate the investment over the life of the product, at the customer's cost of capital. For example, assume that the customer must make a \$1,000 investment, that the investment will have a five year life with the product, and that the customer's cost of capital is 10%. Rather than including the investment at \$1,000, count \$264 as an additional capital cost in each of the five years of the product's life.

• In order to make operating costs and revenue differences for the customer comparable to one another, the company should multiply the operating margin percentage of the customer's business times the new additional revenues to create an operating profit number which would then be comparable to cost savings. For example, assume that the product will improve the customer's revenues by \$2,000 and that the customer has a pre-tax operating margin of 9%. You would calculate that the new additional revenues, on a cost equivalent basis, will reduce the customer's cost by \$180 per year. This is a revenue contribution to offset part or all of the other costs of the product.

• Subtract the customer's potential product and service innovation costs and revenue contributions from the Base Case to estimate the gross cost savings of the innovation compared to the customer's current approach.

• Convert the annual customer cost savings from the potential innovation into a savings per unit of product purchased.

• If the innovation requires, or permits, our company to make a price change in the product, reflect the price change in the customer's cost system.

• If the product price will increase, then increase the customer's Use or Obtain cost by the unit price increase.

• If the product price will fall, then decrease the customer's Use or Obtain cost by the unit price decrease.

• To get the customer's net savings from the innovation, combine the gross savings per unit of product with the unit price difference.

• Calculate the net savings of the innovation as a percentage of the customer's original Base Case costs. Be careful of any innovation where this percentage falls below 25%.

Step 4:

Rank order the potential innovations from the highest to the lowest in net savings in customer costs per unit of product purchased. Use this result in Worksheet #18: Developing Priorities for Product and Service Innovations.