StrategyStreet and the Board of Directors
PRODUCTS AND SERVICES
5. How do the planned product and service innovations create value for the customer?
No company can simply correct its shortcomings and prosper over the long-term. That is equivalent to a constant game of defense. If the company cannot score, it will gradually decline. To score, the company creates new value for the customer and hopes other companies will not, or cannot, copy its innovations.
In most cases, an innovation saves the customer cost in some way: in time, in resources used or in price. An easy way to express value is to quantify the cost savings the innovation brings to the customer. In other cases, such as a style or status improvement, the innovation is harder to quantify but still worth some effort.
Customers do not receive good value unless they reward the company in some way for its innovation. The effort at quantifying value ensures that the company has also considered the costs of the innovation. Some innovations change the company's costs enough to force a price change. When this means a price increase for the customer, you would consider whether the customer's savings more than offset the price increase. The company may plan an innovation without a price increase. Then the question arises of how much sales volume do we need to pay for the innovation. If customers will not pay the higher required price or purchase more from us, they have declared that our new value to them is not worth our cost of providing it.
The savings for the customer may occur in the broader system where the customer uses the product. One high tech company entered a market with established competition. The company's product offered the customer significant savings in the installation of the product and drastically reduced the product's maintenance costs. The high tech company set its product price at the same level as that of the established product. The customer saw no savings in the product purchase price. Nevertheless, the high tech firm grew very rapidly by demonstrating in its marketing and sales presentations the savings the customers realized in their broader system for using the product.
For further discussion of this question, see:
Basic Strategy Guide Step 12: Develop new need-based segmentation
Basic Strategy Guide Step 17: Develop a program for new products and services and confirm their value for customers.