Innovation for Customer Cost Reduction
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 ten 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.
For helpful context on this step:
- “Commodities and Hostile Markets”
- “Convenience: Much Tougher Than it Looks”
- “How Customers Buy”
- “Patterns of Product and Service Innovation”
- “Rare Mettle: Gold and Silver Strategies to Succeed in Hostile Markets”
- “Reliability: The Hard Road to Sustainable Advantage”
- “When to Compete on Features”
Symptoms and Implications:
- Companies are trying to create upscale niches
- Some competitors proliferate products around the heart of the market
The Company creates more performance for its customers through one of three generic additions to value: Add knowledge to the customer, reduce the resources the customer must see with the product, and improve the customer’s experience with the product.
The Company may Add Knowledge to its customers by educating the customer about the Company and its products, by informing the customer of the benefits the Company offers compared to other competitors, and by showing the customer how the product may be employed in its ideal use in the customer’s cost system.
The Company may add value by Reducing the Resources the customer uses with the product. These resources include money, time and energy. The Company may reduce the money resources the customer uses with the product by reducing the costs that the customer incurs with the product and all its attendant components and activities. The Company reduces the time the customer must spend with the product through innovations that reduce the customer’s learning and activity steps. The Company may also add value by reducing the energy the customer must use with the product. These energy reductions include overcoming the physical constraints the product sets on the customer and reducing any toll the product takes on the customer’s health.
The Company may Improve the Experience the customer has with the product in four typical ways: appealing to the senses, associating the Company or the product with a favorable image, increasing the customer’s sense of security with the product, or entertaining the customer while the customer waits for or uses the product.
Once the Company has decided how to innovate its products and services, it decides whether to create a new Price Point or make a change with Price Points.
Your product innovation may change only the performance of the product. The performance of the product includes the product?s Functions, its Reliability of delivering on the promises it makes or implies to the customer, and the Convenience with which the customer may order, receive and install the product. If the Company changes only the performance of the product without changing its price, these performance changes apply either at a particular Price Point or across all Price Points the Company offers. These changes would be less extensive benefit changes than the changes that would produce a new Price Point. Normally, performance changes without a price change would change the cost of a product by ten percent, or less. If the cost of the innovation is greater than ten percent of the current product?s cost, the innovation is likely to produce a new Price Point with a new benefit package and a new price.
The Company makes these changes in performance only in the expectation of better profits. The Company expects that performance additions will produce more sales volume. Changes in the other direction, performance reductions, should produce enough cost savings to improve the product profitability despite any sales volume loss they may cause.
Aside from new Price Points and performance changes, the third way to change your value proposition is to change the effective price. The price of the product has many components. A change in any one of those components usually changes the price of the product. As the Company changes only one of the two components of value, changing price but not performance, it is normally making changes within a product price point. These price changes would change the Company?s average prices by less than ten percent. The Company may raise prices slightly, in order to improve its profitability, despite the potential falloff in sales volume as rising prices dampen demand. On the other hand, the Company may reduce prices in order to increase sales volume. The increased sales volume must be great enough to create better profit margins than the product had at the former price because of the Company’s fixed costs. These better margins pay for the price reduction on the original sales volume. You evaluate your pricing alternatives in more detail in the Diagnose/Pricing section of the web site.
Change Within Price Points Questions
|Summary Points||Next: Improve/Products and Services|