Innovation for Customer Cost Reduction
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.
For helpful context on this step:
Symptoms and Implications
When the Company considers the costs its customers incur, it recognizes the fundamental differences separating the two types of customers it might serve. The two types of customers use the product differently. The costs that each kind of customer incurs reflect the ways that the customer interacts with the product.
The "customers" of particular interest in this step are the largest Core customers available to the Company. The Company can augment this understanding of the costs of these larger Core customers by doing variations of this analyis for the other Core customer size segments that the Company would like to serve.
Intermediary customers incur four major system costs in connection with the product over its useful life: Obtain, Sell, Guarantee and Return.
Each of these system costs offers a basis for performance innovations to reduce costs for customers.
|Final customers incur a different system of four major costs in connection with the product: Acquire, Use, Maintain and Dispose. Final customers incur these same four major costs whether they purchase the product from the producer of the product or from an Intermediary. However, the activities of Acquire, Use and Maintain costs vary.
Each of these steps also offers an opportunity for performance innovation. A Final customer may buy a product for enjoyment. In the majority of instances, even the enjoyment reason has a cost you can estimate. Where a customer does not incur a direct monetary cost with a product, as in the style or design of a product, the cost concept is more elusive but still applicable by comparing the costs of similar products or by valuing the customer's time.
|The Company quantifies the costs the customer incurs over the product life for each of these aspects of the product cost system. It then searches for the cost activities offering the most promise for cost reduction through the Company?s product innovations. Activities of the cost system where the customer incurs the greatest cost offer significant opportunities simply because of the size of the cost. In addition to these activities, the Company might rank cost activities according to its assessment of how much impact the Company might have on each of those activities of the cost system.