Innovation for Customer 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.
As part of your diagnostic effort, you should analyze Price Points in the market. One objective of these analyses is to evaluate the mix of your Price Points compared to the best and the worst of competition to ensure that you have a good mix of Price Points for the future. A second objective of these analyses is to establish a procedure to determine whether a product innovation that you develop belongs as a new Price Point or as an innovation within a Price Point.
To undertake these analyses you consider: the make up of your value proposition, the Price Points that exist in your industry, the potential for bias against a Price Point and the potential to make innovations within a Price Point.
Capsule: Value is performance for price, so you may change value in one of three ways.
A value proposition is a combination of the performance benefits the Company offers the customer, as well as the price the Company demands of the customer. Value is performance for price. A Company can change a value proposition in any one of three ways: both performance and price, only performance or only price. Changing both the product benefits and the product price creates a new product Price Point. (See Perspective: "Why Do Leaders Lead?") Customers who consider a product price notably above or below a product they are considering would normally expect to see a significant difference in benefits as well. A significant change in benefits normally produces a significant change in price. Less significant changes in benefits may allow the Company to add or subtract the innovation within a current Price Point.
A prospective product innovation creates either a new product Price Point or a change in performance. The choice of which form you adopt for the innovation depends on the cost of the innovation compared to the Company's current costs.
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