Value Target Analysis — Part 1
Identify the Value that Customers Want from Your Products and Services
Innovating for Growth
Traditionally, business innovation has been associated with the development of new products and services (NPD). But over the years, innovation has expanded to mean many other things. For instance, innovation is often associated with the use of new and/or emerging technologies to solve business or social problems in more effective ways. Innovation efforts may or may not involve NPD, sometimes going by the name “business model innovation.” There’s also process innovation, which generally involves improving the design of workflow activities with the aim of reducing operational costs and perhaps improving customer quality. All of these forms of business innovation can impact a company’s performance either by increasing revenue, reducing costs, or both.
We’re focused here on the kind of innovation that drives organic business growth by increasing customer demand for a company’s products and services. We call this kind of innovation demand creation. The aim of demand creation is to continually increase revenue streams by offering superior value to customers relative to competing solutions while minimizing the cost of producing that value. Thus, demand creation drives organic growth by increasing the profitable revenue generated through products and services (Levitt, 1969). By contrast, approaches like Lean, Six Sigma, and BPM are focused on enterprise process improvement and process management with the aim of increasing the profitability of current revenues through operational efficiencies.
We like to think of demand creation as two jet engines, one on each wing of an airplane. The body of the airplane represents a company. Both engines have to work if the plane (company) is going to climb to higher altitudes (organic growth). The first engine of demand creation is value innovation, which involves creating new products/services that offer target customers more value than competing solutions. If successful, a new offering will pull enough customers away from competing solutions to achieve critical demand, making the offering financially viable. Once a new offering reaches critical demand, it then becomes an existing offering that moves through a product lifecycle in the market over time.
The second engine of demand creation is value enhancement, which involves keeping existing products/services positioned as the best value for current customers relative to competing solutions while simultaneously reducing the cost of producing that value. The second aim of value enhancement is to attract customers using competing solutions by offering them superior value. When both demand creation engines work well, a company can consistently introduce new products and services that customers want; they can continue to increase the profitable revenue generated from these offerings through their product lifecycles.
Whether they call these demand creation engines or not, all companies have them. And getting these engines to work well is the key to driving organic business growth. But, here’s the sobering reality: the failure rate for new products/services is between 40%-50% and this rate is significantly higher if abandoned projects are included (Anderson, 2017; Cooper, 2017; Castellion & Markham, 2013). Thus, this is the null hypothesis, if you will, for any value innovation effort, which seems odd because companies appear to be creating valuable products and services all the time. But look closer and you will see that many of these offerings do not offer target customers a better value than competing solutions-in-use. Consequently, the offerings don’t generate enough initial customer demand — the root cause of new product/service failures. To avoid the null hypothesis, companies must do more than just innovate. They must produce superior value. Simply put, products/services that offer anything less than superior value to target customers will likely suffer the fate of the null hypothesis.
Sustaining success for products/services after they have launched is also problematic. According to a recent study by the Nielsen Company, only 20% of new offerings grow in year two, while more than half significantly decline in sales. Many of these offerings are pulled from the market by year three. Further, 20% of the new products/services that make it past year three account for 70% of revenue — meaning that the remaining 80% generate comparatively little revenue. The study suggests that this dwindling performance is due to the fact that companies put less energy into protecting current customers and attracting new customers following a product’s first year in the market (Nielsen, 2015). Companies also tend to underestimate fast follower competitors that pull hard-earned customers away with low-priced imitations. This underscores that companies need to actively manage customer value through the product/service lifecycle, especially the introduction and growth stages where demand forces are quite dynamic.
So how do companies innovate for superior value for both new and existing products/services? First and foremost, it’s imperative to know precisely the value that target customers want from your products/services over time. To attract new customers, it’s critical to know how much better your products/services need to be to pull them away from competing solutions-in-use. But this is easier said than done. If the target customers are not dissatisfied enough with a solution-in-use, they’ll be unresponsive to efforts to pull them away, even if you think your solution is better. On the other hand, if the target customers are sufficiently dissatisfied with a solution-in-use, they’ll be motivated to find a better solution. If you know the additional value these customers want, you can pull them away by offering superior value. To retain current customers, it’s essential to keep your products/services positioned as the best value for them. This can be challenging since the customers’ perception of value changes as their circumstance changes, which includes the relative value of competing solutions.
Thus, the economic force that drives demand creation (and therefore organic growth) is superior value. The prerequisite for producing superior value is identifying and precisely defining the value that customers want to resolve the limitations (i.e., pains, hassles and constraints) imposed on them by solutions-in-use (including your own). But how do we identify and define what customers value at any given time? How do we measure value in such a way as to guide demand creation efforts to produce superior value for target customers? We introduce a method in this paper called Value Target Analysis that provides a fast, reliable and inexpensive way to ascertain the value that customers want from your products/services.
Lastly, what does innovating for growth mean from a process perspective? Generally speaking, “innovating” consists of the creative thinking and activities — actually doing innovation — that constitutes an innovation process. If the intention is to produce superior value, then the innovation process must aim to maximize the customer value of a new or existing product/service via the best means possible. This involves combining and/or integrating existing and untapped resources with a business model design that maximizes customer value at the lowest cost. This kind of value maximizing innovation process is only possible when informed by a precise knowledge of the value that customers want.
Value Target Analysis and Demand Creation
Value Target Analysis is a methodology based on the Theory of Jobs to be Done that identifies the value that customers want from products and services at different points in time. We call these changes in perceived customer value over time the value lifecycle of an offering. The value lifecycle is not the same thing as the product lifecycle (also known as the “diffusion of innovation model,” the “technology adoption lifecycle” and the “S-curve”), but there is a relationship between the two. The value lifecycle is the economic force that drives the product lifecycle and determines its characteristics.
In the context of Value Target Analysis, “value” as we generally use the term is a double-sided construct. On one side, there is perceived customer value, henceforth referred to as simply customer value. Because this side of value is subjective to the customer, it can only be defined from the customer’s perspective. On the other side, there is producer value, which is the profit that companies (as value producers) retain or “capture” from the sale of their products and services. Together, customer value and producer value constitute the total value generated by an offering.
Identifying and then precisely defining the value that customers want from offerings reveals four kinds of opportunities or value targets. First, there are times when customers want more value because they are dissatisfied with the limitations of a solution-in-use (value is undershot by the solution). Second, there are certain features, functions, and benefits that customers expect in a solution-in-use. They take this value for granted. Although important, obtaining this value is not a priority because it’s already well satisfied. Thus, this value must-be included in an offering, else the offering will not be viable. Third, an offering can reach a point where it provides more value than can be utilized by customers for certain aspects of use (value is overshot). And fourth, there is the case where customers aren’t sure or they’re not aware how a product/service can provide a better experience with respect to getting a job done (indifferent value) (Kano, 2003).
When value targets are known, demand creation efforts can focus on providing the additional value that customers want from a product/service while also minimizing its cost structure by:
- Scaling-up dimensions of value that are not yet good enough, thereby increasing the customer value of a solution.
- Scaling-down dimensions of value that are over satisfied, thereby reducing the cost structure of a solution; this enables incremental price reductions without compromising the profit margin.
- Maintaining dimensions of value at the least cost that are important and appropriately satisfied.
- Exploring how indifferent dimensions of value can signal opportunities to combine resources in new ways to help customers get a job done better, providing a delightful experience.
The challenge for companies seeking to maximize the profitability of their offerings is that customer value is dynamic over time. That is, what customers value changes at different points in the value lifecycle of offerings driven by customer circumstances, which includes the relative value of competing solutions. These circumstances change the value that customers want from products/services (Wasson, 1978). For instance, undershot value (important and unsatisfied) is the customer’s priority today, but once satisfied, undershot value becomes must-be value (important, well satisfied and expected). But if must-be value becomes unsatisfied for whatever reason, it becomes undershot and once again becomes a priority for certain customers. Overshot product/service features can reach the point where it makes a solution difficult and expensive to use, creating new priorities (undershot value) for some customers. When customers become aware of how offerings can help them get jobs done in ways they were indifferent or uncertain about before, suddenly indifferent value becomes undershot value (Kano, 2003).
This is why companies need a practical way to periodically assess the value that customers want over the lifecycle of their offerings. If a company can maintain a higher total value for their offerings than competitive solutions, they can sustain a market advantage. This means they will be able to create more customer demand and capture a higher profit than competitors. Further, as market forces compel lower selling prices among competing solutions, a company that maintains relatively high total value can keep its offerings competitively priced while capturing significantly higher profits than competitors (Levitt, 1969).
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