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Business Exploration 11
Roadmaptomarket,2.0aguideformarketinginnovation
totheOil&Gas,PowerGenerationandAerospaceindustries
ByFlavioTosiBusinessExploration
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BusinessExploration
Via8marzo,22
50051Castelfiorentino
(Firenze)Italy
+393496482225
www.business.exploration.com
ANotetotheReader
TheRoadmaptoMarket,2.0 iscopyrightedbytheauthor:FlavioTosi.
Itsaworkinprogressdocument,nowatits8th
release.
Youcanduplicateitandshareit.
Youcandownloadthelastreleaseatwww.businessexploration.com.
Youcancopypartofit,orreproducepartofit,quotingtheauthor:
FlavioTosiandthewebsite:www.businessexploration.com.
Copyright2013,byFlavioTosiBusinessExploration.
Allrightsreserved.
Papercopiescanberequestedonthewebsiteat11each,
asaprintingcontribution.
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INDEX:Abouttheauthor:.....................................................................................................6
Prefacetothe2.0release:........................................................................................6
Foreword......................................................................................................................7
Introduction:innovating,andnot:innovation.......................................................8
Summary:..................................................................................................................10
TheRoadmaptoMarket:...........................................................................................11
PART1.DOYOUHAVEACUSTOMER?.......................................................................11
Do youhaveaCustomer?.....................................................................................11
Ifyes,whichpartofthemarketareyouthinkingtoserve?...................................11
Areyouunderperforming,orareyouoverperforming?.......................................12
Fightingforthetop:............................................................................................12
Integratedarchitecture:......................................................................................13
Carefullyplanningnottofail:.............................................................................13
Areyouoverperforming?......................................................................................14
AreyouleavingroomtoaNewEntrant?...............................................................16
IsthereaThreatoranOpportunity?.....................................................................16
Can
my
idea
disrupt
the
Performances
trajectory
game?
.....................................
17
Ismyideabuiltonanew(modular)architecture?................................................18
Isittherighttypeofmodulararchitecture?..........................................................19
Whoisthecustomerofanewmodulararchitecture?..........................................19
Areyougivingawayyourbusinesstoyoursuppliers?...........................................20
Confess:youdonothaveaCustomer,dontyou?.................................................22
Whothehellmaywantit?.....................................................................................22
TheRoadmaptoMarket:...........................................................................................24
PART2.HOWMANYCHANCESTHISINVENTIONHAS?.............................................24
Howmanychancesthisinventionhas?.................................................................24
1/4 Isthesolutionappealing?...............................................................................26
A HowmuchvalueourideacreatestotheCustomer?........................................26
ACustomermaybein2situations:orithasaGOAL,orithasaPROBLEM.......26
WhoistheCustomer?:FromCustomersneedstoCustomersGoals.....27
Wheredoesthesolutionfit?Whatproblemitsolves?......................................28
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Whichsolutiondowedeliver,andhow? (S.O.R.C.)...........................................30
HowmuchdoesCustomerneedsit?..................................................................34
Whatadvantagesgivesoursolutionvsotherssolutions?.................................35
B WhatPricewillbepaid?...................................................................................36
Howtosetprices?..............................................................................................36
Howmuch?.....................................................................................................37
Howdoesthepricechange?..............................................................................39
Summary:...........................................................................................................39
C WhatadditionalcostswillbesustainedbytheCustomer?..............................39
Investments:.......................................................................................................40
Systems:..............................................................................................................40
SwitchCosts:.......................................................................................................40
D Summary:.........................................................................................................40
2/4 IstheSolutionaccessible?................................................................................41
A HowwilltheCustomerknowaboutthesolution?...........................................42
DowehaveaclearUniqueSellingProposition(USP)?.......................................42
Isourpropositiondifferentfromanyotheroneinthecustomermind?...........43
Which
message
will
impact
the
customer
mind?
...............................................
44
HowwilltheCustomergetincontactwiththeidea?.........................................46
Summary:...........................................................................................................50
B WherewilltheCustomerbuythesolution?.....................................................51
Inourbooks:.......................................................................................................51
Insomeoneelsesbooks:....................................................................................51
C WhichisourSalesCarousel?.........................................................................52
TheSalesCarousel:..........................................................................................53
TheTrafficArena:................................................................................................53
TheEngagementArena......................................................................................55
TheConversionarena.........................................................................................56
3/4 Doesprojecteddemandsustaintheinvestments?........................................60
A Howmanypieces canbesoldinthesolutionslifetime?.................................61
TAMTotalAvailableMarket................................................................................61
RAMReachableAvailableMarket.......................................................................61
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SASServedattractivesegments.........................................................................62
B Howmanypiecescanwesellinthesolutionslifetime?..................................62
ListingCompetitors:............................................................................................63
Screening Competitorsappeal:..........................................................................63
Checkingcompetitorsreach:..............................................................................63
PreparingtoCompetitionresponse:..................................................................63
Summary:...........................................................................................................63
C Howordersopportunitieswillchangeinthesolutionslifetime?.....................64
ChangesofDemanddrivers:...............................................................................64
The5forcesimpactingdemandtrends:.............................................................64
The5culturalfactorsimpactingdemandtrends:...............................................64
HowweimpactShare(Organicsensitivity):.......................................................64
D Whichopportunitiesdowereallysee?............................................................65
Summary:...............................................................................................................65
4/4 Doesthesolutionleaveunitmargins?.............................................................67
A Whicharethemaincosts?...............................................................................67
Variablecosts:.....................................................................................................68
Fixed
costs:
.........................................................................................................
68
Investments:.......................................................................................................68
Synergies&Economies:......................................................................................68
B DowehaveaSupplyChainstrategy?...............................................................68
Conclusion:istheinvestmentworth?.......................................................................69
Part3.WHOTHEHELLMAYWANTIT?......................................................................70
Whothehellmaywantit?.....................................................................................70
DowehaveahintaboutinwhichdirectiontosearchforaCustomer?................71
BlindSearch:.......................................................................................................71
InformedSearch:................................................................................................72
Bidirectionalsearch:...........................................................................................72
HowwewillrecognizeourCustomer?...................................................................73
TheknownCustomer:........................................................................................73
Lowendcustomers:...........................................................................................73
Noncustomers:..................................................................................................73
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FakeCustomers:.................................................................................................74
FoundCustomers:...............................................................................................74
Whatwemustbereadyfor?..................................................................................74
Wheretostart?......................................................................................................75
Hireascout:........................................................................................................75
Getanhigherpointofview:...............................................................................75
Followtheriver:..................................................................................................75
Meetresidentpopulations:................................................................................75
Lookforsmokesignals:.......................................................................................76
Beatingthebushes:............................................................................................76
Avoidsearchingincircle:....................................................................................76
Howtobeatresistance?........................................................................................77
Whattypeofresistancewewillencounter?......................................................77
10Resistencestoinnovation:.............................................................................77
FewWordsaboutinnovation:...................................................................................78
Whatisinnovation?...............................................................................................78
Howtheconceptofinnovationevolvedintime:...................................................78
The
ways
we
reach
innovation:
..............................................................................
79
TIME:IncrementalversusRadicalinnovation.....................................................79
SPACE:ExperimentalversusConceptualinnovation:.........................................80
SOCIAL:CompetitiveversusCollaborativeinnovation:......................................80
Thesourcesofinnovation:.....................................................................................80
Innovators:..........................................................................................................80
Placesofinnovation:..........................................................................................81
TheinnovatorsTalents:.......................................................................................81
Bibliography:.............................................................................................................83
FEEDBACKS:...............................................................................................................83
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Abouttheauthor:Since2009,FlavioTosihasbeenhelpingindependentsinnovatorstargetingtheOil&
Gas,Energy,Aerospaceindustriestodevelopthepotentialoftheirbusinessideas.
When they feel concerned about the risks and the best approach to use for
launching
a
new
product
or
service,
or
starting
a
new
commercial
initiative,
he
complementstheirgutand instinctbringingonthetable latestmethodologiesand
provenbestpractices.
For12yearshehasbeenamanagerofGeneralElectricandpreviously for2years,
anengineer intheR&D.FlaviowaspartoftheteamthatbroughttotheOil&Gas
market some of the most fascinating technologies of the last decades, gaining a
deepunderstandingofNewProduct Introduction,BusinessProcessReengineering
andProjectManagementmethodologies.
And
became
passionate
of
the
challenges
offered
by
this
industry,
having
fun
discoveringnewsolutionsandideasforhisClients.
Youcanfindsomeofthemhere: www.businessexploration.com,
oryoucancallFlavioat: +393496482225forapreliminarytalk,
withoutanyobligation.
Prefacetothe2.0release:Inthelast4yearsasanindependentconsultantIhadtofindsolutionstomyclients
thatforcedmetoaddnewconceptstomyapproachtogotomarket.
I was looking to something in line with my understandings, something that was
capable to add to classic marketing, positioning and sales models, few concepts
aboutmarketsdynamicof innovation,evolutionof technology trajectories,search
anddevelopingofmarkets.
IfoundthemintoProf.Christensenbooks,thatgivemeafullycomplementarypoint
ofviewwithmyprinciples,bestpracticesandkeyassumptions.
So I decide to take the gotomarkets key points from these new concepts and
synthesizethemintotheRoadmaptoMarket2.0.
I
added
a
First
Part:
that
will
help
define
where
your
innovation
lays
in
a
competitive
andevolvingcontest,anddecideifyouareinthepositiontopursueit.
AndaThirdpart:thatshallgivekeyprinciplesaboutexploringfornewCustomers.
This isnotmy favoritestartingpoint,but Ihave toadmit thatsometimeyoumay
comeupwithanideabefore tohavedefinedwhoyourcustomeris.Hereyouwill
findfewideaonhowtoexploretofindhim.
The Second part:just optimizes and adds some clarification to the Roadmap to
Market1.0.Soitisalmostunchanged.
Asusual:yourcommentsandsuggestionsandquestionswillbereallyappreciated:
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Foreword
Ifyoujusthadabrilliantideaforyournextproductorservice,probablynowyouare
askingyourselfif:
Ismynewideaworthatry?
Someonetakesthisdecisionjustbygutfeeling.Ienvythemalot.Ineverunderstand
ifitispurecourage,insanemadnessorjustamatteroffaith.
What I know is that, statistically, more than nine out of ten of those guys fail
miserably.Andnotmanyoftheremainingcansinghurrah!asmasterofthemarkets.
Probably for this reason,Companies thatsurvive recessions,wars,and technology
decayhavedevelopedguidingprinciplesand techniquesto identifyandassessthe
variablesinvolvedinthisriskydecision.
Butwhen Istartedto lookaroundforthem,Ifoundamessof ideasandtoolsthat
confoundedandembarrassed.Marketingmeansalotofdifferentthingstodifferent
people, and probably for this reason is a word that has no translation in any
language,evenitsown.
Ineededsomethingworkable.Asyoudo.IfounditwhenIdecidedtostopsearchfor
tools and methodologies capable to give answers and started concentrating on
Questions.
Therightones.
Andheretheyare.Alistofquestionsthatwillguideyouinfindingalltheelements
youneed toreducetheriskof failureofyournextbusinessventureandmaximize
thechancetomakeitacceptedtotherightcustomer.
FollowingthisRoadmaptoMarket Youcanbecomfortabletotouchmost(ifnotall)
the keypoints in taking the finaldecision.HowYou answereachquestionof the
Roadmapisuptoyou.Canbeasimpleconsiderationtakenaroundacoffee witha
friend,
or
a
complex
statistical
study
commissioned
to
top
International
agencies.
But I assure You (for having tested it for years in General Electric as Marketing
ManagerandasaBusinessConsultantthereafter)thattheRoadmapiscompleteand
lean.ItwillkeepYouontrackandbuildtheunderstandingofthemarketinorderto
maketherightdecision.
Then,tomakethatdecision,Youwillneedabitofgut.
ButthisisuptoYou.
BuonLavoro!Flavio
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Introduction:innovating,andnot:innovation.
Thisbookisaboutinnovating,notabout:innovation.
Moreprecisely,ittriestohelpagoodideahitthemarketandgetsold.
Thispartoftheinnovationsjourney,theonethatgoesfromwhenanideahasbeen
invented (found, identified) towhen itbecomesadoptedandcreatesvalue, isnot
reallywelldocumentedinliterature.
Isjustsincefewyears(since1997,precisely)thatClaytonChristensenhasdescribed
thepathofinnovationtomarketandhascharacterizedsometypicalroutesthatare
madebythesuccessfulones.
Failing to understand the differences among those paths, when they should
alternativelypursued,andwhymakingthewrongchoice leadstofailure,causesto
mostoftheInnovatorstowastetimeandresources.
The
questions
collected
here
should
help
you
to
decipher
the
circumstances
in
which
youareandmaketherightdecisionsaboutwhetherandhowtoproceedtowardthe
market.
Butwhenwedoinnovate?
Innovationis:anewwaytoreachagoal.Ifoundthisdefinitionaboutinnovatingin
a paper of Benoit Godin, of INRS Canada, who explained how the concept of
innovationevolvedintime.
Itstartedmeaning:Change(oftheestablishedbehaviorsoftheuserwhowill
adopttheinvention),thenitadded:Rupture(withthepast, notjustdetaching
fromit,butmoreprofoundlydestroyingit,toachieveanewanddiversestatus)
andlately,inthepastfewcenturies,thewordinnovationhasbeenconnotedwith
2modernelements:creativityandutility.
Todayweassigntoaninvention(thecombiningofelementsthat createsanew
value)thestatusofinnovationonlyiftheinventionbringsinanutility.
UtilityinvolvesbothanadoptionbyaCustomer(achangeinhisbehaviors) and
theabilityoftheinventiontobemarketable(capabletogenerateanexchangeof
value).
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Underthislightitbecomesclearthatthestartingpointofanyinnovatingattemptis
intheCustomer.Withouthim,thereisnoUtility.
Thisiswhythisbookstartswiththequestion:DoyouhaveaCustomer?
Thereareonlytwotheoptions:
1)oryoudohaveaCustomer:youhaveanideaaboutwhoishim,andyoualready
bargainwiththisfellow.
2)oryouhavenoideaatall,andyouhavetohopetofindhim.
Thisentitlestotwodifferentkindofproblems:
Inthefirstcaseyourtaskistominimizethechanceoffailureforyourinvestments.
Thereisahugesetofbestpracticesthatcompaniesaroundtheworldhavecollected
inordertomaketheinitiativeofbringinganewideatoexistingCustomers,safer.
Thesecondoptionismoretricky:becausetheonlywaytodiscoveryourCustomeris
totry.Learnyourwaytohimbytrialanderror,beingreadytochangeyourpath
whenabetterwayisencountered.Inotherwordsisamatterofexperimenting:
maximizetheopportunitiestolearn,whileusingtheminimumamountofmoney
and
avoiding
the
chains
that
can
tear
down
your
flight.
Thesetwocoursesofactionseemsselfevident.Andinrealitytheyareequallyviable
inprinciple.WhatChristensenhashighlighted,hasbeenthatthereareprecise
circumstancesthatindicatewheneachoneisworthtobepursued.
Failingtoidentifythemmayleadtodeadends,fightingagainstwindmills,struggling
withresources,findyourselfalonehalfthewayetc.
TheRoadmaptoMarketwilltrytoguideyoutotherightpath,andhelpyou
identifyallthesignsthatleadtosuccess.
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Summary:
TheRoadmaptoMarketaimsatcollectingallthe informationyouneed,toanswer
to3basicquestions:
1)IsthereaClientformyidea?
2)ifYes,canIminimizetheriskoffailureformynewproductorService?
3)ifNo,canImaximizethechancestofindtherightone?
The FirstQuestionwill help you recognize the signs to the rightRoad tomarket,
avoiding deadend paths that have been proven (by others failure) to have the
lowestchancesofsuccessifany.
TheSecondone isaimedatcollectingallthedataneededforanNPV(NetPresent
Value)analysis:Demand,Share,ContributionMarginandRisklevel.Andistheroute
youshouldtake ifyouowntheClientsandyoujustwanttobeatcompetitionand
leverageyourcompetitivepositiontogetthemostoutofyouridea,withthelowest
chancesoffailure.
The lastone isthemost riskybutalsothemostrewarding.Because, ifyoudonot
haveaClient,youmaythendiscoverthatyourideaisworthtosomeoneyounever
thoughtbefore,andhewasreallyjustwaitingtoittosolvehispressingproblems.
TomakeyouswiminthisBlueOceanofopportunities,youneedtoaskyourselfhow
youcandiscover the route to theEldorado.Andbecausenoonehavebeen there
before,maximizingtheresultofeverytrialistherealjobthatbringsyouthere.
Caveat:
Thisbookcollects lessonsofseveral leadingScholars intheFieldofGameTheory(
e.g.:DixitNalebuff),Strategy (Porter,Christensen,KimMauborgne)andMarketing
(Trout,Reeves,Bly,Stokes,Choun). Isackedwildly their ideasand tried tobuilda
roadmapforinnovators,bridgingtheirtheorieswhereIsawpossiblejoints.
Therefore this book is not intended for beginners. You should have a basic
understandingofmarketingandbefamiliarofthecommonjargonsused.Inthisway
youwillmultiplytheeffectivenessofthisRoadmap,thatorganizessoundmarketing
models.
Furthermore Inot intendedtogiveyouareadingcompanion,butaworkingtool
where to find rapidly hints about marketing innovation. You will not find many
examples.Justbriefexplanationsofwhateachvoiceshouldmean.
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TheRoadmaptoMarket:
PART1.DOYOUHAVEACUSTOMER?
Doyou
have
aCustomer?
Wheneverafriendcomestometelling:Ihaveabusinessideathefirstquestion
ImakehimisdoyouhaveaClient?.Buttherealwaytoputthequestionshould
be.DoesanyCustomerownsyou?.
BecauseisnotenoughthatyouhaveanideaofyourtargetClient.Youshouldhave
bargainedwithhim.YourpotentialClientshouldhavebeenabletoexperienceyour
service,oratleastexperienceyou.Recognizingyouasasolutionprovider.Someone
whohastheabilitytosolvehispressingproblem,ortoallowhimtoachievehisgoal.
Ifthisisthecase,probablyyouarenotalone.Youmoveintoatrajectorywithothers
likeyou,readytoservethatclientatthebestoftheircapability.
TheCustomerdictateshisneedsandrequisites,ifnotevenasksawelldefined
performanceleveltoanattributeofyoursolution.
Ifyes,whichpartofthemarketareyouthinkingtoserve?Incaseyouknowyourtargetcustomer,hecangiveclearindicationsaboutthelevel
ofperformanceneeded.Butbecareful.Notalwayswhatheaskforiswhathereally
isgoingtouse.ListeningtoomuchtoClientsrequestsmayenduppushingyour
offertowardthehighendofthemarket.
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ThisisaveryattractivesegmentofCustomers.Theyareneversatisfiedandask
alwaysmore.Andareevenwillingtopaythisplus.Butthehighertheperformance
level,thelessaretheClientstobesatisfied.
ThedistributionoftheClientswithinthemarketmayresembleaGaussBellshape:
Withfewatthelowandhighends,andamassconcentratingaroundthemedian
performance.
Areyouunderperforming,orareyouoverperforming?
Takingasatargetthemediancustomer,iftheperformancesofferedbythemarket
arebelowtheexpectation,allthecompetitorsarefightingforthetop.
Fightingforthetop:Theystrivetosellabetterproductintoanestablishedmarket,andeachtime
someonecomeupwithabettersolution,hecausestheimmediatecompetitors
reaction.
Theprizeatstakeishuge,becauseusuallythemass oftheclientsarestilltobe
tackled,andtheopportunitiestosellgrowthebettertheproductis.
FurthermoretheClientdoesnotfindabettersolutiononthemarket,soiswillingto
payforthebest.Whatyoureallyarefightingforistomakeyourcustomerachievea
betterresult,notreallytoassurethatyourproductreachabetterperformance.
Inthisraceyoucannotstandstill.Youwillbeleftbehindfightingwithahardto
differentiateproduct,andagainstcompetitorswithsimilarcoststructures.
Youaregoingtolookforthoseideacapabletoimproveoratleastmaintainyour
profitmargins,exploitingyourorganizationsprocesses,coststructureand
competitiveadvantages.Alltheinventionsthatcannotdeliverimprovedprofit
marginsrelativetothecurrentcoststructure,arediscarded. Becausethecost
structureismostprobablyanheavyone.Thearchitectureneededtomanagethe
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complexityandtheuncertaintyunderlyingtheresearchofabetterperformanceisa
hugeandcostlyone.Ifyouintendtotakeparttotherace,betterbeequipped.
Integratedarchitecture:
What you need is an integrated architecture. An organization that is a platform
capable
to
achieve
new
levels
in
terms
of
Performance
and
Reliability
of
your
offer.
Isamatterofconcurrentefforts:youneedtheabilitytodevelopthecomponents
of your offer simultaneously, solving the unknow and unpredictable
interdependenciesamong them. It requiresExperience,Talents,ability tomanage
risksandtime. Andthewillingtosustaintheseeffortsforlongperiods.
An integrated architecture can be only proprietary. Is a unique enterprise that
demandhighCapitalExpendituretocoverR&Dcosts,backupinventories,talented
humanresources.Allthiscommandhugemarginsfromeachsale.
Thehigh capitalexpenditure and capitalonoperating costs ratioof an integrated
architecture is the sourceofdifferentiation,and the firstbarrier toentry fornew
competitors intotheofferingtrajectory.Thesecondbarriertoentry isgivenbythe
steepeconomyofscalethatisgeneratedbyanintegratedarchitecture.
Thisiswhytryingtobringanewinventionintoanexistingtrajectorycouldnotbea
goodidea,unlessyoudohavetheintegratedarchitectureandtheClientstoserve.
Theraceyouwouldwillingtoparticipatewouldnotbearacetosucceed,butarace
tonotfail.
Carefullyplanning
not
to
fail:
Companiesthatplaythisgamehaveorganizations,processes,values,resources,that
are committed to stayon trackand sustain themselves.Their strategiceffortsare
dedicated to filter out inventions with lower chances to succeed, with expected
marginsinsufficienttosustaintheircoststructure.Theyareoptimizedtoextractthe
mostoutoftheexistingcustomerbase,and indoingsothey fighttoscaleup the
existingsolutiontowardshighermarginssegmentofcustomers:thehighendofthe
market.Anewideathathasthepotentialwillneverbejustaddedtotheoffer.Most
probablyembedding it intotheofferingtrajectorywillrequiresoundpracticesand
experienceinmanagingtheinterdependencieswithallothercomponents.
Andthemorehightech isthe idea,e.g. if isan inventioncomingoutofaresearch
laboratory,themoreresourcesareneededtogovern it.Nowonderthatonly large
corporations can dare to bring on the market the most sophisticated scientific
discoveries.Theyaretheonlyonedesignedtomanagethecomplexityandcostsof
suchachallenge.
This
race
has
a
toll:
the
quest
for
higher
margins
may
distract
from
understanding
wherethemedianmarketis.Listeningtocustomerswhoaskformore(andpromise
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topayforit)mayendupsurpassingthelevelofperformancerequiredbythemass.
FortheseCustomers,themarginal increase inpricethataCompanycansustainfor
an improved product slowly approaches to zero. This suggests that the marginal
utilitythatCustomersderivefromusingtheproductalsoisapproachingzero.
Yourproductisactuallyoverperforming.
Areyouoverperforming?
HowyoucanrecognizeiftheofferisoverperformingrespectwhattheCustomeris
willingtobuy?Afterall,Customersarethosewhoaskformoreinallthe
questionnaires,survey,feedbacksandrequestsforquotationyoureceive.
Atleastitseemsso.Ononeside,infact,thereisapsychologicalstiffnessofthe
customerinconformingtothehighendluxurytastes,akindofirrationalwishful
thinking,thatforacertainperiodmayhelpyourcustomerfeelbetter,whenasked
abouthisneeds.Ontheothersideyourorganizationtendtoreportasfeedback,
onlythosethatarealignedwithwhattheCompanywanttohear:moremargins.
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Andmoremarginscanbefoundonlyinthehighendminorityofthemarket
demand.Itsfeedbackisthereforetheonlyonethatsurvivethefilteringscreeningof
theCompanyprobes:itsmiddlemanagement.
AbetterlookmayshowthatMedianCustomersarestartingnotwillingtopayforthe
marginalincrementinperformance.Suddenlytheyshifttheirinterestfrom
performance,toReliability.Theyhaveenoughofwhatyourproductrangecan
offer.Theywantthattheproductperformthesamewayaslongaspossible.Later
on,whenalsothisrequirementbecomesmorethansatisfied,theirinterestshift
again.ItmovestoConvenience:thepreferredproductbecomestheonethatis
easiertogetanduse.Finallywhenalsothisfeaturebecomesagiven,thelast
criteriumofchoiceamongcompetitiveofferingsremainsPrice.
Whenyouarestillontheperformancetrajectory,youmaystartnoticethatyour
customersarestartingtobuytheentrylevelproductsofyourproductrange,orof
themarketproductsrange.Allofthecompetitorsarestartedtobetreatedalike.
Pricebecomesaninterestinggaugeofchoice.
Isinthissituationthatathreatsmaterialize:
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AreyouleavingroomtoaNewEntrant?ThisisthequestionfromaCompetitorstandpoint.Youmayseethatnew
competitorswithabetterpricingcanundermineyouroffer.Ifsucha newplayeris
abletocapturecustomersattention,andhasalowercoststructureheisgoingto
benefitofhighmarginsuntilthelastcompetitorofthePerformancetrajectory,will
stayinthemarket,sustainingthepricelevelstowardsthehighendofthemarket.
ThecompetitorsinthePerformancetrajectory,areevenincentivatedintheirrush
towardhighermargins,toleavethelowendsegment,movingtheiroffering
portfoliotowardsthehighendcustomers.Insodoingtheirportfoliosmargintend
toincreaseonaverage,somakingthisattractiontothetopevenfinanciallyjustified
(atleastuntilsomeonestarttoseethathigherpricesbylowervolumesdonotcoop
withcompanysgrowth).
IsthereaThreatoranOpportunity?Iffromthecompetitorspack,overperformingcouldbeseenasathreat,fromthe
pointofviewofsomeonewithagoodnewidea,thissituationismoreofan
opportunity.
Anobservationofthelowendcustomersmayleadtodiscovernotonlyawayto
penetratethemarket,buteventoexpandit.
Amongthelowendcustomerstherearesurelyuserswhoareperfectlyfinewiththe
lowendproductsrange.Butacloselookmayshowthatamongthemthereare
Clientswho,yesaresatisfiedwiththeminimumperformance,butinrealitytheyare
using
other
features
of
the
product.
Features
that
are
considered
not
important
or
notconsideredatallbytherestoftheMarket.
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Someoftheselowendcustomersneedhelptomaketheproductworkforthem.
Theymayneedexpertconsultantswhohelpthemadjustandfittheproductfortheir
need.Theylackofthecompetencesortheinfrastructure:tools,systems,
information,tojustplugandplaytheproducttosolvetheirproblemorachievetheir
goals.AllofthemarelookingforSimplicity.Otherstravelalongdistancejusttoget
theproduct.Theyuseonly10%ofit,butthat10%isworthalongtrip.Ifsomeone
couldbeabletoofferthesame,justalittlemoreConveniently, wouldbecome
instantaneouslytheirpreferredsupplier.OtherCustomerswouldlovetogetthe
productbuttheycanbarelyaffordthePrice.Sometimetheyjustbouncebackand
goawayandmakewithoutit.Iftheyareluckytheytrytomakewithanemergency
solution,somethingthatmakehalfofthework,butisbetterthannothing.
Ifyourbrandnewideacanchangethecoststructureoftheoffering,reshufflingitto
maketheproductmoresimpletoget,moreconvenient,andsellableatlowerprices:
allofthesecustomersareyours.
CanmyideadisruptthePerformancestrajectorygame?IfamongyourCustomersyoufindsomeonethatbehavesassaidbefore:lookingfor
simplicity,convenienceandprice,orjustbouncingaway,chancearetherethata
largercrowdofthesametypemaybeserved.
Unfortunatelymanytimethepeoplethatspottheseopportunity,lackoffantasy.
Ihaveseenpeoplespinningoffoneofthecompetitors,justtorephrasethesame
offer,atlowerprice,orforjustsomeopportunistcustomer,butreallywithout
bringinganythingnewonthemarket.Justgivingawaymargin,andtryingtomake
theirwaycuttingfixedcosts(branding,service,R&D)fromtheoriginalcompetitor
coststructure.
Thisisquiteeasytoseehappeningfromtheservicesideoftheoriginalcompetitor.It
isquiteeasytospotthehugemarginsthatthecompanyismakingwithitsservice
business,stoleafewofthebestservicemendoublingtheirsalary,promiselower
pricestosomefriendcustomeranddentingforawhilethesalesoftheoriginal
company.
This
may
work
in
an
up
swing
economy,
where
the
service
offering
capacity
may
be
notfullysatisfied.Butgenerallydoesnotlasttheshakeoutofadownturn,orofa
companythathaditenoughofthosebitestoitsrevenuebase.
Soifyouspottedtheopportunity,bettertomakeasanitycheckandverifyifthe
moveisbackedupbyanewideacapabletobringthesamevalue,butwithanew
typeofcoststructure.
Thepeoplethatsucceedingrabbingtheopportunity,generallyhavespottedthat
theproductsonthemarketarefarmorecomplexthanwhatisneededtodeliverthe
performanceusedbytheCustomer.(remember:customerstendtoaskformore,
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evenwheninrealityuselessthanwhatyouoffer)sotheyfindawaytopull
togetherthekeycomponentsoftheproductontoamoresimplerandstandardized
architecture.Amodularsystemwheretheinterfacesarefixed,andthecomponents
canbepluggedintoachievethesufficientlevelofperformance.
ThisperformancebecomesagivenfortheCustomer:whatheisreallylookingfor
isspeed,responsiveness,convenienceandprice.
Ifmyideaisbuiltonamodulararchitecture,andthisisaninventionthatcandeliver
thelowendperformancelevelrequired:therearechancesthatmoreofthealmost
customerswillswitchtothisnewsolution.
Ifthisinventioncanachievealevelofperformancethatcansatisfythemedian
customers,withafaster,simplerandcheapersolution.Theareverygoodchances
thatthemajorityoftheCustomerswillmovetoyourinnovation.
Disruptingtheoriginalmarket.
Ismyideabuiltonanew(modular)architecture?Intheorythenewideaarchitecture,shouldnotnecessarilybemodular.Forsureis
newdifferentrespecttheoneinusebythecompetitorsonthemarket.Butifitis
anintegrated,complexone,thechancesthatthecoststructurewillallowalower
pricearefew.Thechancesthatastartupnewentrant,canmanagethecomplexity,
withouttheexperience,andcollectresourceswithoutacustomerbase,arefew.
Sobeforetomove,letscheckiftheideaisbuiltona(new)modulararchitecture.
Thekeypointhereisthatthecomponentsoftheproductshallbepluggedinthe
supportingarchitecturewithouthavetotuneittotheothercomponents.Inother
wordsthemodulararchitectureinterfacesshallnothaveunpredictable(notyet
know) interdependencies.Inthiswayeachcomponentcanbedevelopedseparately
aslongastheymeettheinterfacesspecifications.Thecomponentsspecifications
limitthedegreeoffreedomofthewholeproduct,sotheytendtoleadtoasub
optimizationofitsperformance.Butthisisnotaproblemaslongtheperformance
achievableareenoughtosatisfythelowendcustomers(betterif:themedian
Customer).
What
counts
to
make
the
final
product
performance,
is
not
how
the
componentsintegrate(coordinate),buthowwelleachofthemperforms.
Thegreatadvantageisthattheperformanceofeachcomponentcanbeoptimized,
withouthavingtoreinventtheentireproduct.
Furthermorethemodulararchitectureallowsoutsourcing,leveraginginthiswaythe
economyofscaleofthesupplier.Youcandosoifyourarchitecturemeetsthe
criteriaofSpecificability(youknowwhatiscrucialforeachcomponent),
verificability(youareabletospecifyitandtomeasureit),Predictability(you
cansaythattherearenopoorlyunderstoodorunpredictableinterdependencies
amongcomponents)
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Isittherighttypeofmodulararchitecture?Notallthemodulararchitecturesareequallyinteresting,fromabusinesspointof
view.Ifitisaproprietarymodulararchitecturetheownerofit,willretainmostof
themargin,attheexpensesofhiscomponentssuppliers.
Hecanspecifythecomponentsinterfaces,inauniqueway.Hissupplierscanonly
buildaproducttofitthem,withoutbeingcapabletoofferthesameproductto
otherClients.TheOwneroftheproprietaryarchitecturewillmakethemoney,while
thesupplierswillfightwithcompetitorstogivethebestpricepossible.
(thisisthecaseforexampleofaGasturbinemanufacturer,thatcanspecifythe
bladesofitsturbine,andsupplierscompetetosatisfythosespecswithouthaving
thechancetoofferthesamebladetootherturbinesmanufacturers)
Ifonthecontrary,themodulararchitectureisanindustrystandard,andother
playerscanusethesame,theownerofthearchitecturebecomesalowcost
integrator,andthesuppliermakesthemoney.(seewhathappenwithindustry
packagersofsimpleindustrialskids)
Inbothcase,themodulararchitectureallowslowercostsstructures(R&D,
Inventory,HR)andpermitstosellatlowerpricestoalargerpoolofcustomers.
Thedifferenceiswherethemoneygoes.
Whoisthecustomerofanewmodulararchitecture?Ifyourideahaspassedthetestforarchitecture,isworthtorecapthebattleyouare
going
to
fight,
before
to
proceed,
and
be
sure
you
understand
who
are
the
customersyouarelookingfor.
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Youaregoingtoofferyourinnovation,basedonanewkindofcoststructureand
architecture,toanexistingcustomerbase.Youareanewentrantonanexisting
performancetrajectory.Youcompeteforcustomersthatarealreadyconsuminga
product,andthelargemajorityofthemarewelloverservedbytheexistingoffer.
Yourentrycustomersarethelowendsegmentofthemarket.Arethosethatarethe
mostoverserved,theleastprofitable,andthereforelesswantedbytheincumbent
competition.Youaregoingtoproposetothosecustomersalowercostsolution.
YourstrategyleveragesamodulararchitecturethatgrantyouaCostAdvantage.
Thisadvantageisthereonlytillthesamecustomersarealsoservedbythe
incumbentcompetition.Aslongasthelastofthecompetitorsowningtheoriginal
architectureabandonethefight:yourcompetitiveadvantagewillfadeaway.
Youwillfindyourselffightingagainstequallyequipped(remember:youmost
probablyhaveanindustrystandardmodulararchitecture)competitorsatough
pricewar.Sobereadytoenjoythemarginsuntilthelastincumbentcompetitoris
stillthere.
Youronlywaytoenjoymarginsistoprecedetheabandonmentofthelast
incumbentcompetitor,invadinghisspace.Yournexttargetisthereforehighertire
customers.Andtodosoyoumustbereadytoextendyourmodulararchitecture
stretchingitsperformanceuntilyousatisfythosehighertirecustomers.
Todosoyoucanonlycountonyoursupplier.Youmustbereadytoincorporate
whateveradvancementtheycanofferfortheircomponent,thatcanallowto
increaseyoursystemperformance.Thearchitectureinfactisagiven,andyoucan
not
count
on
it
to
increase
the
performance
or
gain
competitiveness.
Speedinadoptingthenewcomponentsisofmaximumimportance:inordertobe
thefirsttoreachthenewmarketsegment,whiletheincumbentsretreatfromit.
Areyougivingawayyourbusinesstoyoursuppliers?Theothersideofthismechanismisthattheonlywaytogainsomethingintermsof
architectureoptimizationistooutsourcetothesuppliersareasalwaysmorelargeof
yourplatform.Inthiswaythesuppliercanintegratedtheareaandofferanenlarged
sub
system,
optimized
not
only
in
terms
of
price,
but
also
in
terms
of
performance.
Andyouhaveverygoodreasontodothis:yourcoststructurewillbenefit,cause
architecturesbasecostsgetsqueezed.
Thenaturalpathisthatwhileyouaretacklingthehighertirecustomersservedby
interdependentarchitectureplayers,simultaneouslyyougiveawayalwayslarger
chunksofyourarchitecturetosuppliers. Theyexpandthescopeoftheir
(interdependent)architecturetofulfillalltherequirementsofallthepossible
subsystemsofyourproduct. Theywillfinallyendupofferingtoyourclienta
solutionthatisfullycommoditized:isaffordable,undifferentiated,overperforming,
reliableandconvenient.
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Atthatpointtheonlydifferentiationleft, goesintothedistributingchannel:and
amongthem: theonlycapabletoprovideanythinganytimewillprevail.
Thisiswhathappenedwiththesportclothsindustry:wherethetailormade
solution,arenowsupersededbylargeretailchain,offeringproductsbrandedwith
thechannelname(Decathlon,tomakeanexample).
Thegamethereforeneverends,isatokenpassinghands:theinterdependent
architectureispulledtowardsthehighendniches,untilthemarketisdisintegrated
andsupersededbyamodulararchitecturethatisthensupersededbya
commoditizedintegratedarchitecturewithadifferentiatingdistribution
channel...etc.
Canyouavoidit?Notreally.Whatyoucando,ifyouareasavvycompetitorusingan
interdependentarchitecture,istorecognizetheemergenceofamodular
architecture,andanticipatethemovesofthenewentrant,destructuringyouroffer
intothekeycomponents,standardizingtheirinterfacesandsellingthemtothenew
entrant,thatinthiswayispushedintoaindustrystandard architecture,beforethat
hefullydevelopitsown,andreducehimtothestatusofalowcostpackager.
Youwillretainthetechnologyofthekeycomponents,andwithit,thelargestshare
ofmarginthenewvaluechaingenerates.
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Confess:youdonothaveaCustomer,dontyou?IfyouarenotsurewhoyourClientcanbe,probablyyouareoneofthoseguythat
afterbeingimmersedintoatechnologytrajectoryforawhile,yousawawaytofind
thesamethingbutmuchmoresimply.
Youprobablybelongstotheengineering,marketingorservicedepartmentofoneof
theleadingplayers.Somethingtriggedyourattentionandyoupulledtogetherpieces
ofthesolutionassemblingoutoftheshelfcomponentsonamodulararchitecture
andobtainingwhatitlookslikeanotenoughperformingabort.Butitswaymore
cheap,fasttobuild,easytopurchase.Andthesuppliersbelongstoatotallydifferent
valuechain,generallyspeaking,muchlessdemandingandbranded.
Theabort,sorry:idea,thatyoupulledtogetherdoesnotworkfortheusual
customersbelongingtoyourperformancetrajectory. Atmaximumcanalmostserve
thelowestendofyourcustomerssegments.
Yourbosshasridiculizedtheidea.Customersfeedbackisliketohavepresented
thematoy.Yoursolutiondoesnotshowtohavethemarginrequiredtobeableto
contributetotheexistingproductportfolio.
Butithasaveryimportantattribute:itworks.Furthermoreitssimple.Anyonecan
useit,itsmuchcheaper,becausetherearenotinhousebuiltpreciouscomponents:
everythingwasavailableonthemarket.
IfyouonlyhadaClient!
Whothehellmaywantit?
This
is
the
problem
with
good
ideas
that
are
cheaper
and
simpler,
but
do
not
performenough.Yourusualcustomersdonotwantit,andyoudonotknowwho
may.Yourcolleague,instead,theonethathasproposedthebiginvestmentneeded
toimproveofthe1%theperformanceoftheexistingproductline,passedthetest.
Hisidea,wasrisky,difficulttorealize,butwasinlinewithwhatcustomerswere
demanding.AndwhatCustomeraskfor:getprecedence.
Hisproblemwastomakealltheplantomitigatetheriskoffailure.Whatthe
companyhasdoneistocarefullycheck,andeliminateanyriskofpromising to
customerssomethingthecompanyisnotabletodeliver.
Yourideaisdifferent.Isthere.Itworks.JustneedtofindaCustomer.Theproblemistheopposite:isnotamatterofreducingthechanceoffailure.You
needtomaximizetheopportunitiestobumpintotherightcustomer.
Andonethingissure:isnotthecustomerthatyoualreadyknow.
Probablyissomeonethatisstrivingtodoajob,wherethetypeofsolutionyou
proposemayhelpalot.Buttodayisnotoffered.Thesepotentialcustomersprobably
usesomethingdifferent,asuboptimalproduct,thatperformsunsatisfactorily.
Onthoserespects,yourideawouldbeasubstituteproduct.
Probablyyourproductwouldenablethosepotential(nonyetconsuming)
Customers,thatlackedthemoney,theskillsorcouldnoteasilyreachthesolution.
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TheRoadmaptoMarket:
PART2.HOWMANYCHANCESTHISINVENTIONHAS?
Howmany
chances
this
invention
has?
Thedecisionthreeinpart.1,shouldhaveroutedyoutooneofthe2possiblecourse
ofactionswhendealingwithinnovation:
Minimizerisks. Maximizeopportunities.
These2seemquiteparallelpaths,applicabletoanykindofnewventure.ButItsnot
so.Thesetofcircumstancesdescribedabovesolicittogofromideatomoney,using
oneofthesetwomindsets,asanalternativetotheotherone.
Part.2isdedicatedtothefirsttypeofpath:theonetobepursuedwitha risk
avoidancemindset.
Thismeansthatmostprobablyyouareinawellidentifiabletechnologytrajectory
thattakesthemarketsneedsasagivenandissupportedbyawelldefinedvalue
networkofconcurrentsuppliers.Thatalltheinnovationsfunneledintothis
trajectoryaretargetedatawellidentifiedgroupofCustomers.thatthesecustomers
(oratleastasizableandinterestingpartofthem)arestilllookingforaperformance
level
that
none
of
the
competitors
can
actually
match.
That
the
next
level
of
performancewillbeachievedinapriceperperformancesunitlowerthanthepast
levelofperformancereachedandthatyouownthearchitectureofavaluechain
platformthatstillrequiresagreatdealofintegrationinordertosolvethe
interdependentproblemsthatarousesimultaneouslywhenbringingtogetherthe
elementofthesolutionyouwanttooffertotheClient.
Allthissetofcircumstancesfavortheestablishedorganization.Anorganization
withthecapability,abilityandresourcestoplaythegamewiththecompetition.Its
scopeistoextractthemostoutoftheexistingcustomerbaseandmaximizingprofits
indoingso.Itsproblembecomestogenerate,select,evaluate,prioritizeandlaunch
theinventionthatwillbeatthecompetitionandconquermarketshare.
Thefollowingpagestakeforgrantedthatthisorganizationhasbeenabletogenerate
therightideaforanewproductorservice,andbringyouthroughthequestionsyou
shouldanswerinordertobeabletoevaluatethepotentialofyourideaandassure
youdesign amarketingplanthatwillminimizetheriskoffailureinlauchingitonthe
market.
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1/4 Isthesolutionappealing?
Thenicestpartofhavinganewgreatideaisthatitisselfevidentthatitwillbesold
inmillionsandCustomerswillfighttograbitfromourhands.
Unfortunatelyourbankwillnotsee it inthesameway.So,unlessyouarereadyto
betyourownmoney,wearealwaysaskedtoprovethatCustomerwill payforit.AndthiswillhappenonlyifourideacreatesvaluefortheCustomer.
Better: if creates an affordable value, and if this value is greater than theoneof
equallydemandingalternatives.
ThisstepoftheRoadmaptoMarketqualifiesandquantifiesthevaluedeliveredto
theCustomer and tries tounderstand howmuch value theCustomerwill give in
returnofthesolution.
ThedifferencebetweenValueGeneratedfortheCustomerandValueSpentbythe
Customer(i.e.thePricepaid+theCostssustainedtobeabletousethesolution)is
calledtheAppealofthesolution.
Wearegoingtoinvestigatethesethreecomponents:
Valuegenerated,PricepaidandincurredCosts.
A HowmuchvalueourideacreatestotheCustomer?
Understanding the value that the Customer gives to our idea starts with
understandingwhoourcustomer isandwhich isthesituationortheprocesshe is
involvedin.
TheCustomer is inthatsituationbecausehewantstoachieveacertaingoal.Ifthe
goal isbeyondhisreach,thisisaproblemthatneedsa(our)solution.Anysolution
caries some characteristic (attribute) that has specific ability (features) thatmake
possible to make a further step (get a benefit) towards the ultimate goal of the
Customer.
ACustomermaybein2situations:orithasaGOAL,orithasaPROBLEM
1)heknowswherehewanttobeinthefuture,butdonotknowhowtogetthere
2)
he
has
envisaged
how
to
get
there
and
is
looking
to
the
best
way
to
fill
a
gap
betweenwhereheisnowandwherehewantstobe.
In the first case he is actively looking to pursue a GOAL, and need a hand to
understandwhichisthebestwaytogothere.
Inthesecondcasehefullyunderstandhowtogothere,heknowsthePROBLEMhe
has to solve and hejust miss the right solution: piece of equipment, service or
information.
Thesecondcase(thePROBLEMcase)isabittrickyforasupplier,becauseCustomer
willtendtoproposehisvisionofthesolutionneeded.But inrealityhemostoften
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doesnothavethecompetencestodefineit.
This isway collectingVoiceof theCustomer inputs aboutwhat the attributes he
expectsfromthesolutioncan leadtodisaster.Evencollectinghis inputsaboutthe
features is not enough, cause he may describe just part of the problem (the
interfaceswherethesolutionhastoplugin),whatwereallyneediswhatbenefitshe
wantstoachieve:howhewillmeasurehowwellhisgoalhasbeenreached.
Whatwe really need tounderstand iswhat the Customerswants to achieve: his
GOAL:which is thejob thathehas tobedone, andhow,bywhich variables,he
measureshowwellthejobisgettingdone.
Letsstartfromtheprotagonist.
WhoistheCustomer?:FromCustomersneedstoCustomersGoalsACustomerissomeonethathasaGoal,someonethataspiretoachievesomething.
ButhehasagapthatseparateshimfromhisGoal.Thisgap ishisneed.Andweas
suppliersaretheonethathavethesolutiontoclearoutthatgap.
Tomakeanexamplethinkthissituation:imagetobeanownerofaRestaurant.You
getacallfromamanaskingforatablefortwo.Youmayimmediatelythinktoyour
menu prices and which of your table can fit them. You are going to solve his
problem,offeringasolutionforaprice.OryoucanthinkwhatistheultimateGoalof
yourCustomer.Thinkingwhatheisreallysaying:Ineedacomfortableplace,abit
ofromance,animpeccableservice,asoftmusic.Inthiscaseyoumaythinktothe
Value you can offer, and make sure you are going to great him by name at the
entrance,beattentive to thepartnerneeds,andwinoveracouple for the restof
theirlifesanniversaries.
YouunderstoodtheultimategoalofyourClient:aDreamfortwo.
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WhatCustomerdreamsofCustomersarethosethathaveaGoalandaproblem.Suppliersarethosethathave
solutions.Andyes:thereisabitofchickenandeggsgamehere:youneedtoknow
whoisthecustomerifyouwanttoaddresshisproblems.Butatthesametimethe
problem
and
why
Customer
need
to
solve
it,
are
the
starting
point
to
clearly
identify
anddescribetheCustomer.
InB2C thismay requireacustomersegmentation,orgroupingCustomers in34
categories that canbeunivocallydescribed, consideringwhat is theultimategoal
eachindividualClientwantstoachieveandaddressingtogethertheoneswithcloser
desires.
InB2B,understandingwhoistheCustomermayrequiretosearchtheactorsofthe
purchasingprocess.Eachperson involved into thisprocesshas its importance to
influencethefinaldecision.Therolesintheprocessare:Initiator(whoidentifiesthe
needs)Specificator(whodefineswhat isneeded)Decisionmaker(theonethat
willgetthebenefit)theBuyer(theonewhotriestocutdownyourprices)the
User(theonethatwillutilizethesolution).
IamhappyonlyafterIhavebeenabletolistthecustomers(ordescribethem,based
onsomecharacteristics)andgroup together those thathaveacommonreason to
wanttheirproblemsolved.
Wheredoesthesolutionfit?Whatproblemitsolves?
Who istheCustomerisnowclear.Andwehaveevenunderstoodhisultimategoal.
Thingsdonotrunsmoothlyforhim.Butwecanhelp.Atleastwethinkso.
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Tobesure,Itakeacloserlookandtrytoclearlyidentifytheutilizationsituationthat
makesourideaagreatfit.Youcanalwaysgetsurprisesifyoutouchbyhandinstead
makingaguess.ThisistrueforB2C(yourpumpkincouldendupinarisottoorlook
fabulousasaHalloweenlamp);ithasaspecialmeaninginB2B,wheremostofyour
productandservicesareinjectedintheflowofacustomersprocessandCompanies
tendtojealouslykeepsecretthewaytheyreallywork.
InB2C: understandingtheCustomerproblem;whatsolutionsdidtheylookatand
ultimately reject;whydid they chooseourproduct as the solution;howdid they
install our product or implement our solution; how is the customer using our
productrightnowandwhatresultshavetheyattainedwithit isthepaththatmake
youunderstandwhereyourproductfitsandwhy.
InB2B:Understanding the customerprocesswhere the solutionwillbeusedand
mappingoutitslogicalsteps,isimportanttocorrectlyunderstandtheultimategoals
of
the
Customer.
Knowing
its
goals
makes
you
understand
and
prioritize
the
benefit
thatyoursolutiondeliversandhelpquantifythevalueofthebenefitssoughtbythe
Customer.
IfweareabletounderstandwhatjobtheCustomeristryingtoaccomplish,thenwe
cangroup(segment)ourcustomerbythosetryingtodoaparticularkindofjob.
WeshouldbeabletodescribethecircumstancesinwhichtheCustomeris, whenhis
necessityappears, anddefinethecausaltythatmadethephenomenonoccur.Inthis
wayweshouldbeabletopredictwhenandwhyCustomermayrequireourhelp.
Ifyoufailtobeabletodescribethiscausalty,yoursegmentationwillendonbeing
basedonattributes:youarenotgoingtodescribewhyacustomerhasaneedbut
onlyhowheneeds.Soyourforecastswillbebasedonlyonthepast,andnotwillbe
abletobuildamodelofthefuture.
Atyourdischarge,isthefactthattherareatleast4mightyforcesthatdriveyouto
segment yourcustomersby theattributesofyourproduct, insteadby the reason
behindtheirneed:
4reasonswhyyousegmentinthewrongway:1)Your fear that focusingyourproductona customerneed, youwill loose the
opportunity to sell to other customers, with different needs. In reality is the
contrary:afocusedproductstealscustomersfromundifferentiatedproducts.
2)You (oryourBoss)ask formarket size (forwhich the IThasdata ) insteadof
whatcustomersneedstoaccomplish(forwhichtheITdonthavedata)
3)Yourretailchannelstructureisattributebased:theyaskyoufor300strawberry
milkshakestoputontheirshelf,andnotsendmemilkshakeforkidsparties
4)alltheadvertisingisCustomerbased:Young,old,females,men,andnotonthe
circumstancesonwhichyouhaveajobtobedonebased:whenyouarepreparinga
marathon,
when
you
are
cleaning
a
home
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Asnapshotonprocessmapping:
You may find several good books about process mapping. But here are my
recommendations:
1) Startwith theend: i.e.anyprocess transforms something intoaproductorservice that isdelivered tosomeone.Find thatsomeone, this is thestarting
pointofyourprocessmap.
2)Maponlythelogicalsteps,nottheactivities.Thedistinctionisthatthelogicalstepsdefinethechange instatusoftheresourcesprocessed.Donotbother
abouthowyoumake thechangeofstatushappen. i.e: ifyouhave togo to
ParisandYouareinRome,youchangeyourstatusindependentlyifyougoto
Parisbyfeet,car,trainorairplane.
3) Track the deliverables at the end of each step: not the logical step itself.Deliverables at the end of a step: have changed status. Tracking the
deliverablesstatus,youtrackthelogicalstepcompletion.
(Moreonprocessmappingonmysixsigmashortcourseforgreenbelts, askforit)
Whichsolutiondowedeliver,andhow? (S.O.R.C.)
Thisquestionmayseemsoffensive.Afterall,ourfantasticideaissosimple!
But try to explain it to a Customer. I always need to develop very convincing
arguments. This is the reasonwhy I start describing the idea immerging it in its
utilizationsituation:itbecomeseasier.
I
start
with
its
attributes
(e.g
here
is
a
lamp),
then
I
describe
its
features
(e.g.
that
gives light)andultimately I identify thebenefitsachieved through them (e.g.so
Youcansee).
You may want to qualify the benefits delivered by each attribute. Doing so, I
occasionally discovergapsversustheexpectedresults,oropportunitiestoexpand
the product from itsphysical attributes to its service content. Sometime You can
evenexpandittofunctionasaplatformforfurthersolutions.
Agoodwaytoscrutinizeandproperlydescribeourideaisalwaystocompareitwith
whatothersprovidetosolvethesameproblem.A looktowhattheCustomerhas
usedinthepast,isusingnow,orwillgoingtouseintheforeseeablefuturewillhelpyou refine what our solution actually delivers, how is really made, and if its
supportedbyotherproducts,services,orsystemsas othersare.
Sometimethecompetitivesolutionsgobeyondsolvingtheproblem,andassociate
to themselves ideas, feelings, beliefs, andmyths that are even stronger than the
solutionitselfinreassuringthecustomerofhavingreachedhisultimategoal.
So, going from attributes to features till benefits give a great opportunity to
understand the ultimate goal of the customer. This will help you later on, when
lookingtomakeyourideamemorabletohim.
Howmuchvalueoursolutiondelivers?(inB2B)
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Wemustbehonesthere.Wedonotknowhowmuchourideaisworth.
Evenwhen I think I know, I discover later on that Customer has totally different
opinions.Andnotalways itsabad surprise.Moreoften thannot,Customersare
readytopayhigherpricesforouridea,thentheonewearejusthappytoask.
From bad and good lessons, I learned to check with him directlyafter a bit of
homework. Justnot tospoilourprice from thebeginning.Afterall therearevery
fewMecenateoutthere,readytorecognizefullythevalueofourwork.
There are countlessways that aim at identifying andmeasuringhowmuch value
Customergives toour idea.Anda lot iscomplicatedby thedefinitionofValue:
classic marketing manuals can refine the meaning up to search for ultimate
customer beliefs or stay a bit more comfortable in searching for the immediate
benefitsandattributesthataspecificofferdelivers.
Whateverthewayselected,Iproceedintwosteps:FirstIqualifythevalue,looking
athowitisgenerated,thenIquantifythevalueforeachcategoryIveidentified.
WhendealingwithB2C,toqualifyandquantifythevalueofanidea,Isawpeoplego
very plain and just trust their personal feeling, as well as companies go for
complicatedstatisticalanalysisasConjointandDesignofExperiment.
Is a tough argument where I ventured only seldom. What I can say is that the
AmericanMarketershaveinventedthepilottestingofnewideas.AndIthinkthatis
a
good
move.
WhenintheB2Barena,thingsgetsimpler.
Therearebasically4typesofvaluethatourideacandeliver:S.O.R.C.
1)GeneratemoreSales2)ReduceOperatingcosts(financialcostsincluded)3)Reduce the overall Risks associated to the business of Your Customers
(startingwiththeriskofusinganunknownsupplier)
4)ReduceCapitalCosts(Capex)Each of this Values Components can be investigated, referring to the Customer
processoursolutionisintendedtoimpact:
ThemoreSALESValuescomponent.OursolutioncanhelpCustomersalesinseveralways.Butwecanclustertheminto2
bigcategories:
1) TheonesthatincreasetheNumberofgoodssoldbyCustomer.
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2) TheonesthatincreasethePriceofthegoodssoldbyCustomer.Forexample:Youmayproposeanofficeautomation tool thatdramatically reduce
the average lead timeof your customer goods. Thismeansmore pieces soldper
period.
Oryoumayintroduceasoftwaresolutionthatdramaticallyenhancethesatisfaction
ofYourfinalcustomer,leadingtocommandbetterprices.
HereisalistofplaceswheretolookformoresalesValuecomponent.
performance
timetofirstproduction/delivery
availability
reliability
offdesignconditions
performancedegradation
services&emergencies
ThelessOPEXValuescomponent:Again,byopeningthecustomerbalancesheetand incomestatementwemay find
clear suggestions tounderstandhowmuchour idea isworth.When I lookat this
ValuecomponentIgivealargemeaningtoOperatingCosts:allthecoststhatchange
as theCustomer sales change.Checkouthowmuchmanhours,directmaterials,
supervisorymanhours,consumablesetcoursolutioncansave.
Herearesomeexample:
directmaterials manhours/headcount training/professionalism/headquality fuelcosts consumablecosts underpinningcosts tax ecocosts stockslevels/inventory ThelessRISKSValuesComponent.Thisvoiceisabittrickiertodescribe.But thisisthemeaning:whatevermakesyour
customers business more risky, automatically reduces the value of the business
itself.
To
make
an
example:
our
customer
may
be
able
to
sell
100
pieces,
but
if
his
customerspayonly80%ofthetimes,ourcustomersalesareworthonly80times(if
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notless)theaverageprice.ThereforeCustomershouldappreciateanysolutionthat
reduces his business risk andmakes that probable 100% amore likely realized
figure.
IsayshouldbecauseRiskshouldnotonlybethere,butshallevenberecognizedby
theCustomer.It isnotalwaysso:peoplehavedifferent levelofriskunderstanding,
andrisktolerance.
AssumedourCustomerfeelsDamoclespain,ifourideahelpsreduceCustomerrisks,
itcreatesvaluetohim.
Asanexample:justthinktothelowerinsurancefeeaCustomercanpay,thankstoa
newsecuritysystem.
Here You may want to go creative. And Probably you will make your customer
discoverrisksthathewasunderlooking.
Herearesomeexample:
fulltestedsupply reachability(servicelevel) KnowHowcosts returnsintechnology personalrelationship brandleveragingvstopmanagement integrity evaluationrisks financialrisks politicalimpacts ThelessCAPEXValuescomponentFew pages ago we have defined the situationwhere the Customer is in and the
processestheCustomer isusingtoachievehisgoals.Nowwegoa leveldownand
lookattheinfrastructuretheCustomerhascreatedtomakehisprocessdeliver.
SometimeaquicklookatCustomerBalanceSheetcangiveanideaofthestatusof
his
infrastructure:
how
much
has
it
been
used
so
far
(depreciation),
what
recent
investmentshavebeendone,which is thebiggest infrastructurepiece (wherehis
attentionisfocused)andalike.
Thenwecanthinkatdifferentwaysourideacanreducethoseinvestmentscosts.
Herearesomeexample:
solutionprice(thisiseasy) sparepartsprice duration/depreciation
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partscommonality Terms&Conditioncosts warrantiescosts installationcosts plantinducedcosts(asimpleexample:theparkingfortheemployees) financialaids taxesandincentives upgradesandoptionscapabilities customization/standardization bundlebuy ecocompliancecosts expeditingcosts/QualityControlSummary:
Thinkingwhere,(amongSALES,CAPEX,OPEXandRISKabatement),ourideacanhave
animpact,makeseasierqualifyandquantifythevalueithasfortheCustomer.
IkeeptrackofanynewtypeofimpactsIfindaslongasIidentifythem,causeinB2B
the ultimate goal remains to make money and this attitude leads to common
approachesindifferentindustries.
Andsometimecrosslinkingthiscategoriescanhelpidentifysomeunexpectedvalue
andnewwaystoconvincecustomertobuy.
HowmuchdoesCustomerneedsit?
AtthispointofourRoadmapweknowwhoourCustomeris,whenandwhyhemay
be interested inour idea.Wehavearticulatedour ideaandassociatedapotential
valueitcandelivertoourCustomer.
NeverthelessourCustomerdonotshowanysignofinterest.
TheValuethatourCustomerplaceintoasolutionto problemdoesnotdependonly
ontheamountofvalueorthesizeofthebenefititcandeliver.
Itdependsalsoontheurgency,theperceivedrisk,andtheavailabilityofbudget.
Forthislastreasononly,manyprefertomakebusinesswithrichpeople.
TogaugetheinterestofapotentialCustomertomyidea,IfindusefultouseKANOs
analysis,evenifKanoitself,probablywouldnotusehismodelthisway
KANOsmodelclustersthefeelingtowardasolutionin4baskets:
Solutionsthatcustomerfeelsas:
INDIFFERENT:somethingthatdonotreallychangehislife.
MUST
HAVE:
is
something
critical,
and
must
be
performed
in
a
way
or
another.
NICETOHAVE:somethingthatisniceandcool,butCustomercanlivewithoutit.
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THEMORE THEBETTER: something that isof value andCustomerwill get great
benefitrightnow.
Youmayhave theperfect solution,butCustomermay feel solvehisproblemnot
necessary,noturgent,tooriskytotackleortheproblem improbabletohappen,or
simplynothavingthebudgettosolveit.
Another way to understand the Customer purchasing intention is to test them:
collectinghis comments,askinghimdirectly, looking forwhat are the tendencies,
rumors,andfeelingsinhiscommunity.
Mostof the time theproblem isalreadybeen tackledby theCustomer.Trying to
understandwhatsolutionsheused inthepast,whatalternativerouteshetookto
solvetheproblem,whatlevelofbenefithegottillnow,(assuminghehadany)and
themain difficulties encountered so far, are good information to understand the
urgencyandtheBudgetavailability.
Furthermore, listeningtotheVoiceoftheCustomer (VOC)allowsmetotestproof
much of the assumptions made and discover unexpected feedbacks and
considerations.
Whatadvantagesgivesoursolutionvsotherssolutions?
NowwecancompareoursolutiontotheoneoftheCompetition.
YoucangotoMichaelPorterbooksforanoverviewoftheproblem.
WhatItendtodoistolookatcompetitioninrelativeterms.Ilookforgaps.
Lookingatwhattheideashaveincommon,itisnotacustomersselectioncriteria.
ThefirstgapisversusthedoNothingcompetitor.Whatistherealdamageofnot
tackling theproblem? Ifweare so lucky thatCustomerhasnot tried anything till
now, he probably is not aware of the problem often not a good sign of
appreciationforthesolution.
Then
I
compare
what
Customer
is
doing
now
and
what
has
done
in
the
past.
Iespeciallytrytounderstandwhyheisunsatisfiedoftheresultsobtainedsofar.
FinallyitcomesthetimeforRealCompetition:alternativeandcompetitivesolutions.
Alternativesolutionsaremoresubtle:thinkatthedifferencebetweenavaccineand
a daily cure for allergy symptoms. The two are competing, but they solve the
problemindifferentways.
Competitivesolutionsarethosethatcanreplaceyoursrightnow.
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Porterdescribestwotypesofdifferenceincompetitivenessorrelativevalue:
ThefirstreferstothoseattributesthatimpacttheEffectivenessofoursolution.Our
ideas carry some attribute that work better and the customer will get greater
Benefits(creatingmoreValuefortheCustomer).
ThesecondreferstotheEfficiencyofthesolution:howmuchvalueour ideatakes
out fromCustomerspockets (destroying lessCustomersValue),while solving the
problem inadecentway.Porterreferstopricecompetitiveness.Wearegoingto
investigateitinthesecondchapterofthissection.
Summary:
CustomerwillcomparetwosolutionsbasedonthenetValuehewillreceive.
ValuegeneratedValuedestroyed. I.e.EffectivenessvsEfficiency
Whencomparingthedifferencesbetweencompetingsolutions Itendtokeepnote
only of the Delta: what is in one that is not in another. This forces to focus on
tangibledifferences.
B WhatPricewillbepaid?
Thesecondcomponentofattractiveness isPrice.Themorewetakefromcustomer
pockets,thelessvalueweleaveinhispocket.Thegreatestthevalue/priceratio,the
highesttheprobabilitythatYourproductwillbesold.Asafirstmovewecancheck
outthisratioroughly.Aratioof25(i.e.customerwillgain25timesthepricespent)
is a good minimum threshold. Consider that when we will talk about the 3rd
attractivenesscomponent (Costs),this ratiowillbereducedbythecostsCustomer
willincurtouseoursolution.
Howtosetprices?
Strategically:
Beforetothinktothepriceofanewproduct,Ilookatitfromadistance.Itakea
moment to think to the segment, cluster or industry where my idea will be
proposed.Isitwealth?Isittrendy?IsmyCompanybrandpositionedaspremiumor
luxury?Or is it a follower?Andwhat have been the trends of prices?Are being
squeezedbythemarket,orhighdemandcancommandhighprices?Abirdeyepoint
of view and a comparison with what happens in other adjacent segments or
industriescanhelpalottosetadirectioninyourPricesetting.
Competitively:
Thenextstepistolookuptothecompetition.Anewsolutionanditsnewpricehas
to confront with other solutions, the simple fact of add a solution/price to the
Customerschoiceslisthasanimpactoneachpriceonthesamelist.
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Proposing on the market the wrong price can destroy a niche or an industry,
initiatinganiterationofcompetitivemovesthatbecomeeasilyoutofcontrolofthe
priceowners.
Itstheprice/demandelasticity.Andtheeasiestwaytosummarize it is:bewareof
crowdedmarkets.Everycompanyshouldtendtobethemonopolist.
Transactionally:
FinallyIstartthinkingaboutthenegotiationprocessthatmyproductwillgothrough
when put on the market (even if You set a fixed price, actually you have pre
negotiatedit).Thestepsthatthenegotiationprocesswillbemadeof,willactually
setthefinalcashyouwillget.Thisistherealpriceyouhavetoconfrontto.
Howmuch?
How
much
is
definitively
the
Question:
Price
is
the
marketing
variable.
Isoneofthefewthingsyoucanalwayschangeabruptlytoachieveyoursalesgoals.
Price is your resourcewhen you need to counteract or deploy some competitive
strategy.Itseventheretoprotectsomesalesmanfrompoorsalesresults.
TosetPriceforanewideaImakereferencetothree(andahalf)waystodoit.
As a first option, I check if I can define a price based on the benefit (Value)my
Customer will achieve using my idea (value pricing). Then I know I have to take
competitionintothegame,soIcheckouthowtheyprice(marketpricing).Asalast
resource Idothesimplething,andaddaprofittomysolutioncosts:probablynot
thebestwaytodoitbutatleastasafeway(costpluspricing).
SometimeIappealto anultimateresource:anhalfwaytosetareferenceprice:I
ask Customer to set the price. Not my preferred choice but, with a walk away
optionembedded in thenegotiationprocess,You canevenhave some verynice
surprise.
Valuepricing
IfyoumadealltheRoadmapstepstillnowYoushouldalreadyhavetheelementsto
gaugethevaluethatyoursolutionbringstotheCustomer.Youcannowcheckout
theindustryorcompetitivemultiplesto setthePrice.Youcangotosimilarsolution
offeredinotherindustryandcheckouttheratiosused.Thisisgoodpracticeanyhow,
because Customer buys other stuff too. And those prices help him to build his
expectedprice.
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Marketpricing
As said, most of the times we are not alone on themarket. Customer can have
severalsolutionsathisreachandthisforcestothinkintermsofPriceParity:i.e.try
tosetapriceinlinewiththecompetition.
Itsoundsabitcollusive,butitsastartingpoint.
AssumingIamabletofigureoutaPricebenchmarkamongcompetingsolutions,the
nextstepistochooseamong:astrictpriceparity;sellmyideaatapremiumpriceor
atdiscountedprice.
Inamarket,oftenoneofthecompetitorsisthepricemaker.Thepricedecisionhas
tobetakentakinghisgoalsintoaccount.If,forexample,Iwanttotryadiscounted
pricetactictoenterthemarket,Igiveclearsignstothecompetitionthatthispriceis
an interim price, to try avoiding price wars. Customer get the message too, and
mustbeclearthatthepriceisnotcarvedinstone,butanencouragementtoatrial.
Costpricing
Placingamarkupabovethepurchasingcost isacommonpracticefordistributors.
Thelogicis:first:coverthecosts,oryougiveawaywealthforfree.
Forthisreasondefineapricerequirestohaveaclearideaofthecostincurred in
creatingtheproductandbringittomarket.Thisisnotaneasytask,especiallywhen
huge capital costsand investmentsare involvedand thengoodsare soldat small
price.AtrickIuseinpreliminaryanalysis,whenallthecostsarenotclear,istorefer
tothecostofsimilargoods,forwhichIhavebetterdata.Canbethepreviousrelease
of
the
product
or
something
that
I
can
buy
on
the
market
and
for
which
I
have
companyinformationthatcanestimateContributionMargin.
Sometimesellingatbreakevenprices isnecessarytostepbeyondademandcrisis,
but on the long run working for free becomes challenged by moving in other
businessactivities.SoIprefernottosetabreakevenprice,withoutconsideringthe
lifetimevalueofthebusinessinitiative.Inotherwords:isnotthebreakevenofthe
last quarter, but the total life cycle break even of the business venture we are
starting.
TransactionalpricingTill here: theory. But sometime it happens I have to start a negotiation without
having aprice inmind.We alwaysdobusiness in ahurry andwe arenot always
ready.Inthiscasewemaywanttotestproofourassumptionsaskingthecustomer
tohelpussettingtheproductprice.
Notmypreferredstrategy,but thisway tosetpricecangivenicesurprises (when
Customervaluesour ideamuchmorethanwhatwesuppose andwouldbevery
interesting to know why) or strong delusions (when customer forward a price
belowourexpectationagain:takeabetterlook).
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ThisprocedureofaskingtheCustomeraPrice,canbeveryannoyingiftheCustomer
has a strong competitive negotiation style. Sowould itwouldbepreferably used
withcustomerthatdemonstrateacooperativeattitude.
Customersnegotiationstyleshallbetakenintoaccountinpricesetting,because a
pricecanbedefinedforeachtransaction.Thenegotiationphaseofthebusinesscan
greatlyaffectthecashultimatelywillreachourpockets.There isadecayfromList
price, Invoice price and Pocket price. Setting the price should mean set the
tolerancesofeachphaseofthenegotiationprocess,causeeverypercentagepointof
pricegained,goesdirectlyintoourProfit.
Howdoesthepricechange?
Pricedont changejust duringnegotiations, to get theorder signed. Ithas to be
modifiedtoextolthemost,indifferentsituations.
NotallCustomersvalueourideainthesameway.Ifweareabletopackagetheidea
differentlyforeachCustomersegment,wecantrytocommanddifferentpricesfor
thesamesolution.
Ifwearegoingtousedifferentdistributionchannelstoreachthecustomers,each
channelmaybeservedwithadifferentpricethattakes intoaccounttheshopping
convenience.
Priceofaproductchangesduringproduct lifetime:forexamplehightechproducts
have to harvest the most at the beginning of the business life, to assure fast
investment recovery when competition cant copy it. While at the end of their
business life cycle, price could be reduced to make it affordable to anybody.
(Attentionnottocannibalizeyournextidea,tough)
Pricechangesdependingonseason:saleperiods,specialeventsandanniversaries.
I give a thought since thebeginning to theeffectsofpromotionalor competitive
tactics like discounts, trials, refund policies, customer retentions and customer
satisfactionactivities.
Igivealookatpricecomponentstoo:howtobreakdowndownpayments,prorata
andcollectionpoliciesmayhelpthebusiness.
Summary:
SettingPriceisnevereasy,especiallyfornewproducts.
Yourindustry,YourCompetitors,YoursupplychainandYourCustomermayhelpyou
findtherightone.AndPriceisaverystrongtooltomaneuverintothemarketarena
Havingaclearunderstandingofhowfarwecanplaywithit,mayhelpalot,lateron.
C WhatadditionalcostswillbesustainedbytheCustomer?
Price isnot theonly thingourCustomerwillpay foroursolution.Shewillsustain
coststomakeourproductpartofherworld.Notonlyshewillhavetomodifyher
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habits,orchangethewayshethinkstotheproblem,butwillneednewinvestments,
new infrastructures and systems. Sometime she has been able to externalize the
costs of the problem.Our solution could bring these costs back. In this case the
assumedvalueofourideacanbemuchlowerthanwhatwecanthink.
Investments:ImplementingourideainsideCustomerprocessmayrequireseveralinvestmentson
herside.ApartthehardStuffcapitalequipm