The Challenge of Capturing Value through Innovation: Show Them the Money, Pt. 1
After reading CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, a business executive reached out and explained that he and his firm were grappling with the challenge described in the case study in the book’s first chapter, namely that of capturing value from innovations offered to customers who seem to care only about price. He expressed the following observations:
“I was very excited when I saw the title to your first chapter, “Your Customers Want More – and They Will Pay for It.” That’s what we have failed to find in our customer base. They will take our innovations, as long as there’s no higher price associated with them. However, anytime we try to convince them that they should pay more for products we know are superior, they balk.
Our firm has done many of the things your book recommends. We have segmented our customers, and we can identify those that should value innovations and reward us for them. We aren’t trying to foist “better-best” products on customers that only need and want “good” products. We have done the research to understand the unmet and poorly met needs of our customers, and our investments are oriented towards addressing them. We no longer are doing research and development projects for their own sake.
I think one of the problems is that we can’t make the case that our products are better, that the customer will in fact get value from them. We hear over and over that everyone claims to be superior to the competition. We hear from our customers that every competitor tells them that they offer the best products. It seems that our customers are treating our claims, and those of our competitors, as business versions of deliberately misleading statements. Therefore, if our customers don’t believe that our innovations create value and that our products are any better than those of our competitors, they certainly aren’t going to reward us for providing them.”
Since the publication of CoDestiny, the challenge of capturing value associated with innovation has become even more widespread and more complex. Blue Canyon has been involved in countless engagements and discussions with executives facing this problem, and in the process we have identified new challenges that have to be overcome in order for firms to capture the value they are delivering to their customers through innovation. In Pt. 1, we will describe the first of two such experiences, and offer some additional insights that will be useful to firms that are still facing this challenge.
Show Them the Money
The experience of skeptical customers—as the business executive expressed above—is a common one. There are industries in which customers are quite skilled at measuring the value of each supplier’s offering. The commercial vehicles industry, for example, includes many sharp-penciled fleets that keep careful track of metrics like fuel economy and maintenance activities in order to identify which supplier’s components (engines, transmissions, axles, etc.) deliver savings. They reward those best-in-class suppliers with their business, and often are willing to pay an upcharge to the truck manufacturers to ensure those components are on their vehicles. Many suppliers of energy efficient products are able to document the savings their products offer to the satisfaction of their customers, and are rewarded through either share or price premiums. Yet, not all firms are so fortunate as to have sophisticated customers or products where bottom-line contributions are easily measured. It is in those other clusters of customers that the skeptics are concentrated.
In numerous business settings, Blue Canyon has come to conclude that trying over and over to make the case for superior performance involves repeatedly banging your head against the wall, with little to no impact in the end. Customers are naturally skeptical, and that tendency is reinforced by competitors who are often either willing to exaggerate their own claims, or who can muddy the waters with unreliable statistics.
When customers dismiss claims about superior performance, success in such settings often requires finding some way to “show them the money.” Doing so is not always possible, but there are instances in which success can be achieved through a creative offer. For example, one of our clients had failed to gain any market traction with an innovation that extended the service life of the equipment that they manufactured. The firm’s claims and documentation were met with skepticism by customers and counter claims by competitors. Blue Canyon identified a way for this firm to “show them the money” that would be saved through the purchase and use of their equipment. Our client developed an extended warranty for their equipment that was economically feasible because of the product’s longer service life. Matching that offer would have been a costly burden for their competitors. As one executive commented, “The extended warranty gave us, for the first time, a proof statement that couldn’t be discounted, that couldn’t be brushed away. And the market finally began to recognize that our claims of longer service life were valid, that the benefits were real, and did, in fact, translate into value for our customers.”
For this firm, the identification of this opportunity emerged from a rather simple exercise. A team from this firm was asked to put themselves into the shoes of a customer organization, and to think through how they might recognize the value that was associated with the product in question. As part of this exercise, they systematically worked to identify and quantify the “value pools” that were associated with the use of the product, and then to determine which of them might change as a result of the improvements that had been introduced. Some value pools didn’t budge (e.g., in this case, there was no gain in energy efficiency from the new product), but others—like the cost of maintenance—did. Once this was recognized, it was a short step to identify that an extended warranty was a route to proving that their firm’s claim was real, that the customer didn’t have to take it on a leap of faith.
Most solutions come from thinking through the options from the perspective of the customer, and this was still another example of that route to success. If your firm is facing a similar problem of skepticism, the exercise described above—determining whether some value pools would in fact change—might yield the insights necessary to get past skepticism and make your claims feel real to your customers. Also, if you can show a customer potential savings in a value pool that they recognize, getting them to share in such gains is a far less challenging task than getting them to accept based on claims of product superiority.