In dog beers, IÔÇÖve only had one

I recently received an email from a business acquaintance who had somehow come upon the book I coauthored and published in 2010 (CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs). His email 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. His email included 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. But 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 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 R&D 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 like ‘In dog beers, I’ve only had one’. And if they 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, I’ve learned that the challenge of capturing value associated with innovation is probably more widespread and more difficult than I believed at that time. I’ve had numerous engagements and discussions with executives facing this problem, and in the process learned of new challenges that have to be overcome in order for firms to capture some of the value they are delivering to their customers through innovation. The following paragraphs describe two such experiences, and offer some additional ideas that might be useful to firms that are still facing that challenge.

Show Them the Money
The experience of skeptical customers described in the email that I cited earlier 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. But not all firms are so fortunate as to have sharp-penciled customers or products where bottom-line contributions are easily measured. And it is in those other clusters of customers that the skeptics are concentrated.

In numerous business settings, I’ve 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 through the use of one of the many ways we’ve all learned to lie with statistics, even involving metrics like “dog beers”.

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. One firm with which I worked had failed to gain any market traction with an innovation that extended the service life of the equipment that they manufactured. Their claims and documentation were met with skepticism and counter claims by competitors. What finally worked for them evolved from a recognition that there was a way to “show them the money” that would be saved through the purchase and use of their equipment. This firm developed an extended warranty for their equipment that was economically feasible for them because of their 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 faith.

In some important ways, there is nothing particularly creative about what this firm did in order to solve their problem of skeptical customers. Most such 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, of 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. And, 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 on faith statements about product superiority.

Incompetent Customers
Another firm in the capital equipment industry that I worked with recently had recognized the opportunities associated with “Big Data”, and created a generation of smarter equipment that had the potential, along multiple dimensions, to yield cost savings to customers that purchased and utilized it. This firm understood that for business-to-business firms, the most significant contribution from today’s incredible information technology was likely to be linked to data-driven innovations that resulted in performance improvements over the life cycle of operations.

In their own testing, they found that this new generation of smarter equipment was projected to yield 25-30% savings in operating costs over its life cycle, with a relatively short payback period. In this instance, the challenges of skepticism weren’t overwhelming, as the savings were in well-understood value pools, ones that were already on the radar scopes of this firm’s customers as important cost elements to be managed. And in a few pilot programs that this firm conducted for interested prospects, they were able to deliver savings consistent with that projection. And as a result, they were able to make some good initial sales.

The problems began to surface shortly after that. In a relatively short period of time, they began to hear reports of disappointment from their customers, the early adopters who were going to be critical to the eventual success of these new products in the broader marketplace. One customer shared his opinion in the following comment: “After the hype comes the inevitable disappointment. We were sold on big savings, but what we are seeing barely moves the needle. I’m afraid it’s an expense that can’t be justified.” Another customer shared the observation that “We track this week by week, and were expecting a big improvement. I’d defy anyone to point out on the tracking chart when we installed the new equipment. It’s just the same as before.”

The mystery of this disappointment was rather quickly solved. What worked in the labs and in the hands of pilot program experts didn’t easily translate into operations in the “real world”. One individual characterized the problem as that of “incompetent customers”, while a more charitable individual described the problem as that of “failing to recognize that while the equipment was very smart, there weren’t operators in place that were trained – and that had the time – to take advantage of it.” That same executive went on to comment that “We did a great job of designing the equipment, but we didn’t think through how it would be used in customer settings, what would really be required of our customers to fully take advantage of it.”

Once again, this revelation is not particularly unusual. In instance after instance, success in the labs is not translated into success in the real world unless there is attention to the changes that will be required in the business models and operations of the customers that implement the innovation. Understanding the new skills, competencies, training, time, and incentives that will be required to ensure that change will take place is as much a prerequisite to success as is the technology associated with making equipment smarter. This challenge is a particularly acute one for innovations that involve such “Big Data” concepts, as the introduction of such technology can be a major change in many environments in which it is introduced.

This firm was able to implement a solution that resolved the challenge of those “incompetent customers” by moving responsibilities out of the day-to-day operating environment to a central site manned by experts who had no other responsibilities than that of ensuring that the potential of the savings offered by this smart equipment was in fact realized. That step added a bit to the cost of the overall solution that the firm brought to its customers, but the gains nonetheless remained more than adequate in terms of the ability of this equipment to create value for the customer and the supplier alike. So even in instances in which skepticism can be overcome, it’s important to think through everything that will be required to ensure that the benefits of an innovation are in fact realized in the real world.

Capturing the value associated with innovation remains a challenge for many firms. Far too often, businesses still hear the message described in a case study in CoDestiny: “If an idea costs a dime more, it gets rejected out of hand”. The problem isn’t going to go away, and, as the case studies described here illustrate, new dimensions of the problem surface almost every day. Finding out how to get beyond skeptical customers and ensuring that good ideas remain good ideas when translated into the real world are among the steps that firms can take to address this ongoing challenge, to make sure that the value they are trying to create can be translated into value that is captured for their shareholders.