During a recent discussion, a customer of one of my clients described an episode of the popular television series House in response to a question that I had asked. In that episode, Drs. House and Wilson had made a bet as to which could hide a chicken in the hospital for the longest time without being detected by security. A young doctor on the staff asked a colleague why each of the two senior department heads had chickens in the hospital. The answer she got was “The store only had one pig”.
The interviewee connected this story to my question about our client’s product development contributions as follows: “Every year, your client comes to us with a new release of their product, touting some new features and capabilities. We always ask them ‘Why did you do this?’ and get some sort of an answer. Now I realize their answer is the equivalent of ‘They only had one pig’. It is an answer, technically accurate, but doesn’t really address what we are asking, namely ‘What makes you think these changes will be of any value to us?’” He went on to characterize the most recent several releases of our client’s product as being totally disconnected from what they needed as a customer. His concluding comment was that “Maybe someone in your client’s engineering department thinks these are good ideas, but clearly no one has ever asked us customers if we share that opinion”.
While this executive’s perspective was a troubling message to take to this client, the truth is that their firm is far from alone in terms of investing in innovations that produce nothing by yawns on the part of customers. Several years ago, two of my colleagues cataloged the most frequent external inputs to product development as follows:
• Last call certainty – Ideas advanced that react to the most recent customer visit.
• Incrementalism – Ideas focused on small-step improvements to the current product.
• Technology infatuation – Ideas surfaced by experts enamored with technology they have seen elsewhere, heard about, or personally developed.
• Copy-cat imitation – Ideas advanced because a competitor has gone in this direction.
• Brainstorms – Ideas advanced as a result of an inspiration. What is unfortunately missing from this list is the recommendations of customers.
Thinking about your customers – not just your direct customer, but customers at every stage of the customer chains in which your firm participates – provides the inputs for an approach to innovation and product development that can yield a higher payoff. As the executive quoted earlier went on to say, “We know exactly what your client should do in terms of evolving their product. And we’d be excited if they listened and took our advice. All they’ve ever needed to do was ask.” For almost every firm, this executive’s advice is correct and relevant. Customers know what innovations would be of value to them, and are almost always willing to share their ideas.
There is a systematic way to think about your customers and elicit ideas that will create value for them and lead to rewards for your firm’s shareholders. In CoDestiny, we outline three ways in which a firm can bring value to its customers – helping them to grow volume, helping them to achieve a higher price point, and helping them to “take costs out” and strengthen their bottom-line margins. These three routes to success always work, and they work when it comes to identifying innovations and new product strategies.
As an aside, these three concepts also provide a litmus test for ideas that are surfaced through traditional means such as those that were listed above. If the idea has merit, the sponsor should be able to explain how it will help customers grow volume, reach higher price points, or take costs out of the system. If they can’t make at least one of those connections, it is the right time to bring out the caution flag. And, in those instances in which the sponsor of an idea can provide a credible explanation as to how the idea will create value along one of these three dimensions, you now have the foundations for a productive discussion with the customers who are thought to be the likely beneficiaries of the idea. More often than not, discussions with customers that are focused on the reasons why the innovation is believed to create value will yield one of two outcomes. One possibility is that you will learn that it is wishful thinking, that the customer doesn’t buy into the value calculation. It’s rarely wise to just accept that outcome and discard the idea, but it is almost always wise to hear their reasoning and objections. The second possibility is the more exciting one, when the customer agrees with the potential. In those instances, there can be incredible value from interactions that result in a “customer-written product development plan”. After all, who is better at saying what they will value then your customers?
Listening to customers is, of course, always a challenge, always with the potential for distractions and misleading messages. That reality applies to discussions about innovation and product development as well as to the other topics where conversations are important. It is critical to separate the innovations and product development contributions that genuinely create value for customers (and allow you to capture value for your own shareholders) from those that don’t. In truth, customers are often as guilty as your own organization’s team in terms of being swayed by interesting technology, competitor offerings, or other such factors. But when approached correctly, the potential for your customers to contribute high-value insights is great.
Ideas that help your customers to increase sales volume
The first means of creating value for customers involves contributions that help them to increase sales volume. To get at ideas that contribute along this dimension, the focus of discussions has to be on what the customer believes is impeding their growth. Productive lines of discussion involve two routes to greater volume – taking market share and reaching “adjacent” markets.
Most customers respond to questions about how they can grow by focusing on what it will take to increase their market share, and this opportunity should never be overlooked. If a supplier can help its customers win sales against its competitors, your firm and your customer can both benefit from higher volume. If you can learn the dimensions along which your customer is viewed as inferior to its competitors, you might be able to identify contributions that can help to close that gap.
But another way of helping a customer increase volume is by helping them to identify new markets in which they can participate. Sometimes these new markets involve new geographies – entering fast-growth markets like China, India, or Brazil. It is remarkable how much of a contribution a supplier can make in this area, particularly if their customer’s entry strategy depends on understanding the peculiarities of the new country market, or if it has local-content requirements, or if new sales channels are required to reach end customers. The key thing to learn from a customer is what will have to change in order for them to be successful in a newly-targeted market. That insight can help to guide your firm’s product development plans.
New geographic markets are, however, only one option through which a supplier can work with its customers to find new sources of volume. Adjacent markets offer a similar possibility, but often require more creativity in terms of thinking. If the options were easy, the customer would probably have thought of them and already implemented then. Successful suppliers have come up with ideas in this realm by thinking of how their own products and services contribute across the customers and markets in which they are active, and then trying to spotlight lessons that can be taken to specific customers that build upon those broader lessons. Your customer is probably already thinking about adjacent markets and will likely value any insights you can bring as to how they can make the transition successfully. Bringing them ideas is a superb way through which to start a conversation that can lead to ideas about new product development options that will deliver value to your customer.
One firm, for example, had numerous customers that served the aftermarket in their industry with replacement parts and services. It identified other firms that only sold original equipment, and went to them with ideas about how to expand to a more complete life-cycle offering. In several instances, this idea resonated with the customer, and the two firms defined product development strategies to allow entry into the customer’s aftermarket environment. In another industry, a firm that developed a new sensor for use in highly-challenging environments involving extreme weather conditions subsequently did a systematic examination of other instances in which sensors might be subjected to demanding conditions. The project involved a combination of market research and brainstorming, resulting in the identification of nearly two dozen possibilities. They then did outreach to prospective customers, learned the issues that kept those firms awake at night, and commissioned several product development efforts to evolve the sensor’s capabilities into those application environments. Today, over 70% of the firm’s sales are in these additional markets.
Ideas that help your customers to reach a higher price point
The second opportunity for value creation, helping customers to reach a higher price point, is probably the one which is most confusing and challenging. It is rare to speak with any company that doesn’t cite the challenge of developing new capabilities that differentiate their product and respond to the challenge we cited in the title of the first chapter of CoDestiny: Your Customers Want More and They Will Pay You for It.
One approach that has generated constructive discussions with customers involves defining options through which customers can offer a standard product at their current price point and a new, high-end option at a higher price point. This approach allows the supplier to provide customers with a “no downside, real upside option”. If the option is selected, the supplier and the customer can share the rewards of reaching a higher price point, and if the option takes off and gains market acceptance, it can in fact move the market to the higher price point preferred by customers. The key question to ask your customers is of the form “Assume for a minute that your current product falls at the ‘Better’ point on the Good-Better-Best spectrum. Under that assumption, what would the ‘Best’ product look like?”
Sometimes a supplier can do their own market research or draw upon their own experiences to develop a roster of ideas that can be discussed with customers. Learning what is of interest to even a niche group of customers can be of great value, if a trade-up option relevant to that niche audience can be developed. Many of the options that we presently take for granted on our cars and trucks were first offered as trade-up options to a niche group of customers before becoming standard features on vehicles. Small items like cup holders, most of the consumer electronics used in vehicles (e.g., CD players, DVD players, navigation systems, security systems, etc.), and products like sunroofs began in the aftermarket as a post-sale option for those customers that wanted them. As suppliers helped the carmakers to see the increasing volume of customers that bought these products, the carmakers began to offer these features as options on their vehicles. Many of us can remember making the decision to buy the car with the CD-6 player and the sunroof, even though it had a higher sticker price. Today, many cars offer those options as standard equipment. The automotive industry is not the only one where this strategy has proven successful.
What it required to make this option successful is insight about what additional features are of interest to at least some niche group of customers. That is one of the reasons why, in this section and the earlier one, I have advocated using market research and experience to create a factual starting point for conversations with customers. Like anyone, your customers value it when you bring them useful information and insight. Doing so is always a superb way to begin a constructive conversation, one in which the customer sees your attempt to bring value to them and is oriented towards reciprocating. The other reason for the developing a solid fact basis is that of separating those ideas that have the potential to create value from those that don’t. As was noted before, not all of the ideas you hear from customers are good ones, so additional sources of corroboration can help to ensure a focus on the ideas that have merit.
Ideas that help your customer to “take costs out”
The final opportunity for creating value for customers is that of identifying how to take costs out of the system. This approach requires that firms take a new perspective on innovation and product development. Most frequently, the perspective about innovation and improvement involve better performance or more features. These are, of course, valuable contributions, and the source of many of the success stories associated with growth in sales volume or reaching higher price points. But they are not the only possible contributions from innovation initiatives, as the following comments from customers of various suppliers attest:
“It reduced our costs of manufacturing.”
“It eliminated two steps in the installation process.”
“It cut our warranty claims in half.”
“It allowed us to increase our efficiency in managing our shelf space by 25%.”
“It didn’t require protective packaging.”
“It allowed us to use the same component on three generations of our equipment, reducing inventory levels by more than half.”
“It was self-diagnosing, reducing the number of trips required to fix a broken unit by half.”
Every one of those statements was included in a supplier success story told by a customer about a highly-cherished supplier that had brought value to the customer. In none of these instances did the success story involve improved performance along the basic metrics relevant in the industry, nor did any involve new features of importance to end customers. But all of them helped the supplier take costs out of the system and improve their bottom lines.
Every supplier has such options, and innovation planning should focus on identifying them and determining whether it is possible to respond to such options for value creation. The best suppliers become aware of these options by building strong touch point relationships at all levels of their interactions with their customers. It’s highly unlikely that interactions between the sales and purchasing organizations are going to focus on discussions about shelf space economics, manufacturing process improvements, or packaging. But other departments within both the supplier and customer organization are acutely aware of problems and opportunities in these areas. And if those departments interact and share information effectively, it will often be the case that the supplier organization can identify innovations that respond to real customer needs.
It takes investment in relationships to get to the point where such innovation opportunities surface naturally, but such investments can have a huge payoff and significantly increase the number of instances in which innovations will be applauded by a supplier’s customers. Just asking your contacts in the purchasing department “How can we help your firm take costs out?” probably will elicit an answer of the form “Cut your price”. But asking the question of the right individuals throughout the organization can yield answers like those reflected in the various quotes presented above and point the way to product development options that create value that can be shared between the supplier and their customer.
To conclude, return to the challenge reflected in the comments made by the executive at the start of this article. The product innovations that were made only because “they only had one pig” were invested in because the firm failed to listen to the voices of its customers. When this firm refocused its efforts to learn what options would create value for its customers, it found exciting options within all three categories.
For the firm that was the subject of the executive’s harsh review, the outcome was a celebrated success. Within a two year period, it had doubled the percentage of sales associated with new product introductions, and there was widespread agreement within the firm that the best was still to come. Their experience can be replicated in your firm. The same potential exists for you to get help from your customers to bring a focus to your innovation and product development plans, ones that results in customers saying “They listened and did exactly what we needed.”