Value in Use Analysis for New Product Introductions


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This paper shows successful examples of companies selling products based on value. Quantification of value is critical to a successful product introduction and this paper provides a basic overview of the tools to measure it. In addition, a new tool, the Value Box is introduced to capture the value/price space and develop pricing strategy

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Value in Use Analysis for New Product Introductions

  1. 1. Value in Use Analysis and the Value Box© Concept for New Product Introductions<br />Jose A. Briones, Ph.D.<br />SpyroTek Performance Solutions, LLC.<br />ASC Conference<br />October 2009<br />
  2. 2. Value and Innovation<br />Innovation exists at the intersection of invention and value<br />If your new product/invention/service does not offer value, it is just novel - not innovative.<br />Your new offering must deliver value<br />Meet an unmet need<br />Innovation is not a measure of the change you make. It is a measure of the need you address<br /> <br />
  3. 3. How Do We Capture Value?<br />Value is captured through <br />Pricing<br />Market share<br />Brand awareness<br />In order to capture value, we must first be able to measure value<br /> <br />
  4. 4. Pricing of a New Product<br />There are multiple ways to approach pricing for a new product<br />Cost-plus<br />Competition-driven pricing.<br />Customer-driven pricing<br />Minimum Return on Investment (ROI)<br />Cost in use analysis<br />Value in use analysis.<br />We must move away from cost-based pricing to value-based pricing<br /> <br />
  5. 5. Product/Project Minimum ROI Requirement Examples<br /> <br />Scope Change<br />High<br />Level 3<br />Potential reward<br />Translational<br />Level 2<br />Organic<br />Level 1<br />Low<br />High<br />Low<br />Risk<br />
  6. 6. Value in Use Analysis<br />Value must be shared between seller and customer<br />Customer will not switch from alternative technology unless new offering carries enough value to make the switch worthwhile<br />Clayton Christensen: Customers do not buy products, they hire products to do a job.<br />Define the job your product is hired to do and the benefit your customer gets from it <br />Absolute price/unit is irrelevant. We must compare cost in use and value in use.<br /> <br />
  7. 7. Gillette’s Custom Plus Disposable<br />Amazon’s price of 3 Pack with 10 razors/pack: $10.61<br />Cost/razor: $0.35<br /> <br />
  8. 8. Gillette’s Fusion<br />Amazon’s price: $16.95<br />8 Cartridges<br />Cost/cartridge: $2.12<br /> <br />
  9. 9. Gillette’s Custom Plus vs. Fusion<br /><ul><li>Price of product
  10. 10. $10.61 vs. 16.95
  11. 11. Fusion package is 50% more expensive
  12. 12. The custom plus package has 30 units vs. 8 for the Fusion
  13. 13. Cost in use
  14. 14. $2.12. vs $0.35 per razor.
  15. 15. Fusion has a unit product cost 6 times higher than Custom Plus
  16. 16. Why would a customer choose to buy a product that has a cost 6 times higher?
  17. 17. The customer believes that the additional value in use that the Fusion provides justifies the additional cost in use
  18. 18. Durability of blade
  19. 19. Comfort
  20. 20. Less irritation </li></ul> <br />
  21. 21. 3M Scotch® Tape<br />Amazon price: $1.00<br />300’ length<br />Cost per inch: $0.003<br />Cost to hang a poster:<br />$0.01<br /> <br />
  22. 22. 3M Command® Strips<br />Amazon Price: $1.95<br />12 strips<br />Cost per strip: $0.15<br />Cost to hang a poster:<br />$0.60<br /> <br />
  23. 23. Scotch Tape vs. Command Strips<br />Price of product<br />$0.99 vs. $1.95<br />Scotch tape sells for half the price of Commander strips<br />Using Scotch tape, the user can hang 75 posters vs. 3 for the command strips<br />Cost in use<br />$0.01 vs $0.60 to hang one poster<br />Commander strips have a product cost twice as high as Scotch tape but 60 times the cost in use to hang up a poster.<br />Why would a customer choose to buy a product that has a cost in use 60 times higher?<br />The customer believes that the additional value in use that Commander provides justifies the additional cost in use<br />Less damage to walls<br />Simplicity to remove <br />Durability<br /> <br />
  24. 24. Economic Value Definition<br />Reference Value (RV): The cost of the competing product that the customer views as the best alternative to our product<br />Differentiation Value: (DV) The value to the customer (both positive and negative) of any differences between our offering and the reference product.<br />Economic value (EV): The price of the customer best alternative (reference value) plus the value of whatever differentiates the offering from the alternative (differentiation value).<br />EV=RV+DV<br /> <br />
  25. 25. The Concept of “Hard” vs. “Soft” Value in Use<br />Hard or objective value in use is value which can be readily quantified by the customer: “cash out the door”<br />Raw material savings<br />Energy savings<br />Reduction in spare parts cost<br />Increased production that results in direct cost savings such as reduced overtime<br />Soft or subjective value in use are benefits that, while real, can not be quickly quantified or monetized immediately by the customer.<br />Improved safety<br />Improved quality, less returns<br />Environmental/Green benefits<br />Increased production rates when the plant is not at full capacity<br /> <br />
  26. 26. Economic Value Analysis<br />Step 1: Identify the cost in use of the competitive product or process that the customer views as the best alternative<br />Step 2: Identify all factors that differentiate your product from the competitive offering<br />Step 3: Determine the value to the customer of these differentiating factors. Sources of value can be subjective or objective.<br />Step 4: Add up the reference value and the differentiation value to determine the economic value.<br /> <br />
  27. 27. Value Maximization<br />In order to maximize value, we must determine the value in use associated with our product by using mapping tools<br />There is no “perfect” value analysis technique. All techniques will have advantages and disadvantages.  <br />The value captured by of your product will also depend on the number of players in the value chain that will split the value of the product<br />Stop talking about attributes and start taking about benefits<br /> <br />
  28. 28. Value in Use Analysis Tools<br />Market Perceived Quality Profile (MPQP)<br />Kano Analysis<br />Attribute Map<br />Conjoint Analysis<br /> <br />
  29. 29. Market Perceived Quality Profile (MPQP)<br />Rank the importance of attributes on a 1-10 scale or by distributing a fixed number of points (i.e. 100) <br />Rank comparative performance of each attribute<br />Multiply performance by weight to obtain overall product rating<br /> <br />
  30. 30. MPQP Example for Adhesive<br /> <br />
  31. 31. MPQP Issues<br />Advantages<br />Good for a first discussion with the customer and to generate a basic list of requirements when little is known about the market<br />Provides overall product rating comparison<br />Disadvantages<br />No clear differentiation between important variables<br />“Everything is important”<br />“We want everything”<br />We need further differentiation of the importance of attributes to achieve sub-segmentation based on real customer needs <br />Kano Analysis<br />Attribute Map<br /> <br />
  32. 32. Kano Analysis<br />Kano analysis is a tool which can be used to classify and prioritize customer needs. <br />Customer needs are not all of the same kind, not all have the same importance, and are different for different populations<br />Briefly, Kano stated that there are four types of customer needs, or reactions to product characteristics / attributes:<br />1. The &apos;Surprise & Delight&apos; factors. These really make your product stand out from the others. Example, a passenger jet that could take off vertically <br />2. The &apos;More is Better&apos;. E.g. a jet airliner that uses a little less fuel than the competition.<br />3. The &apos;must be&apos; things. Without this, you&apos;ll never sell the product. E.g. A jet airliner that cannot meet airport noise regulations.<br />4. Finally, there are the &apos;dissatisfiers&apos;, the things that cause your customers not to like your product. E.g. a jet airliner that is uncomfortable to ride in.<br /> <br />
  33. 33. Kano Example: Banking<br /> <br />
  34. 34. Attribute Map<br /> <br />
  35. 35. Limitations of Attribute Map and Kano<br />The Kano model and the Attribute Map can be used to help identify customer segments, based on the relative priority of each segment&apos;s requirements. <br />Disadvantages<br />Kano analysis determines value of individual product attribute but does not provide value of specific level within the attribute<br />Customers choose products based on the overall profile of properties, rarely on one single property.<br />Ranking of combination of properties may differ from individual property rankings <br />Conjoint analysis may be needed for breaking ties<br /> <br />
  36. 36. Conjoint Analysis<br />Rather than directly ask customers what they prefer in a product, or what attributes they find most important, Conjoint Analysis employs the more realistic context of respondents evaluating potential product profiles with different combinations of attributes. <br />By varying the combinations attributes and observing the responses we can determine the real value of each attribute and the magnitude of the value within each attribute<br />Forces the customer to make choices of what they are willing to trade-off<br /> <br />
  37. 37. Conjoint Analysis Example<br /> <br />The exercise is repeated for multiple combinations and the analyst or the computer can statistically deduce what product features are most desired and which attributes have the most impact on choice <br />
  38. 38. The Value Box© Concept<br />  <br />The Value Box is a tool to assess strategy based on an overall picture of the value space<br />The total cost of manufacture is the lower level of the box<br />The minimum desirable ROI targets for the product form the next lower levels of the box.  <br />Intermediate levels are set by the cost in use of competitive technologies.<br />The upper levels are set by the degree of value in use of the new product<br />The right axis can be the number of players in the value chain or number of value sub-segments<br /> <br />
  39. 39. The Product Value Box© Concept<br /> <br />Number of players<br />in the value chain<br />Price<br />Full Value <br />in <br />Use Price<br />Cost in Use<br />Competing<br />Technology<br />Minimum<br />Floor<br />Price<br />Total Cost of Manufacture<br />Time<br />
  40. 40. The Product Value Box© Concept for a <br />Generic Product <br />Price<br />Number of players<br />in the value chain<br />“Hard + Soft” Value in Use Price<br />Retailer<br />“Hard” Value in Use Price<br />Cost in Use <br />Competitive Technology<br />Converter<br />Target Return on Investment<br />Manufacturer<br />Minimum ROI<br />Total Cost of Manufacture<br />Time<br /> <br />
  41. 41. Hybrids vs. Non-Hybrids<br />Is buying a hybrid car worth it?<br />Gas savings vs. higher monthly payment<br />Depends on <br />Gas mileage difference<br />Price of gasoline<br />Mileage driven/yr<br />Price differential of comparable models<br /> <br />
  42. 42. The Product Value Box© Concept for Toyota Prius<br />Price<br />Full “Hard + Soft” Value in Use Price<br />$21,000<br />Full “Hard” Value in Use Price<br />$13,500<br />(Break even hard value for customer)<br />Price of Competitive Technology, 40mpg economy car<br />$12,000<br />Discount Pricing Approach<br />$11,000<br />Time<br /> <br />
  43. 43. Value Split Pricing<br />Value<br />Sub-segments<br />Price<br />Full “Hard + Soft” Value in Use Price<br />$21,000<br />50% Hard Value Split plus 100 % Soft Value Pricing<br />$20,250<br />Full “Hard”Value in Use Price<br />$13,500<br />50% Hard Value Split Pricing<br />$12,750<br />Price of Competitive Technology<br />$12,000<br />Customers whose main criteria is hard value in use will not purchase the product unless they get to capture enough of the value. Price must be attractive enough to overcome risk and cost of switching.<br />Customers who consider soft value in use in their purchase criteria may not need to capture as large a fraction of the value to make the purchase decision.<br /> <br />
  44. 44. Summary<br />To be successful in the marketplace and create innovations, products must deliver clear value that addresses unmet needs<br />Value in use can be measured and quantified<br />Pricing is a tool used to share the value with the customer <br />The Value Box© is a new tool to facilitate the mapping of the value space and determine the best commercial strategy<br />Contact information:<br /> (469) 737-0421<br /> <br />