Innovation Rescue Kit
Value Accounting Basics
This article is for Innovation Managers in trouble.
If you have a successful innovation program with many new products, happy customers and positive financial impact, you don’t need to read it.
But if you don’t know where to start. If the previous efforts didn’t work and you are afraid that you are being disrupted, you might find some answers here.
This article will bring you to the basics. We will look at your product through the eyes of your customers. And we’ll try to evaluate the value your product brings. I will keep it brief. If it sparks some ideas or it sounds like a total nonsense I will be happy to follow up with you.
Let’s start with an example. If you want to go to a place you have several options — walk, bike, take the bus or train, get a taxi, drive your car. Some of these options are not always available, but most of the time you’ll have several options to chose from.
How do you choose what option to use?
They will all bring you to your destination. But each of them have some burdens or cost.
If you walk — you’ll get tired and sweaty.
If you bike — you’ll get tired and will need to lock the bike somewhere.
The bus will not get you to the exact destination.
The taxi is expensive. Your car needs a parking spot and gas.
The benefit is more or less the same but the cost is different. And before each trip we mentally go through the different options and calculate the best “deal”. Maximum Benefit and lowest Cost. If the Benefit is equal for each option, then the Value depends mostly on the Cost.
Let’s call this Value Accounting. It comes with a few counterintuitive points:
- Your customers receive LESS value from your product than you offer. (See fig. 1)
- The Cost your customers pay is HIGHER than the price you charge. (See fig. 2)
- The MORE features you put in - the LESS value they get
- Your Best customers are your “Most” customers. (See fig. 3)
Fig. 1 — Your customers are these flowers. Their height shows how many features they use.
You think you give them all the value from the Price line up to the Fancy Benefits line. In reality each of them receives only as much as they need (the length of their own stems).
Why? You might not want to drink more than one cup of coffee at a time even if there is a whole carafe. Not because you can’t afford it. You just don’t want more. Or you might want one apple but they give you a 25-kilo bag of apples for the same price.
The space above the flowers is unused, but paid! More money for you, less value for them.
Fig. 2 — To use your product the customers need to put some efforts. Learning, moving, charging, calling support etc. These are the Effort fees. They are subtracted from the value the customer receives. Which as we saw is restricted from above. So the stem gets even shorter.
If you add features that are not used or make bundles with useless products, they will only increase the complexity and the efforts. And will in fact reduce the perceived value*.
What to do about it? Understand the tradeoffs your customers are making and improve them. It might save you from disruption.
Most of the disruptions happen by reducing the efforts, not by adding features. Think about the efforts of calling a Taxi, and how Uber reduced them.
Fig. 3 — If your product is mature, your customers probably are distributed in a bell curve — most customers using around the half of your features.
(You should measure that for your product!)
This means that the majority of your customers are paying for things they don’t use.
Most of your customers are overpaying for your product. They also use unnecessary complicated product, which reduces the value for them even more. They are looking for alternatives and will be happy to leave you.
The total value your product brings is the sum of all the individual perceived values. When most of the features are underused, they only add “Effort fees” that reduce the value of your product.
To improve the Value Accounting for your customers:
- Reshape (restrict) your features to the needs of your “most” customers and reduce the prices accordingly.
- Reduce the efforts for your customers to the minimum. This is one of the reasons, your customers would go to a disruptor.
- Add features and bundles only if they really add value to the customers not because the competitors have them. Check again the point above.
- Improve your value chain and your profits, reduce the price for your customers.
- Find ways to scale. Learn how to grow again. The disruptors are able to scale globally while keep the prices down.
Pick the best solution and technology for the task. Don’t start with the fad of the day.
Measure the progress. Does it improve the product value or not?
* The effort and frictions are not always a bad thing. They can be used strategically, like Ikea does. The effort to go the remote store and navigate the labyrinth makes the customers buy more, so they don’t have to come again. The additional step to assemble the furniture is an effort, but it boosts the feeling of accomplishment — “I did this myself”. All efforts should be offset by added value to keep the balance positive.