People usually equate innovation with creating new products and services, or improving existing ones. More abstract, and useful, is to think of innovation as creating value, for no matter the product or service, the goal of innovating is the same—find ways to deliver superior value to customers. But what, exactly, does ‘value’ mean? And how does one go about creating it?
When it comes to innovating, a useful definition is to say that value equals the benefits received by the customer less the costs that the customer incurs in obtaining the benefits. A simpler way to put it is the equation: Value = Benefits – Costs. Other ways of putting it are the get-give equation (value equals what the customer gets minus what he gives), the positive-negative equation (value equals the positives less the negatives), and the good-bad equation (value equals the good minus the bad).
Once you understand the meaning of value, the next question is how to go about creating it. A quick look at the benefit-cost equation provides the answer—increase the benefits, lower the costs, or do both. It sounds simple enough, but it’s not. There are all sorts of benefits and costs to consider and few organizations have a systematic way of thinking about them. To help you think about innovative ways to create or increase customer value, let’s take a closer look at benefits and costs.
The first thing to understand is the relationship among features, functions and benefits (see illustration below). A feature is an attribute or aspect of the product-service offering–what it is, is made of, or is composed of. For example, one feature of a hotel is its location. A function is what the feature does. Staying with the hotel example, the function of a hotel’s location is to enable quick access to where the guest wants to be. A benefit is a need that is satisfied by the function. Oftentimes, a function can provide more than one benefit. Enabling quick access to where a hotel guest wants to be provides the benefits of saving time, saving driving costs, and enabling the guest to periodically return to the hotel to freshen up, make phone calls, and so forth.
The final issue to understand is the difference between ‘basic’ and ‘motivating’ features and benefits. As the name implies, basic features and benefits are the basic things you need to “get in the game.” For example, basic to getting in the “hotel game” is the feature of cleanliness and the associated benefits of knowing that one isn’t going to feel disgusted, catch a disease, or be bitten by bed bugs.
Motivating features and benefits are those that go beyond the basics and serve to motivate a customer to select one product or service over another. An example would be the feature of having a rewards program and the associated benefit of enjoying free hotel stays. All else being equal (including cleanliness), customers will be motivated to select a hotel that offers a rewards program over a hotel that does not.
The other half of the value equation has to do with costs. Here, the important thing to know is that costs can be divided into two types. The first is the purchase price. The second is all of the other monetary and non-monetary costs associated with buying and using a product or service. An example of a monetary cost is the cost of complementary services, such as the air and ground transportation costs associated with staying at a particular hotel. An example of a non-monetary cost is the time it takes a customer to search for and book a reservation at a hotel.
So, how do you go about devising innovative ways to provide more customer value than your competitors? Your first step is to divide the market into a set of market segments. Why? Because different customers derive different benefits from the same attribute of a product or service. Consider, for example, the different benefits that are sought from a hotel by commercial, group, and leisure travelers. Next, for each market segment, you want to devise creative ways to provide greater benefits and lower costs than your competitors. There are various ways to carry out this step, all of which involve methodical processes for disciplining and stimulating your thinking.
One method is to disassemble your product and processes into their component attributes. Do the same with your competitor’s products and processes. Then, organize the attributes so that they can be compared side-by-side. The next step is to identify the differences between the attributes. Finally, analyze the differences in terms of customer benefits and costs. Comparative analyses of this sort are an excellent way to stimulate creativity. Oftentimes, the comparison leads to a combination that is better than the two attributes being compared.
Ideally, you want to create customer value that is difficult or impossible for your competitors to copy. While easier said than done, it is doable. But that’s a topic for a future post.