Innovation Series: Part 2 – Mapping the Value Chain
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In Innovation Series: Part 1, I discussed the building blocks and language one needs to start finding areas to innovate. In this next part, I’d like to share with you a series of questions you should ask to help map out an area you think might be ripe for innovation. There are an infinite number of questions you could ask depending on what you are studying. To quote my martial arts sensei, “The answers are everywhere, the magic lies in knowing how to ask the right questions!” These just came to mind.
• How does an entity form an opinion that they need a new product or service? How do they collect the data? How much time does it take them? What is the value of that time for each person in the process? How long does the process typically take? How much time and expense is expended internally and externally?
• What is the process they go through to narrow down a final pre-selection? How do they contrast and compare during the final buying process? Do salespeople come to them? Do they go to a physical location to touch and feel? How many places? What is the time and expense associated with each part of this section?
• What is the on-boarding process? How does the buyer get up to speed? What are the stumbling blocks?
• What is the life process? Once the product is in regular use, what are the ways to save time and money for the user?
• What are the CapEx and OpEx implications? If depreciation is involved, how long is the asset required to be in service? Is there value in for cutting short an existing asset’s depreciation life in favor of something more innovative?
• What forces would cause a user to want to discontinue the relationship? Customer service? Alternate products? New trends?
• Are there areas of the life cycle that there is not enough information to determine client happiness or utility? What if you had that information? Would that information be more valuable to the seller or the buyer? Why?
• What additional time and or expense could be created or saved based on knowing more detail?
• What is the disposal process?
• Is residual value (resale value) important to the buyer?
• Are any of these processes driven by outdated methods or technologies?
Building out a value-chain doesn’t mean you need to build a full business case for everything. All it requires is that you start thinking about everything in terms of the real or perceived value in the chain of objects and processes that make up a value-chain.
EXTERNAL EXAMPLE
This feature/widget/product will save my customers an hour a week over the old way of doing things. On average, my customers cost their companies approximately $65/hr, so I will save them between $3,100 and $3,400 per year in value that is now free to be used towards other activities. If the time span of that value is spread over 2 years, that’s up to $6,800 in value. Do you think it would be easier to sell a customer a feature costing $1,000 if it will save them almost $7,000? From here, it’s easy to make a case that you will be able to upgrade or up-sell 20% of your 50,000 install base or $10M in predicted revenue. Don’t you feel better standing on a value-chain to make that prediction than using a typical cost-plus argument for pricing? What if it only costs you $100 in direct costs to product this $1000 feature/widget/product? How are you going to arrive at $1,000 for pricing if you don’t understand the value-chain. If you follow a cost-plus mentality, you might price it at standard retail markup over cost, or 100% or $200. You may have just left $800 on the table for a valuable innovation.
INTERNAL EXAMPLE
This feature/widget/product comes out of a request from support. It doesn’t necessarily provide economic value to our customers, but it will reduce a lot of friction in the support organization. Most of the time, this feature is a gut-feeling feature that is managed by the product manager. Break-fix is never as sexy as revenue producing items. However, you dig further and find that you are loosing five of your support staff each month over this issue. You estimate this is costing $70K/month in recruiting, on-boarding and training expenses. That’s $840K/year! 2nd year savings of $1,680,000! Now it’s a bit easier to prioritize in the product roadmap because you have some justification.
I didn’t give an example from the customer’s point of view, but the exercise is the same. Map out an internal process. Determine the value at each point. Do any inefficiencies stand out?
Innovation lies behind the answers to the questions and can sometimes form at a level higher than individual questions. Take the time to map things out, then take a step back and look at the big picture. You might find something very interesting.
In Part 3, I’ll cover Hard and Soft Trends.
© Mark Travis – All Rights Reserved http://www.travis-company.com
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