The Law of Imbalanced Value

Posted on April 13, 2015September 6, 2016 by Jerry Vieira

Those of you who frequent my blog will know I occasionally make reference to “The Law of Economic Value”. I am now calling it “The Law of Imbalanced Value”©. The reasons will become apparent.

That law states:

“All economic value accruing to your firm has as its source, the customer’s perception that they will receive greater economic, emotional, political or physical value from your product or service, than it costs them economically, emotionally, politically or physically to acquire and use.” ©

When we consider any investment of time, energy, money or emotion, we hope for a meaningful return on that investment. We look for an investment that will make us more money (economic), make us feel good (emotional), help us look good to the right people (political) and/or relieve our stress or pain (physical). If some combination of those benefits are not envisioned, we will not be motivated to invest. If the mix of those benefits is not delivered in the optimum relative proportions, we will not re-buy.

The relative levels and mix of the four customer-received value attributes (economic, emotional, political and physical) is a business’ complete value proposition.

At the receiving end, a mix of those same four value attributes must be expended by the customer to buy and use a product.

A common example of the range of complexities associated with this law of imbalanced value and the relative value attribute mix, becomes apparent by considering the process of buying a diamond engagement ring. Imagine the complexity, mix and range value attributes considered in such a purchase.

Thank goodness our B2B world is simpler.

Or is it?

The Value Quotient (and why it must always be greater than 1)

Value, by definition, equals benefits divided by cost. It is a quotient.

The Law of Imbalanced Value © defines the Value Quotient as the Sum of Perceived Value Attributes Received by the customer (benefits) divided by the Sum of Perceived Value Attributes expended by the customer (cost).

This equation needs to yield a perception or feeling on the part of the buyer of a return much greater than 1, or much greater than break even. If that perception is not triggered, the purchase will not be worthy of consideration.

This means the value quotient must be significantly imbalanced in favor of the customer. It also means that the customer must consider all contributing value attributes in their decision process. It also means that a customer-centric marketing and sales process must incorporate the defacto creation, communication and use of that quotient.

The following questions can help you assess and appropriately adjust your value attributes to deliver a perceived imbalanced value quotient to customers.

1. Have you surveyed your customers to ask what value attributes they receive from your products and your firm – and in what order of importance?

I confess to being surprised when I did that survey for my own business several years ago. That answer was flattering, but not what I expected. The result of that survey was an increase in the amount I am investing in what they told me was important vs. what I had thought was important.

You will probably, need to face some cold truths when you see the results of your survey too. Then you must exhibit the humility and courage to reallocate time, money and people to reinforce what customers perceive as valuable. It may be painful, but the reward is less wasted resources on non-customer-value producing activities (see our related post on “Applying Lean in Marketing & Sales”), higher sales and higher marketing & sales ROI.

2. Do customers in all your target markets perceive the set of value attributes delivered by your product/service in the same proportions?

Probably not.

Sub-sets of customers with similar value-attribute profiles form a de facto market segment. Whether or not they fit neatly into, or can be labeled as, a traditional vertical or demographic category is irrelevant.

This kind of market segmentation, based on a common mix of value-attributes received, permits a narrow and cost effective focus on those segments. In these segments the profile of value-received delivers the highest value quotient to customers. This approach typically results in less price competition, higher differentiation and more effective peer-to-peer communication throughout your customer community.

In other words, a common value attribute profile defines your customer community.

3. Do your marketing and sales activities (from product definition and design, through marketing and sales, to customer service) consciously integrate and align the four customer-received value attributes with your target market?

Many small to mid-sized B2B businesses still adhere to a one-dimensional, surface-level economic benefits approach to marketing and sales. As differentiation they may tack on customer service and good relationships. This approach leaves too many unprotected dimensions of value that competitors will exploit.

4. Do your recruiting and training programs communicate and inculcate in your employees and culture your unique formulation of the Law of Imbalanced Value?”

A firm’s value proposition, its unique combination of the four value attributes it delivers, must not be left to the passive process of osmosis, any more than recruiting and training a new member of a football team can be left to chance. The new player must integrate into the team’s system, practice and train hard.

A Non-Action Call to Action

I call on you to think. Not do, but think. Not multi-task. Think.

This is the first, and most common barrier to overcome in achieving the insights and benefits that can accrue from designing your business around the “Law of Imbalanced Value”. Ask your customers, group them by common value attributes and optimize their value quotient.

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For more information on the process of optimizing the value model and incorporating the Law of Imbalanced Value into your business, call Jerry Vieira, CMC at 503.318.2696 or email Jerry@qmpassociates.com. You can also elect to describe your challenges through our Contact Us page

Escaping the Non-Innovative Product Development Box

Posted on April 12, 2015June 14, 2018 by Jerry Vieira

The Four Boxes of Product Evolution:

The figure below illustrates the basic four boxes of product development evolution. Along the horizontal axis we have Explicit and Implicit customer needs and wants. Along the vertical axis we have Conscious and Subconscious customer needs and wants. The intersection of these dimensions creates 4 boxes, or quadrants, each defining the level of basic and/or differential value your new product might provide to customers.

The Product Evolution Matrix:

To use the map, simply bulletize the product characteristics you are planning to develop, recording them in each appropriate quadrant. The further up and to the right your newly developed product capabilities fall, the more value they should provide to customers, the higher prices they should be able to command and the higher the innovative brand value they should create.

Think of what box Steve Jobs was working in at Apple – and what he was able to accomplish with Apple’s products and brand.

What to Expect in Each Box:

The Reactive Box:

Engineers and marketers using “Voice of the Customer” techniques to build the product development road map, can simply ask customers what they would like to see in their next generation product. This may be one step better than simply going off into the engineering “lab” and, in a vacuum, conjuring the product changes that the customers “should” like. But, this approach puts the firm squarely in the Reactive Box of our Product Evolution Matrix. A firm working in the lower left hand corner of the map, the Explicit-Conscious sector, is simply reacting to customers’ explicitly-stated needs and missing the opportunity to create unique value.

This is not necessarily a bad thing, unless of course, you stop there and do not venture outside of this box. If your competitors are working in the boxes further to right and up on the map – you lose. Working in the Reactive quadrant, provides little in the way of competitive, defensible advantage – because all competitors can do it.

Many developers elect to start in this box because it’s the easiest and path of least risk. If the redesigned product ultimately fails miserably, the product manager can always say, “Well, we gave them what they asked for. You can’t blame me for wanting to give customers what they explicitly requested.”

However, in order to achieve high customer-value product functionality, strong competitive differentiation and defensibility (all things that permit price premiums), a product manager must travel through, and out of the Reactive Box – upwards and to the right.

The Pro-Active Box:

Thinking in the Pro-Active Box requires a deeper understanding of customers. It requires considering their psychological, emotional and physiological motivations in buying, using and experiencing your product. For example: Consumers would not likely have asked for a microwave oven in the early 1960’s if a cooking stove manufacturer was asking questions in the Reactive Box. They didn’t know what a microwave oven was. Respondents, more likely would have said: “I’d like a clock that does not fail after a few months.” or, “I’d like a self-cleaning oven” or, I’d like a selection of colors other than simply white.”

It would have been unlikely customers would have said “I need a stove that cooks faster because I am pressured by time.” Only by understanding the subconscious, psychological and physiological needs of the primary chef in the house would a faster cook time have been recognized as a critical value needing to be delivered.

In the Pro-Active Box we think about emotions and subconscious physiological factors – not just functions.

The Insight Box:

In the Insight Box a product manager asks the question, “I know what the customer said they want, but what do they really mean?”

Take, for example, a customer observation that a first aid kit is difficult to open. What do they really mean? Does it mean, they have fat thumbs or does it really mean that, the life-saving components in the first aid kit need to very easy to access… fast! Is it a minor inconvenience or a life-saving need.

In the Insight Box we search to understand implicit needs

The Innovation Box:

When a product manager is working in the Innovation Box, he is bringing to bear all of the dimension of need: Conscious, Subconscious, Explicit and Implicit. The Innovation Box produces products that break with tradition, fulfilling needs people didn’t even know they had and providing features they never imagined they would love. The Innovation Box challenges product designers. The Innovation Box creates products that create iconic brands.

Steve Jobs lived in the Innovation Box. Thomas Edison lived in the Innovation Box.

Framing the Innovative Product within an Innovative “Experience”:

But, your job is not complete, even if you have worked our way into the Innovation Box.

Once a product manager has exercised their power of inquiry and thought in these 4 boxes or quadrants, they must then envision all of these boxes working within a greater bubble of the total customer experience. This means that prior emphasis on product features and capabilities must now yield priority to the customer’s total experience. The product must be integrally woven into the total environment your customer will experience in buying, setting up, using, servicing and communicating with your business throughout the life of the product.

This last exercise brings into play almost everything from order entry to repair and replacement parts. The key here is envisioning the perfect experience and creating and aligning all the key parts of the business model, and your organization, around that vision.

Experiential needs then fall into the same four quadrants for consideration. By blending an Innovation Box developed product with an Innovation Box developed experience, you create an true innovation.

Conclusions:

Never be satisfied with just developing product enhancements out of the Reactive Box. Reactive Box product enhancements rarely achieve price premiums, defensible competitive market positions or market share gains.

Even a thoroughly mapped out product enhancement plan that incorporates input from all the quadrants can fail on a bad holistic customer experience. The whole customer experience needs to be exercised according to the same 4-quadrant tool.

All aspects of the business must be aligned to deliver both innovative products and innovative experiences.

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For more information about The QMP Group and it’s methodology for developing market and product strategy, call Jerry Vieira, CMC at 503.318.2696 or email to Jerry@qmpassociates.com.

Accelerating the Market Adoption of an Innovation

Posted on April 7, 2013November 19, 2014 by Jerry Vieira

The Product Development and Management Association Glossary of Terms defines failure rate as the percentage of a firm’s new products that make it to full market commercialization, but which fail to achieve the objectives set for them. By that measure, it is not surprising that a quick internet search on the subject of product failure rate yields studies that claim anywhere between 50% (commercial) and 90% (retail food) of new product or service offerings fail.

Failure can mean some or all of lost time, wasted money, missed opportunity, damaged credibility, tainted brand reputation, enhanced competitive vulnerability, lost jobs, truncated careers and a host of other unpleasant outcomes. So, whether the real failure rate is closer to the lower (50%) or higher (90%) end of the estimate is not as important as recognizing that discovering ways to improve it is essential.

For the past 15 years a good part of our work at QMP has centered around helping business-to-business clients turn around under-performing businesses and products. Many of them were struggling with getting new offerings off the ground or gaining traction in the marketplace. We’d like to share with you a bit about what we have learned, in hopes that it may improve your probability of success and help you avoid the myriad consequences of failure.

The Empirical Science Basis of the Adoption of Innovation:

In 1962, Everett M. Rogers wrote a breakthrough work entitled, “The Diffusion of Innovation” (republished in its fourth edition in 1995 by The Free Press). In it he compiled a number of studies documenting adoption successes and failures of all types of innovations over the past 100 years — from sociological to scientific. He included varied research findings, such as the struggles of the Chilean health department with getting Andes mountain villagers to adopt the habit of boiling water for health reasons, Iowa farmers adopting hybrid seed corn and Pittsburg school system principals adopting new math.

While the lessons learned from reading such a remarkable book are many, two items stand out above all others; 1) the adoption or diffusion of an innovation is not a linear phenomenon (meaning it does not gain its energy and momentum just one isolated customer at a time across a wide range of groups), and 2) adoption is significantly accelerated by the dynamics of the intramarket communication network (how buyers in a market or group meet, discuss and communicate ideas).

In fact, one of the most amazing conclusions coming from the research is that communication through the intramarket network is roughly 13 times more effective than mass communication in the adoption of an innovation. This interesting research conclusion predates the emergence of social media, blogging and Tweeting which, by now, are well recognized as an effective internet-powered intramarket communication vehicles.

Mass Communication and Struggles with Adoption

One of the most common problems we find with innovations struggling to gain a foothold in the marketplace is the parent firm’s unwillingness to focus. Rather than taking a chance on a focused launch initiative, they believe it’s better to try a broad one and see what sticks. In addition, the management team and product people are typically so convinced of the universal applicability of the innovation, that it leads the firm to believe that “getting our name out there” quickly, to masses of potential buyers, will be all that is required for success. This is rarely the case.

In pursuing such a course of action, it is not uncommon for a firm to find they have spent valuable economic resources on grand branding schemes and exposure initiatives with a minimal real impact on market penetration. Applying for a second round of dilutive funding to finance a second run at that same holy grail is an option—and some select it – with the same results.

Fragmenting the market to gain a profitable foothold

Buyers, particularly commercial and business-to-business buyers, invest in an innovation because they believe the economic value they will receive from that innovation will exceed the amount they have to pay for it. The market success of an innovation requires that the market which you’ve targeted has a significant enough proportion of customers with a big enough common problem to create a compelling argument for an investment to solve it. The key is, not all market segments have the same problem to the same degree. Focusing your launch on a particular sub-segment of the market where the economic value proposition of the innovation is compelling, creates a much higher probability of success than a broad approach.

If it’s that simple, why don’t more businesses focus?

There are many reasons: First, investors prefer firms that are moving after big markets with big payoffs. The bigger the market envisioned, the bigger the potential payout. Secondly, the inventors have a sincere belief that “everyone” can eventually use their innovation—and eventually they may be correct. Third, innovators and marketers alike get caught in the excitement, glitz and hype of launching a major market initiative launch. It can be a very heady experience. And, fourth, they simply have too much marketing money in the budget and don’t know how to manage it well.

Trying to stand in front of the innovation-launch train as a voice of reason, as it barrels down the track of a well-funded general market launch is fruitless. It’s best to wait till the train burns out its fuel and then catch up to it further down the track when it has stalled.

Not withstanding the previous explanations, there is a more fundamental reason why people don’t focus for success, they simply don’t know how to select the best markets to focus on.

Criteria for Target Market Attractiveness:

Over the years of working the challenge of assessing and selecting the target market segment that will yield the highest probability of success for an innovation, we have developed a series of criteria that seem to work effectively.

Market Momentum: Different market segments have different economic, demographic and regulatory factors which affect its basic momentum. When selecting a market, we want our investments to be lifted and propelled downstream as much as possible by inherent momentum factors in our favor.

Compelling Need: This factor refers to the extent the problem the innovation is designed to resolve is compelling from an economic, safety or regulatory standpoint. Take the Segway for example, the innovative two-wheeled, gyroscopically-balanced personal transport scooter. It’s general market launch, after much early hype, has been less than hoped for by investors and its inventors alike. It is, however, finding its way to higher success rates in mobile security markets, on campuses, malls, large commercial complexes, inner city tourism, and in a slightly modified version, golf courses.

Match: The extent to which the innovation matches and completely resolves the compelling need it was designed to fix. A perfect match will increase customer satisfaction and improve the ability of potential customers to rapidly make the innovation-to-problem-fix mental link.

In the early days of flat panel monitors, when they were expensive compared to bulky CRTs, one of our clients attempted to penetrate the general desktop market with this own version of a flat panel monitor. At a $1,000 selling price, compared to a $249 monitor price, the effort failed. However, when the effort was refocused on hospital rooms (a much smaller segment of the market but with a more compelling set of needs), the monitor was wildly successful. In hospital rooms, space is constrained, electromagnetic interference from CRTs cannot be tolerated around sensitive medical monitoring equipment and sparks from high static CRTs can’t be permitted in oxygen rich environments. The client’s initial adoption failure was turned to success simply by redirecting the market focus—and there were no changes required to either the average selling price or inherent product features. In fact, the selling price increased as, over time, hospitals requested additional features to increase the basic capabilities of an already good solution.

Socket Count: A socket is a potential place where the innovation can be installed. For example, a first estimate of the potential sockets for the microwave oven at its inception would have been the number of households without one. Today, the number of sockets available for new microwave oven innovations is going to be limited to those sockets that either don’t have a microwave already installed (very few) or those for which the innovation solves a compelling need or significant shortcoming with their existing solution.We want to find a market to target our innovation at that not only has a compelling need and positive momentum factors , but also a lot of unfilled or under-satisfied sockets.

Value Quotient: Closely related to the magnitude of the compelling need is the balance of the value quotient from the customer’s perspective. This relates to the value of the benefit to the customer of solving their problem with your innovation, divided by the cost of acquiring, installing, learning and using it. There may be a significant compelling need, but if the cost of the innovation needed to repair the compelling need is prohibitive, adoption will be slow. A rule of thumb is that within three years of purchase the innovation should pay back at least 5 to 1 in bottom line cash flow for the customer. A further note on this point: Value received is not completely economic. Value comprises the complete suite of benefits encompassed in the Economic, Emotional, Political and Physical realms of what your product/service delivers.

RPQL Position Availability: RPQL stands for Relative Perceived Quality Leadership. Forty plus years of research in the Strategic Planning Institute PIMS data base (Profit Impact of Market Strategy) indicates that the single most important factor affecting a business unit’s success is the market’s perception of the relative perceived quality of its goods and services compared to its competitors. One important point to remember—perceived quality is related to the segment of the market. Not all segments perceive quality in the same way. Charging after a market that already has an RPQL leader is equivalent of a military frontal assault on an entrenched position. Not a wise decision.

IntraMarket Network: As mentioned earlier, innovations diffuse more rapidly if there is a strong intra-market network through which the value proposition of the innovation can be communicated—person-to-person, customer-to-customer. The intra-market network comprises two parts a) its venues (events, forums) and vehicles (journals, publications, websites) and b) its intra-market opinion leaders.

Opinion leaders are the real geometric multipliers of the value proposition message. For opinion leaders to be most effective they need to have four important characteristics. First, they need to be rabid believers in the innovation and its value proposition. Secondly, they need to be well-networked. Third, they need to be highly credible in the network of interest and finally, they need to be natural sales people—anxious and completely un-shy about communicating new ideas to friends and colleagues alike.

The next five target market attractiveness assessment criteria are important as well, but if the market isn’t attractive after an analysis of the first seven the second five are not worth working through.

Profitability: Selling the innovation must be inherently profitable. If you feel you have to reduce price to gain traction, it may simply be that you have a questionable value proposition or your perception of the customer’s compelling need is misunderstood. It certainly should bring into question your thoughts about the economic equation factor. Sometimes simply changing the target market can change the profitability by allowing pricing in proportion to unique benefit—as in the flat panel terminal example stated earlier.

Competitive Turmoil: The higher the competitive turmoil the more expensive it will be to create a successful presence. The exercise of focusing down to a smaller, less competitive market segment, will provide a higher probability of surviving any inevitable market shakeout.

Brand Leverage: It’s easier to gain market attention for your innovation if your brand speaks innovation. Apple will easily get media and intra-market opinion leader attention for a new consumer, music or creative computing idea. Volvo will get attention for an innovative auto safety related product—like a car seat or anti-roll stabilizer for an SUV. Neither will get brand traction if they introduce a pillow or dinner ware.

Accessibility: Sometimes markets may be attractive but relatively inaccessible because of sales channel limitations, aggressive competition for limited shelf-space, import/export restrictions, licensing requirements or other considerations.

Perceived Value of Differentiators: This last factor comes into play when the competitive turmoil factor is less than optimum. It assesses the degree to which your differentiated position for the innovation, compared with your competitors’ approaches, has meaning and economic value in the target segment under assessment.

Conclusions:

What we have learned in years of helping our clients with the market introduction of their innovations is this: Focusing on those markets that exhibit the best composite results on the listed assessment factors results in:

More rapid adoption
Higher average selling prices
Higher profitability
Higher degree of customer satisfaction
Lower market launch expenses
More defensible positions
Higher probability of surviving shakeout
Learning how to do it consistently in the future
Less ownership dilution

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For more information about how to accelerate the market adoption of your innovative product, contact QMP at qmp1@qmpassociates.com or 503-318-2696