Innovation for Customer Cost Reduction
Customer Cost Systems
Capsule: A product and service innovation program is going to be most effective when it considers the customer’s costs in a broad system. Intermediary customers incur four major system costs: Obtain, Sell, Guarantee and Return. Final customers have their own set of four system costs connected with the product: Acquire, Use, Maintain and Dispose. To set up its performance improvements, the Company searches for the cost activities offering the most promise for cost reduction.
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For helpful context on this step:
Videos
- Video #69: Overview of Products and Services Part 1: How to Look
- Video #30: The Customer Cost System for a Manufactured Product
Symptoms and Implications
- Competitors are improving the product by emphasizing the customer’s purchase process
- The level of convenience offered to customers has increased
- Competitors are aiming their marketing at narrower segments
When the Company considers the costs its customers incur, it recognizes the fundamental differences separating the two types of customers it might serve. The two types of customers use the product differently. The costs that each kind of customer incurs reflect the ways that the customer interacts with the product.
The “customers” of particular interest in this step are the largest Core customers available to the Company. The Company can augment this understanding of the costs of these larger Core customers by doing variations of this analyis for the other Core customer size segments that the Company would like to serve.
- Audio Tip #77: Which Customer’s Cost System Do We Care Most About?
- Audio Tip #76: The Cost of the Product and the Customer Cost System
Intermediary customers incur four major system costs in connection with the product over its useful life: Obtain, Sell, Guarantee and Return.
- Obtain steps include all activities preceding the selling of the product. These activities include the costs of identifying potential suppliers and stocking the product.
- Sell steps are the activities Intermediary customers take in selling and delivering the product to their customers. These activities include the Intermediary’s recruitment of customers and product delivery to them.
- Guarantee steps include the activities required for the Intermediary customer to keep the product or service in working order for the Final customer. These activities include both problem assessment and correction.
- Return activities include the work to deliver the product back to the supplier and to receive credit for the returned product.
Each of these system costs offers a basis for performance innovations to reduce costs for customers.
Examples of Innovations for Customer Cost Reduction: Obtain Cost Innovations» Sell Cost Innovations» Guarantee Cost Innovations» Return Cost Innovations»
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Intermediary Customers Questions |
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Final customers incur a different system of four major costs in connection with the product: Acquire, Use, Maintain and Dispose. Final customers incur these same four major costs whether they purchase the product from the producer of the product or from an Intermediary. However, the activities of Acquire, Use and Maintain costs vary.
- Acquire steps include all activities the customer completes preceding the use or the consumption of the product. When the Final customer purchases from the producer of the product, these steps include the customer’s efforts needed for evaluation of alternative suppliers and for acquisition and installation of the product. When the Final customer purchases from an Intermediary, these steps include the customer’s efforts to evaluate alternative Intermediaries and to locate and travel to the chosen Intermediary’s location.
- Use steps, when the Final customer purchases from the producer of the product, include the customer’s own value added activities or the consumption of the product itself. Use costs include any activity incurred in employing the product for its intended function. When teh Final customer purchases from an Intermediary, Use costs include the Final customer’s efforts to find, choose and pay for the product at the Intermediary’s location.
- Maintain steps include all activities required to keep the product operating as expected. These steps include the costs the customer incurs to diagnose and correct product problems. When the Final customer purchases from an Intermediary, these steps may include the Intermediary’s installation of the product at the Final customer’s location.
- Dispose steps include all activities required to remove the product from the customer’s premises or system of activities. These steps include the costs for final disposition of the product.
Each of these steps also offers an opportunity for performance innovation. A Final customer may buy a product for enjoyment. In the majority of instances, even the enjoyment reason has a cost you can estimate. Where a customer does not incur a direct monetary cost with a product, as in the style or design of a product, the cost concept is more elusive but still applicable by comparing the costs of similar products or by valuing the customer’s time.
Examples of Innovations for Final Customer Cost Reduction: Acquire Cost Innovations» Use Cost Innovations» Maintain Cost Innovations» Dispose Cost Innovations»
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Final Customers Questions |
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The Company quantifies the costs the customer incurs over the product life for each of these aspects of the product cost system. It then searches for the cost activities offering the most promise for cost reduction through the Company?s product innovations. Activities of the cost system where the customer incurs the greatest cost offer significant opportunities simply because of the size of the cost. In addition to these activities, the Company might rank cost activities according to its assessment of how much impact the Company might have on each of those activities of the cost system.
- Audio Tip #78: Quantifying the Customer Cost System Into Costs Per Unit of Product
- Audio Tip #80: Measuring Customer Cost Savings
- Audio Tip #79: How Much Must My Product Reduce the Customer’s Costs?
Customer Cost Systems Questions
 | Analysis 43: |
The Company may find it helpful to express these customer costs in units of currency per unit of sale. This expression of costs enables the Company to view the costs to the customer in terms comparable to the product price the customer pays and to the costs the Company incurs. By using this approach, the Company can assess how far into the customer size/role segments a particular innovation might apply. The same analysis suggests limits on the price the Company may charge each customer size/role segment for a potential innovation.
- For the largest target size/role segment, what are the customer’s system costs when the costs are expressed as an amount per unit of sale? (Analysis 43)
- What costs of the customer might offer the Company the most promising opportunities for performance innovation?
A word of caution: Each of these analyses should relate only to the specific business the Company has defined in Analysis 2. The Company may uncover opportunities to involve itself in parts of the customer’s cost system where it does not participate, but where other companies do operate. For example, a personal computer manufacturer may discover, while diagnosing its customer costs, that it might have the opportunity to enter the business of retailing personal computers. The discovery of the potential to enter a new business can be alluring but also dangerous. The personal computer manufacturer may have a good opportunity to enter the retail business. It cannot, however, evaluate the attractions of that business while developing a strategy for the personal computer manufacturing business. Since manufacturing and retailing are different businesses, the personal computer manufacturer would need to do a separate review of its potential participation in the retail business. Each business demands its own strategy.
Basic Strategy Guide Users Go To: Step 17
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