By Jeffrey Phillips

True innovation requires a more expansive evaluation than a traditional business case and needs to be considered with features and attributes that are more qualitative and driven more by emotion than logic. Seven components contribute to innovation success: choice/control, convenience, community, completeness, compatibility, coolness/communicationand customer’s cost. These factors, used to evaluate an idea early in the process, can contribute to the success of a new product or service by improving adoption, reducing risk and building trust for the new product or service.

Most of the factors used to evaluate an innovation (convenience, compatibility, control, etc.) require that the innovator consider the customer or consumer’s point of view.Does an innovation offer the customer more convenience than what was available previously?Does an innovation offer the customer more control? Does it offer the customer compatibility with existing products or services?This “outside-in” viewpoint is not a common starting point for most innovators.Typically most organizations innovate around internal technologies or capabilities, and then seek market feedback in an “inside-out” innovation approach.Customer’s cost, however, is a factor that can only be considered from the customer’s viewpoint.

Cost is a factor that many firms will claim to consider when evaluating a new idea.Many firms do evaluate the cost of the innovation – the internal cost to develop and distribute – but not the true cost to the customer to acquire and use.Again, this approach is an example of an inside-out view of innovation, as opposed to an outside-in evaluation of cost.To be successful, an innovator must consider the ultimate cost to the customer to acquire and use a product or service.

Customer’s Cost

When evaluating a new product or service, it would be rash not to calculate the costs for design, development and marketing, and develop some expectations for market penetration and sales.This is a rational approach to the business of developing products and services.Very few ideas are commercialized without some sort of a business plan – what can be expected in revenue, what will it cost to produce the product or service, and what are the profits to be generated.

It is hard to find a firm that uses a consistent business case model for ideas – many do not seem to have any formal process whatsoever. Many firms fail to develop a consistent internal cost model, and have little understanding or knowledge of the importance of understanding the cost of acquisition, and use of a new product or service from a consumer’s point of view. While producers tend to view new products and services in terms of the costs to develop and market plus a markup for profit, consumers tend to assess several types of costs that are not apparent or considered by the innovator.

All innovators set a market price for their products and services – what they think of as the cost to the customer for acquiring their product or service. That cost is the retail price. While that is one significant component of customer’s cost, there are other, equally important costs that must be considered:

• Costs associated with acquiring the innovative product or service
• Costs associated with learning to use the new product or service
• Costs associated with transition and obsolescence of the existing product or service

Incorporated in these items are even more types of cost – psychic costs that are evidenced more in terms of resistance to change, or fear or inertia, and hard dollar costs associated with the acquisition and use of a new product or service.

Acquisition Costs

What can a company do to make it easier to acquire its innovative product or service? Some consumer packaged products and appliances can create tremendous demand; people will line up and experience inconvenience to be the first to acquire the product or service. These individuals, however, only reflect the early adopters, not the vast majority of the market.

Sometimes an innovation can be off-putting, or seem too sophisticated or ornate for consumers or users to feel comfortable acquiring. It is in this regard that P&G does such a great job with its innovations. Products like the Swiffer are easy to acquire, since they are found in the same channels as other cleaners, and are easy to try and learn to use. Their applicability is easy to understand and the value proposition is relatively high. The Swiffer fills a market opportunity between a broom and a mop, can be sold in the same mass market channels and does not present challenges to acquire. P&G and other innovative consumer packaged goods firms have done an excellent job innovating while keeping the acquisition cost of their new products low.

Can the target audience easily acquire a company’s product in the same channels, at similar price points and with the same knowledge and information as they have acquired other alternative solutions? More importantly, can a business lower its acquisition costs by making information more readily available, establishing a community around the product or service, or taking other actions that lower acquisition costs and effort?

Learning Costs

Any new product or service requires some education or training since the new product offers new or different functions or capabilities over the existing product, or is offered to a market that did not have a solution previously. The learning costs associated with a product is probably the most under-emphasized and the most important challenge to the acquisition of a new product or service. Most people do not want to spend a lot of time learning about a new product when they are reasonably happy with an existing product or service. The innovation must either offer exceptionally compelling features or be demonstrably easy to learn to avoid switching challenges.

There are many examples of products and services that present excellent value and compelling services yet do not achieve their expected market breakthrough. Often the gap between expected uptake and actual sales is attributable to the cost of learning a new application or technology. (Microsoft Vista may fall into this category.) Humans are relatively lazy and do not enjoy products or services that require thinking too hard. Any innovation that requires significant relearning or training will face a challenge in market acceptance. Based on this fact, there are several ways to ensure the learning costs are minimized:

• Undershoot the goal: Deliver slightly less functionality than is believed necessary.Most innovators over-engineer their products believing that most consumers are just like them. In the case of learning costs, less is often more. A good example of an undershot product are new cell phones targeted to the elderly, which provide larger keys, a larger ear piece and which lack many of the bells and whistles that other cell phones provide. These simplified cell phones have a much lower learning curve and are easier to adopt within specific consumer segments.
• Make learning fun: Video game makers understand that any new user must learn how to use the game and master the basics within the game. To do this, game designers often build different modes of play for the beginner, which helps instruct the individual on the basic expectations and rules. Additionally, game makers often provide clues and hints online and other places; they make learning a new game or technology interesting and fun. Many electronics and appliance manufacturers could learn a lot from the gaming industry, since it can be exceptionally difficult to learn new applications and technologies.
• Leverage early adopters and a community to support those who may need more help to use the new product or service.

Obsolescence Costs

Usually an innovation supersedes or replaces an existing product or service. Once the new product or service is adopted, the existing product or service must be eliminated.There are both psychic costs and hard dollar costs associated with obsolescence; a trusty product or service that is being replaced may have great sentimental value, or secondary and/or tertiary products and services. For example, moving from vinyl to CDs probably meant getting rid of a treasured record collection and phonograph, which would have both emotional and monetary impact.Many innovations create obsolescence in the products or services they replace, yet they offer no means to mitigate these costs or create value for the owner even after obsolescence.

When it comes to evaluating innovation by compatibility, most innovators have two options: 1) leverage existing infrastructure and standards, which provides for easier adoption since consumers are building on an existing stack of goods and services or 2) disrupt a standard and create a new one, which requires compelling new benefits due to the investments that may become obsolete. When a firm considers a new innovation, it is important to understand and evaluate what products, services or offerings might be threatened or made obsolete by the introduction of the new innovation or technology. If the cost of obsolescence is too high, the market may reject the innovation on this basis alone. As an example, consider the switch from analog to digital broadcast television. The U.S.federal government is providing vouchers to consumers who own televisions that receive only analog signals. This means many consumers can enjoy digital broadcasts while those who have yet to adopt newer technologies are not forced into a choice they may not be comfortable with.

Can the innovation reduce or eliminate obsolescence costs? Can a business leverage the existing technology, product or service in such a way that it builds on an existing stack rather than eliminating the product or service?

Counting the Costs

The final factor to consider when thinking about customer’s costs is the level of disruption and benefit an innovation provides – as measured and determined by the market, not by an innovation team. The iPod combined with iTunes created benefits for the consumer that allowed the iPod users to pay more than the market rate for an MP3 player, since those consumers felt they were getting tremendous value from the total solution.Too often innovators worry too much about the price of a product or service, when in reality they should focus on value to the consumer. Many successful innovations have entered the market at prices that were higher than reasonably competitive products or services. If a product is truly new, valuable and attractive, it can – and will – command a premium. Using Apple again as an example, the iPhone commanded a significant price advantage for almost a year, but Apple and its distribution partner Cingular are preparing to damage the aura surrounding the iPhone in the subsequent rollout.While Apple is lowering the price of the equipment, the costs associated with using the iPhone on the Cingular network are increasing. It may be that Apple realizes that it is not just the phone that matters, but the entire cost and experience. In this case, however, they do not control the “whole” product and there may be a disappointing launch and uptake for the second version of the iPhone.

Understanding the value your product provides and the total costs associated with acquiring, learning and using the solution will help a company better evaluate its new product and service ideas.

Conclusion

Consumers and business people are all worried about the costs of the products and services being built, sold and acquired. Innovators have to be able to understand the customer’s perspective and look at the costs to use, acquire, learn and manage a new product or service. To do this, they must take an outside-in view of the products and services offered as innovations. Too frequently, expectations for costs are too closely related to what it takes a business to bring the product to market, rather than the costs the consumer bears to acquire and use the product or service. Only when a company evaluates an innovation from a consumer’s cost perspective will the viability of an idea be truly understood.

About the Author:

Jeffrey Phillips is a vice president with OVO and responsible for marketing and for leading innovation projects with OVO’s clients. Mr. Phillips has extensive experience working in the innovation space, with a wide range of Fortune 500 firms. He has published articles for Harvard Management Update, DigitAll Magazine, Pure Insight and blogs about innovation at Innovate on Purpose. Contact Jeffrey Phillips at jphillips (at) ovoinnovation.com.