Innovate the Future: Where Did All Your Revenues Go?
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It's Just Not Fair
When we play football, tennis, or a game of pool, we use an agreed-upon set of rules. When someone breaks a rule, everyone knows it, and there are repercussions for every rule that's broken. Someone is compensated in some way when the rule is broken. Generally, the compensation exceeds the damage caused by the infraction, in an effort to teach everyone that breaking the rules is bad.
Similarly, the relationship between a company, its products, and its customers operates under a set of rules. Some of these rules may be as follows:
- If my company makes a useful product that's needed by customers, the customers will pay a reasonable premium to own/use our product.
- If my company improves the product, the customers understand that they must pay extra for those improvements.
- If my product is better than my competition's products, my customers will be loyal to my company and product.
- If customers want new features, they'll tell my company and we'll deliver those features, expecting the customers to be satisfied and to pay for the new features.
- If my company doesn't maintain the value of our product, our customers will not be loyal.
Business rules are not as cut-and-dried as stepping out of bounds on the football field or sinking the cue ball in a game of pool. Business is far more similar to a soccer match, where everyone starts pointing at the opponents and saying it was their fault.
Have you ever watched a debate between young children? They're so confident of their understanding of the rules and of their actions that they enter into the infamous "Did not! Did too!" battle. No one ever wins a "Did not! Did too!" battle, because no one ever changes positions. Their assumptions remain the same.
Companies have their own subtle way of playing "Did not! Did too!" with their customers. They see that the entire game is changing right before their eyes: Sales are dropping, customers are unhappy, new competitors are entering the market successfully. Yet these companies continue following the same old rules that made them successful. Eventually, playing fair will cost them the game.
What They Want, Not What They Get
Most of us accept this principle: Sales will follow some form of S-curve, showing sales growth that then stabilizes and tapers off. But the factors driving the sales S-curve can lead to a collapse in revenues, even as the company attempts to improve and expand the capabilities of the product and increase market penetration. Why are the customer and the market breaking the rules? Why isn't a better product worth moreor at least worth the same price as the previous version? Why do customers become disloyal?
In many ways, I'm a contrarian. I don't believe that old statement, "If you aren't failing, then you aren't trying." In my world, this rule should be reworded: "If you're failing, then you're doing something wrong and you're breaking the rules of the game with your customer."
I can hear youI get that response a lot! You're saying things like this:
- I'm improving my product, but my customer isn't happy. That breaks the rules.
- I asked my customers what they want, and we delivered it. Then the customer switched to a competitor. That breaks the rules.
- My product is the most powerful in the industry, and yet my customers are switching to new competitors with much less capable products. That breaks the rules.
Each time your customers appear to break the rules, look for two possible causes:
- The customer is wrong.
- The customer values your product differently than you think he should.
You can't fix the first possible cause. Unfortunately, there is no penalty in business that will always reward you when your customer is wrong. People make mistakes every day, no matter how much advice or information you give them.
The second cause is entirely your faultremember, we already covered "The customer is wrong." If customers appear to be breaking the revenue rules, it's because they'll only pay for what they want. They don't necessarily pay for what they get from your company in your product.
How can this happen? How can a set of business relationship rules covering your company, your product, and your customer suddenly stop working? We're talking about rules that made you successful and dominant in your market.
The rules haven't changed. What changed is the value of your product. So what happened to that value? How can a product with more features have less value to your customer?
How a customer perceives and utilizes a productand subsequently values the deployed productdetermines whether that product is merely competitive with existing products, or is innovative to some degree. This measure could be summarized as the product's "transformative value" or "transformative impact." In other words, how much does the new product transform the consumer's life or business?
If you go to an Internet search engine and enter wacky patents, you'll discover the true breadth of human ingenuity for creating inventions with little or no transformative valuelike the "Bird Diaper" for use with uncaged birds (U.S. Patent # 5934226) or the "Spider Ladder" that will provide spiders with a means of escape from a bathtub (U.K. Patent #2272154).
I seriously doubt that the inventors of these and other strange patents felt that they were bizarre, niche inventions. They probably were confident that they "had a winner"! Otherwise, they wouldn't have gone to all the trouble, spent all the time, and invested all the money required to file a patent. I'm also confident that these inventors didn't think a great deal about the size of the market for their inventions, or the transformative value to those markets. After all, how many people would want to let spiders escape from the bathtub to roam the house freely?
Consumers and enterprises have multiple reasons for considering whether a particular product is worthy of their money:
- Cost. Lower cost is expected for most products, but higher cost may be accepted or even anticipated for luxury products.
- Quality. Are you getting the level of quality for which you're paying?
- Aesthetic properties (color, smell, taste). Does the cheaper version taste like cardboard?
- Quantity. Will you ever use all of it?
- Reliability. Will it do the job for which you purchased it?
- Ease of use. Are the instructions in a bizarre, compressed language? And where is "slot A"?
- Flexibility. Can the product be used in multiple roles or situations?
- Brand name. Is Gucci butter actually better butter? And do I need better butter?
- Consistency. Is the product consistent from one purchase to the next? (Fast food comes to mind for most people.)
Features Alone Don't Drive Transformative Value
The average consumer uses only about 40% of the functions on her cell phone. Sure, a few amazing people out there can make a cell phone perform the Macarena. But to the average consumer, the transformative value of the cell phone doesn't include that unused 60%. Those features only create unwanted complexity, and for many consumers they also create fear and an unwillingness to switch to a new product. A friend of mine, a long-time salesman in the telecom market, once told me that it took him 15 minutes to change the ring tone on his cell phone. He couldn't locate that feature among all those menus.
Smartphones are "smart" because they simplify the way in which people manage and access the features that create the transformative value of the device to the consumer. You're still dialing, talking, texting. But now you can do a lot more, without digging through five layers of menus. So, in the case of smartphones, more features became an asset that increased the transformative value.
Time, money, and simplicity are the underlying drivers of all transformative value, no matter how many features you wrap into a product. Does it save me time or money? Does it simplify my life?
Even if you deliver the most amazing features ever seen, if you damage the way in which your product affects time, money, and/or simplicity, you're breaking the most important business relationship rule: You've lowered the transformative value of your product to your customers. And your customers will punish you in turn, by driving down your revenues when they switch to your competitors.
Are you seeing any of the following?
- Your customers aren't loyal any longer.
- New competitors are entering your market successfully with "inferior" products.
- Your salespeople have forgotten how to sell.
- Your product group is no longer innovative.
- Your revenues are falling.
If so, more than likely the game is still the same and the rules are still the same. (This assumes that the market hasn't shifted away from your product.)The problem is that you have damaged the transformative value of your product to your customer. Adding more features, or continuing to "drive innovation" will very likely destroy the remaining transformative value of your product to your customers.
If you want to get back your revenue stream, stop playing "Did not! Did too!" with your customers. Find out where you broke the rules, and you'll stop being penalized for it.