Innovation and Tradeoffs?

Is the world of consumers kind to tradeoffs in products?

Ask your customer what they want in their new product and the answer you get is "Everything!". Customers want the most features at the lowest possible cost, even free if possible. Everyone wants a product or service that will do everything for them and not cost a penny.

As marketers know, you cannot make that happen at no cost and no upside in revenues. Businessmen and women know that it is the revenue model that drives the business. No revenue means no business and no customers. So, I have good news for you. Customers are willing to make tradeoffs when it comes to products. This is exactly where Innovation comes into play. The higher the magnitude of the innovation (per definition of a "Marketing Innovation", see below), the higher the willingness of the customer to pay. The more you alleviate a painpoint, the more you can charge for it.

An example would be medicine. Some truly innovate life saving drugs can facilitate tremendous extensions in patient lifespan. They cost a lot to make, and have good amount of margins, but patients are willing to pay more because of the benefit of extension of their lives or pain alleviation.

Another good example is air travel, which is a mature industry and not an innovation anymore. Nevertheless, when passenger air travel was introduced, it was a true innovation. We are still willing to pay a lot more than it costs to drive so that we can get from Point A to Point B faster. We are willing to pay for speed of travel.

Consumers are willing to pay several hundred dollars for an ipod for an iphone for the additional innovative features that they offer.

Overall, this is good news to marketers. Why? Because the better you are at innovating, the more value you can deliver to your customers and the more value you can extract from them.

Questions that come to mind are:

• How much more can you charge?
• And how will I know where the customers will be willing to make tradeoffs?

Answer: Ask your customers. They will tell you.

Tools and frameworks like Conjoint Analysis and Pricing models facilitate asking these questions to your customers. A conjoint study is a partial DOE (design of experiment) that can assist you in asking your customers where they are most likely to make tradeoffs. The output of a conjoint study will help you a) find areas to innovate in and b) understand how consumers will make tradeoffs and maximize value delivery.

Value extraction from consumers will come from value based pricing. There are several pricing models that can help you answer the price question. More later on pricing models as applied to innovations.