By Tom Nunlist
In our increasingly fast-paced world, there is no room for companies to be complacent. To survive in the competitive marketplace long term, constant product innovation is a basic necessity. However, nearly three-quarters of new products either fall far short of their targets, or fail entirely. Not only that, businesses have become tolerant of this high failure rate to the point where it is treated as a given risk.
Dr. Georg Tacke, CEO of the global management and consulting firm, Simon-Kucher & Partners, emphatically disagrees with this presumption. According to Tacke, failing to make a product financially successful is very often the result of a homegrown issue—rather basic flaws in the process, from the initial design to end marketing. In his new book, Monetizing Innovation, co-written with his colleague Madhavan Ramanujam, he explains the traps many companies fall into when creating new products, offering refreshingly commonsense principles to avoid them. To him, it is all about “designing the product around the price.”
[Georg Tacke, CEO of Simon-Kucher & Partners]
Q. In the beginning of the book, you point out and criticize the fact that a high rate of financial failure for products and innovations—72% to be accurate—is deemed acceptable. Where does this attitude of inevitable failure come from?
A. Yes, and in Asia it is 76%.
This is a difficult question, there is not one single answer. A little bit comes from the Silicon Valley attitude of VC-based businesses, which are very much about statistics. The assumption is that if I invest in many companies, there’s a higher probability of investing in a unicorn, a business valued above $1 billion. But there’s a major flaw in this attitude, because it assumes the probability of success is independent from the probability of failure, and that success is a given. In our view, that couldn’t be more incorrect.
We are already seeing a slight change in attitude. Back to the VCs for instance, investors are starting to see that their job goes beyond financial investment, and they’re going more into the businesses, trying to do turnarounds and take more of an influential role than five or seven years ago.
On the US West Coast, I also see the development that the pure growth orientation, which ignores profit or revenue, is gradually vanishing. We have lots of projects where people don’t ask us “how can I grow volume,” but rather “how can I grow revenue and how can I become profitable?” This means the traditional way of looking at businesses is experiencing a comeback.
Q. Can you tell me about a product that you consider one of these unnecessary failures?
A. Take for instance Amazon’s Fire Phone. Amazon wanted to attack Apple’s iPhone and put every feature you can think of into the phone. That included, among others, a 3D-display, which needed several cameras to generate the 3D effect. The cameras used a lot of energy, which significantly reduced battery life.
The Fire Phone was a disaster. Already after a few weeks it was given away with a cell phone contract for just $1; Amazon had to write off $170 million on the Fire Phone inventory. But this disaster could have been avoided. Amazon could have asked the customers about how important certain features are to them. They would have found out well in advance that smartphone users don’t care about a 3D effect and several other Fire Phone features. Amazon surely wouldn’t have started the Fire Phone adventure, or they would have at least designed the product to be completely different. But Jeff Bezos did none of that; he built it, tried to sell it, and failed.
Another example is the Segway. If you look at the initial numbers it is a super flop. But if the developers had started talking to customers in advance, they would have found out that the price they needed to cover the costs was far too high to make a mass product. Accordingly, they would have either come up with cheaper and simpler technology, achieving a price point to make it a mass product, or they would have recognized it works well with a segmented approach, for example, for security workers in a shopping mall, or tourists. They then could have designed it specifically for these segments. But they did none of that, and so it failed in its original positioning.
Failure is also possible on the other side of the coin. The Asus Mini EEE PC, introduced in 2007, was the first mini notebook when it was released. Many people would call it a success: it was completely sold out, and after three or four months on the market the CEO said they were unable to produce more than 10% of their current demand. To my mind that is a failure. Could they have done better? Yes. They could have found that out earlier on, and either gone higher with the price or increased production capacity.
Q. So this is building the product around the price. Can you explain more about how it differs from just picking the optimum price?
A. If the task is to pick the optimal price, you first have the final product and then you determine the price. In the way we describe it in the book, and the way we recommend, you start early on, right at the beginning of the innovation process when you don’t yet have the product. You have what we call the “willingness to pay” talk and you find out which features are important and which are less so. With this information you design a product with an optimal value-cost-price ratio. In the other scenario, without using the information on willingness to pay, you simply hope to design the right product and then you try to find out what the best price is. But if the product does not fully meet customer needs, the price cannot correct that mistake, and the product ends up as a flop.
To give you an example, if you do it our way, you would perhaps find out that an SUV does not necessarily need a four-wheel drive, because people use their SUVs to drive along city streets. They just want a bigger car. Your analysis shows that half of these drivers don’t want a four-wheel drive, and the other half do. You then have to make the decision: Do I integrate the four-wheel drive feature into the product, or do I leave it out? You maybe decide that it won’t be included in your base version. That reduces costs and gives you the opportunity to offer a lower price tag, leaving the customer to choose whether they opt for a four-wheel drive.
Without having made that analysis, you most likely would have put everything into the product. It would have been fully loaded and a big segment of drivers would have perceived it as too expensive. In the end you would have ended up with lower volume.
Q. That is one of the big lessons in the book: Ask the target customer what they are willing to pay for, which is a very simple principle. What flawed thinking causes companies to skip that basic question?
A. It is so easy, right?
I think it is a combination of three things. First, what we see in many companies is laziness. They have always done it that way, they don’t think about it, and they leave the innovation process unchanged. The second is a conscious decision, to do things without analyzing the willingness to pay. The principle is: trust the engineers, they know what they are doing, they will come up with the right thing and let’s not disturb them in the innovation process. All the other things, like pricing, customer segments, positioning etc. are afterthoughts and will come later. Several companies have that as a conscious principle.
And the third thing is: companies believe that it cannot be done, that the customer has no idea what he or she wants, that there are no reliable methods to find out the willingness to pay before the product is ready. That’s incorrect. You can describe things to potential customers and they are able to state their preferences and willingness to pay. And nowadays we have excellent methods for every product and situation imaginable to measure customers’ willingness to pay in a precise and reliable way.
It’s a combination of these three ways of thinking.
Q. You also mention flawed demographics, for example the point that, technically speaking, Ozzy Osbourne and Prince Charles belong to the same group. In China the buzzword is the middle class, which is extremely diverse. What is behind this flaw?
A. If you do segmentation based on socio-demographics such as age, status, income, region, etc., you end up with Prince Charles and Ozzy Osbourne being in the same segment. This is of course nonsense, but is a good illustration of the classical segmentation deficit. For new product development, segmentation should always be needs or value-based, that is to say homogenous groups with the same or similar needs. In this sense, the middle class you mentioned is not a precise enough segmentation for product innovation. It is too broad, fuzzy and not needs-based. Products aiming at such an unspecified large group will most likely end up as average products, which don’t really fit anybody.
Q. Yes, and there is yet another distinction you also make here, between features and values. Is this a branding issue?
A. It is a product communication issue rather than a branding issue. Product communication often focuses on technical features, in telecommunications for example it could be megabits per second, LTE, etc. The value of these technical features is that you can download a 90 minute movie in X minutes, which is much more meaningful than the technical specification, which is often not understood by the customer. We observe that for this reason a lot of products flop. To fix that, we recommend to involve marketers early on in the innovation process, so that they fully understand the true customer value of the new product. Only with this understanding are they in a position to develop an appropriate product communication strategy.
Q. It seems this would make sense especially in B2B, because the value you are trying to create with the product is probably more specialized and something that you really have to understand.
A. I couldn’t agree more. And the takeaway for lots of people in innovation is: communication is not a task to be given to so-called specialists. Or you at least need to check the communication they come up with. What we very often see is that this part of the process is handed over to other functions, while the innovation people think they are done and start with a new project. They are not done. The product is only ready when it is on the market and successful, not before.
Q. Speaking of B2B, the book uses examples of both the B2B and B2C sector. How do the approaches differ when applying the book’s lessons?
A. The principles are 100% the same, there is absolutely no difference. The ways to apply them are of course slightly different because if we take private customers in the B2C area, the user and decision-maker are the same person. But in the corporate world, we have a buying center, we have users, procurement people, influencers, decision-makers and so forth. So the situation is a bit more complex. It’s also more difficult to identify needs. You have to go to and take into account all of these target groups. So, while it is a different method of investigating, the general process remains the same. The key principle is also the same: Go early and ask.
Q. How do you make sure you get this stuff right and make a successful product?
A. What you have to realize is that most of these failures are really homemade. No external factors can be blamed; success or failure—it solely depends on us. That first of all is good news. We have developed a bulletproof nine-step process, which will lead to innovation success, almost guaranteed. It includes all the mentioned elements such as a willingness-to-pay analysis, price before product, communication, etc. Equally as important as the process itself is getting it into the organization and making it stick. For many companies, this is a difficult and challenging transformation process. Here leadership and top management come into the game. If the C-level executives do not drive that transformation and put a clear focus on monetization and pricing, this transformation will not come to life. In the end, monetizing innovation is a C-level task.
[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]