Products nowadays are subject to ever-shorter market cycles: By constantly offering new functions and design elements, manufacturers are attempting to reinvent products that have become part of everyday life, such as washing machines or telephones. But to develop successful and profitable products, companies have to involve their customers right from the start.
That's because customers determine what price is feasible and ultimately what the profit margin is. Manufacturers therefore have to rethink their approach: it used to be that costs played the primary role in product development, but now customer wishes and price sensitivity are coming to the fore. For this reason, the product value management approach focuses strictly on only those functions and features that customers actually want and are willing to pay for – at minimal production costs. The results are better products, happier customers and improved sales and profitability. These are the key findings of "Product value management", the latest issue of Roland Berger's think: act CONTENT series.
"Successful products are those that customers like and are willing to pay an appropriate price for. Product development therefore needs to take customer desires more strongly into account," says Oliver Knapp, Partner at Roland Berger Strategy Consultants. "If the product can be made at a low cost, then the companies are successful as well."
Customers becoming more sensitive to price and performance
Over the past few years, the conditions for manufacturers in many industries have become much more difficult. Tougher competition and stricter production requirements have raised the bar, but changes in customer behavior have also played a major role: now that customers can compare offers more quickly and easily, they are more likely than ever to question a product's value for the money.
Companies are therefore being forced to replace their products more and more rapidly, giving them new functions, more technology and a fresh design. This applies not only to faster-moving sectors like consumer goods, but also to industries such as engineered products. Companies have to constantly attract new consumers while maintaining their existing customer base.
That's why it's imperative for companies to know the desires and price sensitivity of their customers even before they begin developing a product. As Roland Berger Principal Michael Zollenkop puts it, "Customers are only willing to pay an appropriate price for a product if their preferences concerning functions, features and materials have been taken into account."
More customer benefits and greater profitability go hand in hand
At the same time, companies want to keep production cost-effective to improve their own profitability. For this reason, manufacturers pay close attention to how much each function of the end product costs. This is because a function contributes to a product's profitability only if it is not too expensive to include and makes it possible to charge a significantly higher price. In this way, the company covers its costs and improves its profits.
"There are essentially two ways for companies to improve a product's value for their customers while simultaneously increasing their own profitability," says Knapp. "One is to increase the benefit for the customer to the point that he or she is ready to pay for it." In that case, the increase in price must outpace the rise in costs in order to be profitable for the company. Knapp continues: "In the second way, the benefits for the customer are not changed. Instead, the company eliminates only those product features that customers don't consider important anyway, thus reducing costs."
Product value management is key to successful product development
Against this backdrop, Roland Berger Strategy Consultants leveraged its cross-industry experience in optimizing products and product costs to develop the concept for product value management. The concept outlines a four-phase process, which switches back and forth between the customer and company perspectives, and indirectly that of suppliers. In each phase, manufacturers use various methods to identify key findings for optimal product development. Zollenkop explains, "It's crucial to use the right methods at the right time in the right order." That's because up to 60% of all new product developments flop after being launched on the market. Therefore it is well worth it for companies to pay more attention to a product's benefits and sale value – and not just on manufacturing costs.
How this concept actually works in practice can be illustrated with the example of a premium automotive manufacturer: The company offers its customers the option of paying for a panoramic sunroof instead of a traditional one. The sunroof was developed in line with customer wishes, which had a considerable effect on the manufacturing process. This ultimately increased the automaker's profitability, as the margins on the product are around 40% higher than those on standard sunroofs.
Study verifies success of product value management approach
A comprehensive analysis by Roland Berger expert Marc Graner reveals that companies using the product value management method have seen excellent results. In his study entitled "Best practices in new product development", Graner looked at more than 400 successful product developments by leading manufacturers in various industry sectors. He was able to show that a key goal of product value management – simultaneously improving profitability and increasing customer satisfaction – is in fact possible. "The study concluded that companies have to combine various methods, such as those from the fields of R&D, marketing, purchasing and logistics, to make their products a success," says Graner.
