The following excerpt is from Richard Koch and Greg Lockwood’s book . Buy it now from | |
With price-simplifying, price is the strategy. Everything else is tactics -- the means to arrive at the target price. Price-simplifying rests on the observation that if you can halve the price, your market will more than double (and may well increase by 10 times or more). So everything you do from now on -- in thinking, in planning and in execution -- must be done with price in mind. It must become a burning obsession... but for a purpose.
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If you’re contemplating cutting prices in half, three fundamental changes must take place:
- The product must be redesigned to make it simpler and cheaper. Visualize your target customers -- those whom you wish to create and reward.
- The business system must be redesigned to make the product simpler and cheaper to produce and deliver, and to provide protection for your firm against imitators.
- The business must be scaled -- that is, its sales must multiply, and continue to multiply -- as quickly and extensively as possible.
We’ve examined the most successful price-simplifiers’ strategies and have determined three steps that are related to product redesign.
Step One: Subtract features/performance and return to the product’s core function
With IKEA, buying a sofa or a table isn’t a rite of passage, not a signal that you’ve arrived or established independence from your parents. It’s a monetary transaction, pure and simple. You don’t want advice from a salesperson, don’t want to bounce up and down on the sofa, don’t need to know if you can get it in yellow polka-dots or brown leather. You buy it because you need it. With McDonald’s, you don’t demand a wide assortment of food, candlelight, a man in a tuxedo, a friendly waitress or even somewhere to sit down. You want a quick, tasty, filling meal. Romance is thrown out of the window; hard utility is everything.
Every price revolution goes back to basics, back to economics, back to utility. If you’re clear about a product’s core function -- and about everything that isn’t its core function -- you’re well primed for product redesign. Many of the features and services that everyone once viewed as essential fall by the wayside, and as a result, some customers will be lost. Trade-offs usually involve dropping features and/or customers to get the price as low as possible. Subtract everything that isn’t absolutely essential for a product’s usefulness. Doing so will leave you with nothing but the core function.
For a physical product, subtraction should also be pursued in two other dimensions -- weight and size.
Subtract weight. Expense always rises with weight. Economic historians tell us that in the U.S. and UK, the weight of all the goods that generated GNP in 2000 was roughly the same as it had been in 1900. Yet that same output was twenty times more valuable in real terms. In other words, products went on a huge diet during the last century, but the same value was generated for one-twentieth the weight. A typical timepiece bought in 1900 would have been a heavy fob watch. Contrast that with a Swatch. The latter is far more accurate yet weighs much less, and costs a fraction of its predecessor.
Products also lost weight when manufacturers started using lighter versions of existing materials (such as Ford’s vanadium steel), when they developed entirely new materials (such as plastics), when they eliminated heavy components and when they replaced hardware with software.
Follow Henry Ford’s advice:
“Start with an article that suits and then... find some way of eliminating the entirely useless parts. This applies to everything -- a shoe, a dress, a house, a piece of machinery, a railroad, a steamship, an airplane. As we cut out the useless parts and simplify necessary ones, we also cut down the cost of making.”
Subtract size. Expense also increases with size. A bigger product uses more materials, and it occupies more space throughout its journey from assembly to the consumer’s hands -- more space in the factory, the warehouse, the shop and during transportation between these stages and finally to the consumer. It’s no accident that those products that have slimmed down most over the past decades have also been those that have seen the greatest price reductions and consequent explosions in demand: computers, mobile phones, music players and other electronic devices, and, of course, the biggest space-saver of all: the Cloud. Investigate every possible means of miniaturizing the product, and of saving space, especially in transit.
Step Two: Reduce variety and invent a universal product
Successful simplifiers slash the variety of what’s offered to customers in order to cut costs and prices. Ideally, a single “universal product” emerges, one that’s both cheaper to produce and achieves high fame and scale: the Model T Ford; the Big Mac; IKEA’s light-colored pine furniture; single-class travel on Southwest Airlines.
Consolidating many different products into a few -- or just one -- has really strong economic advantages: large reduction in stock-keeping units; higher stock turns; lower purchasing costs with greater volume per product; lower marketing and selling costs; and lower production costs. Moreover, a universal product stands out from the crowd as an anomaly, so it attracts attention and commands respect, reducing the need for advertising and the cost of international growth, and multiplying visibility and sales.
In redesigning your product, ask yourself, “Can I invent a universal product, or something close to it, that incurs much lower costs and has the potential to appeal throughout the world?” Think about Ray Kroc, who wanted to make McDonald’s burgers and fries identical in appearance and taste everywhere. Simplicity breeds universality; and universality demands simplicity.
Step Three: Add cheap benefits
The third step is to provide benefits that cost the price-simplifier little but have substantial value for target customers. Often these benefits can cost the simplifying firm nothing whatsoever -- or even less than nothing when the additional volume of customers and their spending are taken into account. For instance, IKEA offers free parking lots, childcare and restaurants in compensation for eliminating expensive features, such as pre-assembled furniture and home delivery. This might seem like a simple case of boosting the balance sheet by withdrawing expensive features and replacing them with cheap ones, but in fact, it’s far better than that for IKEA.
All of the firm’s apparent “gifts” increase profits in themselves, usually by attracting more trade. Anything that generates more volume has high marginal value, and this usually more than offsets the extra cost of providing the service. But beware of complicating the product or business system, and avoid anything that might raise the price.
If you can, conduct a controlled experiment -- at different times and/or in different places -- to see whether your basic offering, or something additional, generates more net profits. Once your product has been redesigned, it’s time to consider how to redesign the business system around it, how to deliver your simplified product to customers in a way that makes the whole industry vastly more efficient and shuts out rival firms. This is an even more ambitious and critical task because you're aiming to do nothing less than transform your industry.
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