From Exceptional Utility to Strategic Pricing

From Exceptional Utility to Strategic Pricing

Chapter 6, BOS: Get the Strategic Sequence Right Team II Josh Pavlik, Jennifer Rogas, Logan Reynolds, Corbin Ray, Marlee Armstrong, Amy Drake The Next Step So far, youve discovered possible blue oceans, constructed a strategy canvas for that blue ocean, and youve explored how to aggregate the largest possible mass of buyers for your idea.

The next challenge is to build a robust business model to ensure that you make a healthy profit on your blue ocean idea. The Sequence of Blue Ocean Strategy The Revenue Side Buyer Utility Does your offering unlock exceptional utility? Is there a compelling reason for the mass of people to buy it?

Price: set the right strategic price Is the offering priced to attract the mass of target buyers so that they have a compelling ability to pay for your offering? Final Two Steps Cost Can you produce your offering at the target cost and still earn a healthy profit margin? Can you profit at the strategic price- the price easily accessible to the mass of target buyers?

(You should NOT let costs drive prices) Adoption What are the adoption hurdles in rolling out your idea? Ex: potential resistance to the idea by retailers or partners Testing For Exceptional Utility Utility: Product or service that is useful

Many companies fail to deliver exceptional value because they are obsessed by the novelty of their product or service, especially when new technology plays a part in it. Example: Phillips CD-I and the technology trap The Buyer Utility Map Outlines all the levers companies can pull to deliver

exceptional utility to buyers as well as the various experiences buyers can have with a product 6 Stages of the Buyer Experience The columns of the table represent the 6 stages of the buyer experience cycle These are all the activities a buyer will do with the product

Purchase Delivery Use Supplement Maintenance Disposal Utility Levers The rows of the table represent the 6 utility

levers The utility levers are the ways in which utility or value can be offered to the customer: Productivity Simplicity Convenience

Risk Fun and Images Environmental friendliness Uncovering Blocks to Utility To test for exceptional utility, companies should check whether their offering has removed the greatest blocks to utility Ask the Question: In which stage are the biggest blocks to convenience?

The greatest blocks to utility often represent the greatest opportunities to unlock value From Exceptional Utility to Strategic Pricing Set the right Strategic Price Strong Revenue Stream Customers want to purchase Have the means to pay

Numerous companies do the Opposite Price high to novelty seekers Price to mainstream overtime Two Reasons to Strategically Set Price Volume Generates Higher Returns High initial R&D costs subsequent lower costs in the future Example: Apple OS initially cost billions, selling to the masses cost the means of delivery, a CD

To a buyer, value of product is tied to the number of total users Example: EBay, the website would not be utilized if only a few used the services Important Vocab Rival Good: Once used by one firm can not be used by another Employees Raw Material

Non-rival Good: Use by one firm does not limit its use by another Virgin Atlantic Airways- Upper Class Brand Can be mimicked by other airlines Important Vocab & Meaning Excludability: Dependent on nature of product and legal system Excludable if you can prevent others from using it Patents-excludable Floor Plan/Business Idea or Plan- not excludable

Strategic Pricing Must attract large numbers of buys Must Retain them ID Price Corridor of the Mass Challenge- Understand the price sensitivities of your potential customers List Products and Services into 2 Categories Different Form same Function

Same core utility, different form Ford Model T Priced against horse draw carriages VS auto industry Families from point A to B Different Form and Function, same Objective Cirque de Soleil, night time entertainment Competes with bars, movies Price against industries that have the same goal Specify a Level Within the Price Corridor How High to Price within the Corridor? Two Principle Factors

Degree of protection legally through patents and copyrights Ownership of exclusive assets or core capabilities Manufacturing plant, knowledge Mid to Low Pricing if Blue Ocean high FC & marginal VC Attractiveness depends heavily on network externalities Cost Structure benefit from steep economies of scale Volume brings significant cost advantages From Strategic Pricing to Target Costing 3rd step in strategic sequence is target

costing Use PRICE-MINUS costing to arrive at TARGET COST Strategic Price - Desired Profit Margin Target Cost Price-minus costing allows maximization of profit potential After calculating target cost, companies

must find ways to meet the target cost Company should NOT increase the strategic price to meet the target cost; this leads to decreased profit potential Companies should utilize the 3 Principal Levers to hit target cost: 1) Streamlining and cost innovations 2) Partnering 3) Pricing innovation 1) Streamlining and Cost Innovations

Streamlining operations and introducing cost innovations from manufacturing to distribution Use less expensive raw materials Metal to plastic Eliminate, reduce, or outsource high-cost, lowvalue activities Move to lower-cost location Southwest uses secondary airports instead of major ones Reduce number of parts or steps in production process Swatch reduced parts in watch from 150 to 51

2) Partnering Partnering allows a company to utilize other companies expertise and capabilities to decrease costs IKEA meets its target cost by partnering with around 1,500 manufacturing companies to find the lowest prices for materials and production Nike partnered with Apple to use Apples technological expertise and production facilities to create its Nike + iPod running shoes 3)Pricing Innovation

When the first two principal levers do not make it possible for the company to meet its target cost, the company should change the pricing model of the industry Blockbuster rented videos for a few dollars when no one would buy them at the initial price of around $80 NetJet uses a timeshare to make its jets available to corporate customers who do not want to purchase a jet HP gave servers to Silicon Valley startups in return for part of their revenues Companies were able to meet target cost while still earning large amounts of revenue

From Utility, Price, and Cost to Adoption Blue Ocean Ideas do not always guarantee success Changing your business model to incorporate blue ocean ideas can provoke fear and resistance among a companies 3 main stakeholders: Employees Business Partners General Public Addressing Employees

Failure to adequately address the concerns of employees about the impact of a new business idea can be expensive Merrill Lynchs stock price fell by 14% because of resistance among employees Companies should make a conscious effort to communicate their awareness of the threats posed by execution of new plans Companies should work with employees to find ways of defusing the threats so everyone in the company wins Morgan Stanley engaged employees in an open discussion to

address the new strategies and by doing so the company's shares rose 13% Addressing Business Partners Business Partners are fearful that their revenue streams or market positions are threatened by the new business idea Because implementing new ideas can be harmful to the company's market position, it is important to communicate and ensure the success to the partners SAP incorporated a new software program that left investors skeptical, but by engaging in an open

discussion the SAP executives were able convince the partners that they stood more to gain more business than to lose Addressing the General Public If your new business ideas are very new and innovative, it could threaten social or political norms It is important to make the public aware of the new business plan and how it can benefit them and not harm them Make the public a part of your new ideas and you will eliminate some of the public outcry against your companies efforts

The Key Challenges Engage in open discussion about why the adoption of the new idea is necessary Explain the new ideas merits, set clear expectations for its ramifications, and describe how the company will address them Remember that stakeholders need to know that their voice have been heard Companies that take the time to have such discussions with stakeholders will find that it considerably repays the time and effort involved The Blue Ocean Idea Index

What is BOI Index? A simple but robust tool to verify if a new business idea meets the criteria of a Blue Ocean Strategy. Often, companies believe that a great idea is enough to generate a commercial success.

The Blue Ocean Idea Index Great ideas must create a significant leap in buyer utility. Offering must be priced so that it is within the reach of the mass of target buyers, while at the same time guaranteeing a profit to the company by reducing cost structure. Blue Ocean Idea Index cont.

Managers need to ensure that before going through the strategy, they have to address the following: Company fears Resistant employees Business partners General public All need to be on the same page in response to change. What Does BOI Index Test?

Does the new offering provide exceptional utility? Is the price easily accessible to the mass of target buyers Does the cost structure meet the target cost? Are adoption hurdles addressed up front? If the answer is no to any step, it is important to return until the answer is yes. Brief Summary of Concepts

Building a Business Concept Buyer Utility Map Strategic Price Setting Target Costing

Business Relations Partners Employees Customers

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