COST – BENEFIT RATIO

Offer a "must have" productBy aligning it with the customer's perception of value

cost-benefit analysis

How do customers measure value?

Your product’s value to the customer is established by its cost-benefit ratio. Whenever you provide substantial benefits at a reasonable cost, it seems natural to expect customers to be happy. The challenge with this concept is some customer accept reduced benefits, in order to make the product virtually cost free.

Brand new products frequently provide customers with very high gains or benefits, but come at a very high cost. This explains why early adopters are the only buyers of new innovations and technologies. Early adopters accept high costs in order to get exceptional benefits. Herein lies the challenge for your new product or innovations. The cost-benefit ratio that is acceptable to your customer changes over time. And you must always be in alignment with the changing value ratio of your customers.

Formulas that fail

One of the near-universal assumptions in business is: “if the cost of something gets low enough, everyone will automatically buy it.” And we have seen many times that a reduction in price often accompanies the acceptance of a product in the marketplace. But there is no guarantee that a product will become mainstream just because it is low cost. The two primary drivers of market expansion are product intangibles and an aligned cost-benefit ratio.

Consider what happened in the personal computer (PC) industry. Not only did prices go down and performance went up, but MANY other things helped make the PC a mainstream appliance. One of the biggest factors was the addition of IBM’s backing and reputation to the desktop computing industry. Remember the so-called “IBM compatible PC” standard? IBM’s blessing along with other “standards” such as the DOS/Windows operating system and the ISA/EISA bus (i.e. product intangibles) all combined to reduce the perceived risk of buying a PC.

However the most powerful factor in PC market development was a benefit-boosting application called the spreadsheet. Early spreadsheet software such as Lotus 1-2-3 and Context MBA running on the PC, provided a quantum leap in capability over the existing ways of manipulating numbers…with adding machines, calculators, pens, pencils and sheets of paper.

Without the intangible factors and the massive boost in performance, the PC would not have been adopted by the mainstream…even at an ultra-low cost.

cost-benefit analysi fallacy

Cost-benefit challenges

Most product managers are aware of how to increase the benefit their product provides, but few consider the cost component of their value equation. The cost-benefit ratio must follow the lifecycle of customer adoption. Introduce a product that can deliver a very high gain while requiring only modest discomfort or cost. Follow that by releasing a higher performing product (not necessarily very high) that has a comparatively painless or low cost of adoption. And finally, mature markets must receive increasingly modest gains going forward as long as there is no pain in getting them.

Unsuccessful products promise good but not fantastic gains that can be adopted with discomfort but not excruciating pain. These products are “nice-to-have” but not “must-have.” And the unhappy customer must take on a certain amount of responsibility for learning how to use the new product, which is often too painful.