Product Innovation Isn’t Everything

starbucks

This article was originally posted on Inc.com.

How was Starbucks able to build an empire in just 35 years by charging premium prices for what is essentially a commodity? The coffee purveyor’s legions of loyal patrons seem to find significant value in what it offers, to the point that it has become one of America’s most beloved brands. Others, meanwhile, are perplexed by the fact that someone would pay $4 for a cup of coffee, standing in a long line for the opportunity to buy something that could be created at home for much less. Starbucks founder Howard Schultz has said, “If I went to a group of consumers and asked them if I should sell a $4 cup of coffee, what would they have told me?“

So how does Starbucks pull it off? Because it offers more than just coffee. It prepares premium custom beverages made to your precise order, excellent customer service, and beautiful stores with comfortable chairs and free WiFi. For many, a trip to Starbucks is as much about the experience as it is about the caffeine. For others, it is a matter of convenience-they can always find one nearby when they need to connect to the Internet. All of these things add value beyond the coffee itself, which enables Starbucks to sell one of the World’s most commoditized products, at a significant premium. For those who value these benefits, Starbucks is contributing significant value, well worth the $4 per visit.

Amazon.com is a subtler example of what’s possible when we look beyond the commodity. It is not selling a premium version of a product like Starbucks, nor does it have a physical presence on every street corner. It does, however, contribute significant incremental value beyond that of its competitors. Most of us shop at Amazon.com because we know it has the world’s largest inventory, the fastest shipping, and one of the best return policies. And, because it is now the largest retailer in the world, it also has significant pricing power and is thus able to offer some of the best pricing.

If all of these benefits seem trivial, ask yourself if you would buy from a smaller online store you don’t know much about, even if the product is the same price. Perhaps you have a bias toward supporting the small businesses or the underdog, but that aside, would you pay the same price for a product from a store that has slower shipping and an unknown return policy?

In 1979, Harvard Professor Michael Porter introduced the concept of the value chain, suggesting there are multiple layers to your business, each of which contributes to the total value to your customer. Direct activities, including sales, clearly contribute to revenue, and activities such as IT and customer service provide indirect, long-term value. The presence of all of these services form an integrated value chain that makes some brands more professional and valuable than others. The investments these companies make in their infrastructure cannot only make them more efficient and bring down cost, they have the potential to add value for their customers by improving the purchase experience, reducing risk, and addressing other needs that the customer may have but are being ignored by the market.

Starbucks and Amazon.com have both built an empire around selling commodities, but they invested heavily in the indirect benefits surrounding their offerings, thus providing more value than their rivals. Put another way, their innovation is the value chain they wrapped around the commodity products they sell, not the products themselves. After all, innovation does not always mean technical wizardry or superior craftsmanship–creating a more valuable delivery or purchase experience can be fertile ground for innovation too.

How can you take a page from Starbucks or Amazon? First, you have to appreciate the irony of selling a commodity and yet become so differentiated in the process, that you rise above the commodity trap that plagues so many businesses. Therein lies a subtle, yet crucial, distinction. Everyone in Silicon Valley seems to be “innovating” a technology product, but not many are creating meaningful differentiated value that gives them a leg up on competitors. That is unfortunate when you consider that many technology products become commodities eventually.

The bottom line? If you spend all of your resources innovating a product that is bound to become a commodity, you won’t have a defensible market position down the road. In fact, all of your resources will have been spent fighting a battle you are unlikely to win in the long term, unless your successful at being acquired during market consolidation, which is unlikely. That’s why innovating the value chain around an existing commoditized product, rather than innovating the product itself, is sometimes a better strategy. That’s especially true if you’re entering a crowded space and lack the timing or resources to become a leader when the market matures.

Framework for Evaluating Marketing Opportunity

poem

This article was originally posted on MindTheProduct.com.

How do you know whether a product idea is going to succeed if you build it and take it to market? If you’ve ever been part of a startup, or if your organization has launched a new line of products, you know how precarious the effort can be.

Some would advocate using the ‘Lean’ method to arrive at a product market fit. The basic premise is to seek input from customers early in the process to ensure you are building a product people actually want. This allows you to challenge your assumptions and go see for yourself what the problems are you purport to solve.

While there is a lot of validity to this approach if you have identified a viable market and are merely seeking product-market fit, it may not be the best tool for discovering market opportunity. Lean is a great approach to optimization, but it does not help you determine risks or propensity for success when evaluating a brand new product or market concept.

One of the biggest challenges faced with new product innovation is the lack of heuristic models or best practices for discovering product opportunity. This is partly because the market is dynamic and it is difficult to pin down anything truly actionable before the opportunity has changed. But it is also because no heuristic models (set of best practices) has really been defined.

That is the challenge that led to the creation of the ‘product opportunity evaluation matrix’ or POEM framework. It is a conceptual framework that accounts for fundamental market dynamics in order to help startup entrepreneurs and product managers to think through the conditions of the market, to determine if an idea is likely to be successful or not. It can be used to identify strengths and weaknesses for an individual idea or to compare overall strength of several ideas to determine which opportunities are most likely to bring success. By taking this approach, one can take a more informed approach to determining whether to build a new product in the first place, rather than building it, hoping customers show up, and iterating and ‘pivoting’ repeatedly until they do.

The framework is comprised of five forces that drive market opportunity:

  • Customer
  • Product
  • Timing
  • Competition
  • Finance

Five generally accepted truths are stated for each of the five forces and the practitioner is asked to grade their product concept (A-F) for each of the five truisms. An averaged score is then derived for each of the five forces. By going through this exercise, the practitioner is required to account for all of the significant dynamics that may determine the propensity of a product to succeed in the market.

scorecard

To illustrate how this is useful, consider the metaphor of how cell phone service providers detect location of a device. Each cell tower can detect an approximate distance of a cellular device from the tower, but can only determine a radius around the tower. Adding a second toward provides directionality and by the time you add a third, you have the basis by which to triangulate a location with a fair degree of confidence.

poem-triangulation

It is a similar concept in that opportunities in a dynamic market are always moving and changing, and you need a few points from which to reaffirm where opportunities might currently be. Doing a reasonable evaluation of externally facing factors such as customer, timing and competition will tell you where opportunities are. And by looking at internally determined considerations such as what product you are proposing and your financial means to provide this product to the market (at this time in the maturity cycle), will give you a much stronger understanding of where the best opportunities are for you or your company to pursue.

The purpose and application of the POEM framework is similar to other open source conceptual frameworks such as SWOT and The Business Model Canvas. In the case of SWOT the practitioner loosely define the strengths, weaknesses, opportunities and threats they face in their current market, relative to their competition. This is helpful for strategic planning within an organization. Alexander Osterwalder’s Business Model Canvas, meanwhile, has become a popular tool for defining key elements of a business such as partners customer segments, and applicable channels. With POEM, the purpose is similar, but its application is to provide structure and guidance to the discovery of new product opportunities in the market.

poem-infographic

The POEM Framework is a free-to-use open source resource that has been published under the Creative Commons license. To learn more, please visit POEMFramework.org. There you will find a detailed explanation of each of the criteria and how to use them. You can also take an interactive quiz for an easy and fun way to try applying the framework for the first time.