This is the second installment in a series of posts by Eli Schragenheim on how Theory of Constraints can contribute to the quantification of the value a new technology can bring to new product applications. It builds on the first which covered how to choose a project.
The relevancy of the perception of value to clients of any new product is straight-forward — being able to sell more or to sell at a higher price. But, the concept of value is vague enough to make it hard to translate it to money. Even when the perception of value is high it is not always straight-forward to get a relatively high price for the product.
Due to the difficulty of translating value into money, and the sensitivity some people have of not paying more than the worth of the product, people look for “something similar” in order to decide how much is the product/service worth in money. This creates a “reference” by which people judge the worth of anything that looks “somewhat similar.” For instance, the price for a new book has very little to do with how much value is in the book. More important is the number of pages and whether it is hard or soft cover. This is the power of the reference.
New technology, which looks like a substantial change to anything preceding it, is easier to break the barrier of the cheap reference. For instance, flash memory disk-on-key, looks quite different than a CD or a DVD disk, even though basically both technologies are a means to carry your files from one location to the other without having to carry your computer. Thus, the price for disk-on-keys is not fully connected to the price of 5 or 10 blank CD’s. On the other hand a CD of music has a very limited range of prices, no matter what is the real value of the music (and the music making) it contains.
What determines the perception of value? Ignoring the distortions of the references, we can identify three different parameters:
- The rational based value to the client, either by helping the client to generate value (money) to himself or by helping him to do things he likes to do and either cannot do at all at the present time or that requires much more time and effort. We can call this parameter: the practical need.
- The pleasure gained by the aesthetic or artistic experience of having the new product.
- Gaining “status” by owning / using the product or service. “Status” means the value gained by other people appreciating the user for the product. Owning a Rolex watch gains a certain value by letting other people know and appreciate you (or your financial capabilities) wearing it.
TOC focuses on the practical needs as a vehicle to enhance the perception of value. We do believe that if the practical need answered by the new technology is substantial, then there is a way to convince the user to pay more.
The next installment in this series will present some guidelines for assessing new technologies in order to provide:
- A better assessment of the added value of potential new products.
- Concentration on the aspects that contribute the most value to the new product/technology.
- Focus of the marketing and sales efforts to achieve the required high perception of value to the users.
About the author:
Eli Schragenheim is Associate Managing Director at Elyakim Management Systems Ltd. and an international expert in the Theory of Constraints (TOC) and its links to other management philosophies. He is the author of Management Dilemmas, co-author (with Carol Ptak) of ERP: Tools Techniques and Applications for Integrating the Supply Chain, co-author (with Bill Dettmer) of Manufacturing at Warp Speed, co-author (with Eliyahu M. Goldratt and Carol Ptak) of Necessary But Not Sufficient, and co-author (with Bill Dettmer and Wayne Patterson) of Supply Chain Management at Warp Speed.