Added Values

Presented by: Nick Newby & Russell Davis

Added Value of a Monopoly

• • • • “one strong company and the rest weak.” -Hiroshi Yamauchi, President, Nintendo Nintendo hardware was a bargain to produce b/c they used commodity processors Personal computers averaged $2500 to $4000.

NES was $100

Nintendo

• • NES was designed to simulate hit arcade games.

Inexpensive hardware and hit games = SALES

Virtuous Circle

• • • Software houses wrote games for the NES, but Nintendo had complete control over them through licensing agreements Nintendo also had in house game writers.

This meant that Nintendo was not dependent upon any one supplier

Nintendo

• • By limiting power of software developers, Nintendo limited the values to outside companies.

Nintendo created an intentional shortage of video the video game library at retailers. Was this a smart move?

Nintendo

• • • • • Yeah Shortage made game cartridges more desirable Created publicity due to the shortage during the holiday season (1988) Helped retailers move slower selling games But kids remembered to tell their parents they still wanted the real popular game

Supply

• • Monopolies and shortages complement each other Growing demand for products means: – Expand too little →Risk loosing sales – Expand too much → Unused capacity Added values entails building less instead of more

Limiting Supply Pros

• • • • Gets you a bigger slice of the pie May give you distinction May provide free publicity May lead customers to purchasing slower moving products while waiting for the shortage to end

Cons

• • • • Shrinks the pie – costs you sales today May cost you a relationship and thereby future sales Creates ill will Leaves a hole in the market inviting entry.

Trade-Offs

• • Spend $1 so customers value it as $2 TWA goes from worst rated airline to #1 when it spends $1 million to increase leg room in coach.

Trade Ons

• • • Create higher quality and lower costs simultaneously.

Costs will initially rise, but customers will eventually come to you increasing production and distribution.

Scales of economies will prevail and costs will decrease.

Trade-Offs

• • Raise the amount customers are willing to pay by more than the incremental cost.

Reduce costs without reducing willingness to pay as much

Trade-Ons

• • Lower costs in a way that helps you to deliver a better product Deliver a better product in a way that helps you lower costs.

Added Value of a Relationship

Added value

• • • Provide high quality at low costs.

Be unique (if others can do what you do you have little added value).

Key to added value is differentiation.

So how do you create added value in a Relationship?

• Create Loyalty – Some extent, relationships are automatic.

– Actively promote strong relationships with customers and suppliers.

– Create value for the customer.

U.S. Airline industry

• • • • 1981 facing extreme competition.

Found passengers after low prices had no loyalty.

American Airlines – frequent flyer program.

Customers became loyal at little cost to airlines.

• Divided Loyalty – Two weeks later United Airlines created Mileage Plus frequent-flyer program.

– Within three months all major airline companies had frequent-flyer programs.

– Playing field was level again, every airline had their loyal customers.

– Important: competitors with little to lose have reason to cut prices to attract customers.

Thanking the Customer

• • • Important to thank your loyal customers.

Essential part of added value in a relationship.

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9 ways to thank the customer.

Say thank you in kind, not cash.

Save the best than you for your best customers.

Say thank you in a way that builds up your business.

Don’t say thank you too quickly, or too slowly.

Say that you’re going to say thank you.

Recognize that you may have to compete for loyalty.

Allow your competitors to have loyal customers too.

Don’t forget to say thank you even if you have a monopoly.

Say thank you to your suppliers as well as to your customers.

Imitation

• Healthy Imitation – Harmful when you think win-lose strategy (win-lose + lose-win = lose-lose).

– Win-Win = both companies profit.

– Example: frequent-flyer program.

• • • Greater price stability Loyal customers price rises less risky

• Unhealthy Imitations – Not everything is win-win.

– Game is about how fast you can improve you improvements.

– Individual Inc. has fine tuned their customer learning process, resulting in preserved added value.

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Getting feedback from customers.

Improving products.

Becoming faster at improving products.

• Minnetonka – Robert Taylor’s innovation of the Softsoap machine.

– Ordered 100 million pumps from the only two suppliers.

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Locked the suppliers up for two years.

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Eliminated threat of imitation.

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Gave time to build brand image • Antidotes to Unhealthy Imitations 1.

Collect customer feedback to customize your product.

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Create brand identity Build volume to move down the learning curve.

Compete aggressively for volume so that competitors can’t follow you down the learning curve.

Changing the Added Values

• Little competition = assured added value • Competition = find some added value of your own.