With Target Price Formulas For The Right Balance Between Customer Benefit And Production Costs

2023 Author: Hannah Pearcy | [email protected]. Last modified: 2023-05-24 11:12

Nowadays, design should not only be cost- and specification-driven, but oriented to customer benefit: "What do our customers want and what would they be willing to pay for it?" Is one of the key questions in the development process. This must be considered from the beginning at the center of attention to avoid overengineering or non-value costs

Otherwise, products with numerous features are created - but hardly any buyers value them. He should still pay for the large range of functions. The result: customers migrate to the competition and procure products that better meet their own needs. The customer only reaches deep into their wallets if they consider a product to be particularly useful, e.g. B. because it saves time, solves existing manufacturing problems or improves your own product quality.

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The digitization of production requires a rethink in product development. The Smart Engineering Day offers decision support for the selection of the most suitable methods for the conception, design and development of smart products and machines.

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From customer benefit to sales price

Various methods are available in the company for pure cost analysis. But how can the development department translate customer benefits into a realistic sales price quickly and precisely during the product development process?

And how can many different product variants be evaluated in order to understand how costs and benefits are related - even before detailed development starts? Classic calculation methods such as enterprise costing are too cumbersome and complex for such a scenario. The NLPP method , or short for non-linear performance pricing, is more suitable.

NLPP shows the relationship between costs, benefits and sales prices

The NLPP method analyzes to what extent the product properties influence customer benefit and thus the realizable sales prices and costs, and quantifies this influence. The relationship is shown using forecast formulas for target prices and costs. Based on this, the development department can now play through a wide variety of product variants extremely quickly and simulate which product properties have to be changed in which form in order to either

• reduce costs
• increase customer benefit (and thus justify a higher selling price) or
• to achieve a combination of both.

NLPP is available as a software solution of the same name, which makes the application of the complex method suitable for everyday use

Product development

Rethinking product development

Benefit-oriented development in four steps

A product development based on customer benefit goes through the following steps in practice:

• 1. Define the properties that embody the benefit of the product for the customer. The definition can even be made for each customer group, in order to map the target group-specific benefit perceptions.
• 2. Feed the software NLPP with the properties and sales prices of existing products. In addition to your own data, you can also include the data of competitive products in order to obtain a reliable market benchmark. Based on this, NLPP calculates a benefit-based target price formula within a few seconds. With this target price formula, the appropriate price is now calculated from the customer's perspective. The customer benefit is therefore translated into an amount of money.
• 3. You can now use NLPP to calculate the cost forecast formula just as quickly, based on the constructive product properties and costs of previous parts. This results in the target costs. Otherwise, you can also use classic methods to create a cost estimate for each product variant.
• 4. An evaluation of each product variant per customer group is now very easy, because the expected target price and the expected costs are known. The most sensible product variant is the one with the greatest difference between target price and target costs.

Variant check using the example of "production robots"

Musterbot wants to bring a new handling robot to the market. The development department knows that three benefit parameters are decisive for the potential customer group:

• the reach of the support arm,
• the possible payload as well
• whether accessories are included or not.

The development team translates these utility parameters into design parameters that would be there: engine power, necessary bearings, material, total weight etc.

Now NLPP is used: fed with the benefit parameters of real handling robots and the associated sales prices, the software outputs the target price formula. In this fictional example, this could be as follows:

Target price = exp (9.288 + 0.012 * 'arm length in mm' + 0.001 * 'load capacity in KG' + 0.031 * 'accessories included / Yes')

Now the cost forecast formula is calculated - this time based on the design parameters and not in relation to the sales prices, but to the associated costs. This cost forecast formula could be as follows:

Target costs = exp (2.371 + 0.452 * 'motor power in KW' + 0.042 * 'bearing diameter in mm' + 1.276 * 'material in kg')

Now both formulas are being brought to life: The development team goes through all conceivable product variants of the new handling robot by inserting specific values for the utility parameters as well as design parameters into the respective formula. The software then calculates a target price and the associated costs for each variant. The thickest variant results in the most sensible product, which the company Musterbot costs comparatively little to manufacture, but can be sold at a particularly attractive price.

Supplementary information on three questions to Robert M. Münch, inventor of the NLPP method

Mr. Münch, you are advocating a change of perspective in the company: away from the previous focus on production costs towards the properties of the end product. Why?

Anyone who thinks stubbornly in terms of costs will develop past customers. Only products with high customer benefits can achieve high sales prices. However, a pure cost analysis says nothing about the customer benefit. So far, however, only a few have received this knowledge. And so designers and sales people are still sitting in the quiet closet, putting together products and sales prices on a cost basis - and in the end everyone is wondering why the sales figures are not right. It always amazes me to see how retracted the structures are. Thinking in terms of customer benefit is like a revolution.

The benefit-based NLPP method works with target price formulas: each product family can be characterized by an individual formula that relates benefits and costs or prices. If this approach is so unusual, how should it prevail?

It is not unusual in all areas of the company. That is exactly what I always try to make clear to the designers. Because: In well structured and innovative thinking purchasing departments, the use of NLPP has become standard - for a wide range of parts families and multi-million dollar purchasing volumes. Buyers calculate target prices for their product groups and negotiate with their suppliers based on these target prices. They confront the supplier with the benefits of the product and evaluate how much consideration they get for their money. So if the potential customer of my products uses NLPP to assess the appropriateness of their purchase prices based on utility parameters, how can I say in development: "I don't care?"

The forecast formulas for a product family can be used throughout the entire product lifecycle. But what does the designer get out of it? Can you explain this with a concrete example?

The benefit for engineering is obvious: With the forecast formulas, you will be able to create products with a better price-performance ratio faster - with less effort, you will get a better result. The formulas show you in black and white which adjustment screws you have to turn to make the customer happy. Furthermore, the forecast formulas also show everyone involved the limits of the possibilities and thus protect against wrong assumptions and thus against nasty surprises.

Anyone who uses this way of thinking in the various company areas increases the effectiveness of the entire organization. The design is closely linked to purchasing, sales and marketing via the forecast formulas, although knowledge transfer is of course not a one-way street. A company-wide feedback loop is created. The knowledge gained from this can then be incorporated into the development of the subsequent product generation.

Consistent data in the product lifecycle

But that's not all: once forecast formulas have been calculated for a product group, these formulas can be used throughout the entire product lifecycle. Consistent data is the key word here. This is how the formulas become the heart of previous and new products:

• All locations of a company can access the easy-to-use target price and cost formulas.
• The forecast formulas preserve the price / cost knowledge for the development of further products and thus ensure that work is carried out company-wide on the basis of a uniform and transparent database.
• The sales department knows the daily achievable prices in constantly changing markets, for both new and existing products - a great competitive advantage.
• Since the value proposition (value proposition) is clearly defined by the benefit parameters, marketing can target its communication precisely to the target group that is willing to spend the most money on the respective product.
• Purchasing knows the realistic and realistic market prices for purchased parts before the negotiation.

There is no longer any technical hurdle in the way of a consistently customer-oriented product life cycle. However, a rethink in the company is necessary. No longer the question "What does it cost?" but "What does it do?" stand in the focus.