Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 12: standardized and customized product offerings 2

Posted in macroeconomics by Timothy Platt on May 22, 2015

This is my 12th posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Macroeconomics and Business, posting 173 and loosely following for Parts 1-5 and Macroeconomics and Business 2, posting 203 and loosely following for Parts 6-11.)

I began discussing the issues of standardization and customization in Part 11 of this series, with a brief analysis of some of the factors that have to be considered when building for and offering either in a marketplace. And I continue that discussion here, adding in a specific assumption as to the perceived value that real world customers would see in points of difference that could be offered as either customized or standardized offerings:

• I assume that the product and service differences offered do in fact rise to a level of sufficient perceived significance, and for a sufficient enough percentage of consumers so as to qualify as value defining points of distinction for the marketplaces that these businesses sell through.

I wrote Part 11 in terms of the concept that a difference without a distinction that a consumer would see and appreciate, is not a real difference and I assume here that differences built into products and services offered at least meet that threshold for holding specific value from the consumer perspective.

My initial goal for this posting is to more fully discuss what that means, and its implications for determining whether a standardized or a customized product and service approach would make more sense and both for consumers and manufacturers. And I begin that by at least briefly outlining something of the financial dynamics between manufacturer and consumer and by positing that a type of product be at least categorically available in both standardized off the shelf versions, and in more customized versions.

Let’s start with the product itself and what customization means for it and for its end users.

• Does customization here primarily mean cosmetic differences or prestige name branding, where there are no functional distinctions that would make customized options fundamentally better for the consumer then a more standardized alternative would be?
• Or would a customized version offer the consumer a more individualized product that would in some way be a better fit for them than a more standard-build alternative might offer, or offer better overall quality in general to any interested consumer?
• Would a customized product version offer more functionality features?
• Or perhaps more importantly would it afford a more individualized and a more usefully selective assortment of just those features that a given buyer and user would individually want, limiting the clutter of what they do not want or need?

In this context, and as a working source of examples, considering complicated electronic devices that might at least potentially offer a seemingly endless number of distinct functionalities (e.g. through inclusion of apps and other software enhancements.) The basic hardware product might be more standardized and all customization, which can be significant, might be in individualized product setups that would more specifically meet the needs of the individual consumer. This “complicated electronic device” example obviously applies to computer and communications tools. But in an increasingly internet of things context where wider and wider ranges of types of devices can network connect, the scope of applicability of this case-in-point example will grow and tremendously (see my series: Some Thought Concerning a Rapidly Emerging Internet of Things at Ubiquitous Computing and Communications – everywhere all the time 2, postings 211 and loosely following for its Parts 1-11.)

Now, once you have a basic inventory understanding of what is available, at least in readily achievable potential in the way of customized and standardized products and services to the consumer, the next level of analysis here has to be one of value and costs and how they balance out on the manufacturer and the consumer sides of any possible sales and purchase transactions.

• What are the standardized options of these product types worth to the consumer: the buyer and the end user? Rephrasing that, what is the consumer-perceived and defined value of standardized product offerings of this product category? What is it for any customized options or alternatives that might be available? And how do they both compare with each other and to price points they would be offered and sold at?

In a competitive market with multiple manufacturers offering their products for this product category, and with multiple price point versions from basic and even stripped down on through levels of premium offerings, consumers might perceive and identify a wide range of value levels available to them, and at a wide range of costs of purchase, and of maintenance where that becomes a significant factor for them too. This, I add applies to the range of customization that might be offered as a source of options, just as much as it does for the range of more standardized offerings that might be available.

• What do each of these various standardized and customized product offerings cost, and how would buyers and potential buyers compare value received from them if they calculate in all costs to themselves from paying for these various selection options – and both initially at time of purchase and as additional expenses might have to be paid out to maintain their chosen purchase?

That is in fact the most complex question I have asked so far, as standardized and customized (and partly customized) might very well fit along overlapping ranges and both for perception of value received and for overall costs faced. Potential value received that a given consumer would not see as being of use or interest to them, would not necessarily be seen as offering additional value; it might in fact only be seen as raising the cost to purchase and use, and without any additional return on investment to the consumer and as such be looked at more as an avoidable cost center for them. Unwanted additional features can in fact quickly come to be seen as clutter and as a source of deterrence to purchase. And with that I come to a closely related and equally complex question:

• How do these costs and benefits compare categorically between standardized and customized product options per se?

Once again, any measures of these determinations have to be established from the consumer perspective as it is the consumer who decides whether to enter into a transaction with the seller, and ultimately with the original manufacturer. So it is the buyer who determines whether that seller and manufacturer can and will actually conduct business and gain revenue from it.

And to add an essential complication to this, materials used and care and precision in manufacturing processes can and frequently do vary both between standardized and customized product offerings, and within their ranges of offerings too, with “high end” and “low end” alternatives for both. And differences here can be functionally significant or strictly cosmetic and in ways for the later that the individual consumer might or might not see as offering value to them.

Now let’s examine this complex of issues from a more manufacturer-centric perspective.

• How much does it cost to design, manufacture, market, distribute and sell (to wholesale at the very least) fully standardized product offerings of this product category?

This question would in many cases have to be asked and answered separately for each of a range of possible specific product model offerings that would, depending on costs determined, have to be offered at market at their own distinct price points if they were to lead to at least minimum acceptable profit margins.

• How much do customized and at least semi-customized product options cost to manufacture and deliver, going through the same type of fully considered manufacturer process cycle as noted in my above question for standardized products?

Customized might add extra steps and complexities to this cycle than would be needed in the case of fully standardized offerings, but in either case the full cycle that is relevant would be analyzed, so that comparisons would be between comparable entities.

I have posed a set of questions here about consumer perception of value received, and what buyers and end users would see a product as being worth to them, where that would determine what they would consider reasonable to pay for these products. And I have posed questions of what it would cost to the manufacturer to offer these various products.

• How do these understandings of value-perceived and value-offered compare?
• And how do these understandings of costs considered acceptable and costs considered at least minimally necessary compare?

Where there is overlap between what a consumer would be willing to pay and what a manufacturer and seller would be willing to accept in payment, it becomes cost effective for a manufacturer and seller, or a manufacturer and a progression of wholesale and retail sellers to produce and handle this product merchandise. (Note that in this context, adding additional distribution steps as for example with wholesale and retail distributors involved, reduces the per item value that a manufacturer can receive for its production efforts as each such step predictably adds in incremental costs that get passed onto the consumer, impacting upon and in fact ultimately determining their calculations of relative costs to them, versus value received from them. In order for the final price point and cost per item that the consumer sees, to be kept attractive to them, the manufacturer has to ask for less and accept a smaller profit margin as a result.)

Economies of scale enter into this, where at least in principle standardization in manufacture lends itself to a more mass production, economy of scale-driven approach and customization tends to lead to at least select bottlenecks in this and with greater per-unit costs for manufacture and/or sales and delivery. I have already mentioned, above, how customization can in fact take place anywhere in the production cycle from design and initial manufacturing on through product set-up and configuration where, for electronics and computer systems controlled devices those later steps can allow for significant customization. It can even take place in a post-initial sales context with product maintenance and upgrades too, and software upgrades are only one possible source of that. All of this enters into the calculation of costs incurred by manufacturers and by sellers in competitively successfully bringing a product or product model to market.

And this leads me to one more pair of questions that I would pose, at least for this posting’s discussion:

• Do sufficient numbers of consumers and potential consumers in a marketplace see sufficient added value from purchasing customized product versions to offset any additional costs they would have to cover in obtaining that, so the increase in price point faced would not serve as a deterrent?
• Would it be cost effective for one or more of the manufacturers who operate in the business vertical that produce for this market to produce customized, or standard production plus customized product versions to meet this consumer demand?

And as a final thought-piece question, I also add this:

• How can a manufacturer that enters into the customization market here, leverage their participation in this to drive sales for at least significant elements of their overall, larger range of products and services offered?

This, I add can mean ongoing product servicing and customer support, as marketable and profit generating offerings too, as well as enhanced sales opportunities for other and related products. And this last question brings in marketing as much as it does product design and manufacturing.

And with this I turn back to reconsider product portfolios and I will at least begin to do that in my next series installment. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation.

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