Market-driven InnovationThe Value of Value

NSTDA Technology Licensing Office

A simple question:

What is the value of Coke?

USD 70.5 Billion

A simple question:

What is the value of an IPOD?

Pricing and Costs of an IPOD

Hard Drive $73.39

Display Module $23.27

Video/Multimedia Processor $8.36

Controller $4.94

Insertion, test, and assembly $3.86

Battery $2.89

Memory ROM $2.37

Back Enclosure $2.30

Mainboard PCB $1.90

Mobile RAM $1.85

Subtotal for 10 most expensive inputs $125.13

All other inputs $19.28

Total all iPod inputs $144.40

Apple Profit $154.60

Retail Price $299.00

Apple’s Profit

• $155 vs $144 (all other inputs)

• Is this fair?

• What value is Apple providing for this profit?

Some Value Apple Has Created

• Design

• Supplier Management

• Innovative Business Model

• Brand/Image

• Created a mass market for good design

– Important implication for us!

A Relationship?

• Value

• Price

• Cost

Types of Costs

• Sunk cost: Money already spent and permanently

lost; it is a past opportunity cost that is partially

(salvage value) or totally irretrievable, and therefore

should be considered irrelevant to future decision making.

– Ex. Research investment.

• Incremental: the cost to produce one additional unit, after all fixed costs have been absorbed.

Some Obvious Rules

• For a customer to buy, they must feel like they are getting more than they are giving up.

– What do they have to give up?

• For a seller to sell, they should feel like they are receiving more than their costs.

• For a buyer to buy from us, they must feel like

they are getting something they can’t get elsewhere, at a given price.

More Generally, For Us…

Only 3 Ways to Create Value:

P

C

×Q

The 3 Ways Do Not Have Equal Potential

C↓ has LIMITED benefit.

P↑ and Q↑ are UNLIMITED.

The 3 Ways Do Not Have Equal Potential

• Our innovations: usually C↓

• Find higher value solutions

instead (P↑ and Q↑ ).

IP is not the only additional value which must be provided by a new product.

Market

Society Scientific InquiryA new invention

Technology

Not all value chains are the same.

Research

Custom

er

Fully integrated: development-mfrg.-distributionEx. pharmaceuticals

Chain of several intermediaries managed by a single, powerful player (contract agriculture)

Chain of several intermediaries (often SMEs)

Price

Sharing the value…

Assume we can determine the

price premium that will come

from a particular technology benefit, should we get…

• All of it (it’s our technology)?

•None of it?

•Some of it, and if so, how much?

Premium

Customer receives

We keep

Sharing the value…

Factors to consider:

• Risk:– Technology: will it work?

– Market: will people pay for it?

• Other value which also might be required:– Marketing communications to explain about new benefits.

– Training (how to use the new technology).

– After sales service (to fix or maintain the new technology).

• Remember: all discussion should only be about the value-added part:– Incremental price

– Incremental cost

• The 25% rule.

Up-front and Royalty Payments

• Up-front fee:

– An up-front fee should not try to offset research costs (remember sunk costs!),

– Instead, it is to encourage commercial commitment;

– May cover administrative and start-up consulting costs;

– In other countries it is used to offset expensive patent filing fees.

• The royalty system works because:

– Simply put: a royalty shares a portion of the profits proportional to the amount that the technology provides an opportunity.

– If a company does better, the technology supplier does better;

– If a company has less success than expected, so does the tech supplier.

Conclusions About Value

• Value is not intrinsic; it’s value is determined by what somebody is willing to pay.

• We can do things to increase value:– Makes things which are valuable and different.

– Find the right customers.

– Sell at the right place.

– Make something easy to buy.

– Make something easy to use.

– Lower uncertainty of being satisfied.

• Be willing to pay for value!:– To encourage more valuable products to be made.