When innovation is viewed primarily as increasing value relative to price, organisations naturally optimise existing exchanges. Over time, this biases them toward incremental innovation and makes radical and disruptive innovation more difficult.
What we’re thinking
nnovation viewed through a value-in-exchange lens is primarily about increasing the value-price advantage of an offering. This perspective has generated enormous growth, but it can also bias organisations towards improving existing exchanges rather than creating entirely new ones.
Why this matters
As markets mature, the greatest opportunities often come from helping customers achieve outcomes in fundamentally different ways. Yet organisations built around existing exchange flows frequently struggle to pursue such opportunities because doing so threatens the very exchanges that sustain them.
Under the value-in-exchange model, value is typically understood as the maximum amount a customer is willing to pay. As a result, a customer’s incentive to buy can be expressed as:
Innovation therefore succeeds when it increases a customer’s incentive to buy relative to existing alternatives:
Viewed this way, innovation has a clear objective. It must either:
- increase perceived value,
- reduce price,or
- achieve both simultaneously.
Much of modern innovation practice reflects this logic. Organisations seek to add features, improve performance, enhance convenience, increase quality, reduce costs, or introduce new combinations of benefits. The goal is always the same: improve the value-price relationship sufficiently to encourage adoption.
The ISO 56000 innovation standard reflects this perspective:
Innovation is about creating something new that adds value; this can be a product, a service, a business model or an organization. And the value that is added is not necessarily financial, it can also be social or environmental, for example
Alice de Casanove, Chair of the ISO technical committee responsible for ISO 56000 (2020) – Innovation Management – Fundamentals and Vocabulary
Companies frequently extend this approach through bundling and unbundling. Rather than offering a single proposition, they assemble multiple value components into different combinations and price points. The total incentive to buy then becomes the sum of the value-price relationships associated with each component:
Streaming services, software subscriptions, airlines, telecommunications providers, and automotive manufacturers all employ variations of this logic. Features are grouped, separated, packaged, and repriced in an attempt to increase the perceived value received relative to the price paid.
Implication on innovation
This logic has undoubtedly generated substantial innovation and economic growth. However, it also shapes how managers think about customers, opportunities, and innovation itself. Those assumptions become increasingly visible as economies shift from manufacturing towards services, software, ecosystems, and ongoing relationships.
The first concerns how innovation itself is understood.
Under a value-in-exchange logic, innovation is treated primarily as a process of manipulating value and price. Organisations seek to increase the value embedded within an offering, reduce its price, or ideally achieve both simultaneously. Customers appear largely as recipients of value who choose between competing value-price propositions.
What risks disappearing from view is the customer’s desired future state. The model focuses on improving an exchange rather than understanding the progress the customer is attempting to make. This distinction becomes increasingly important in service-based economies, where outcomes emerge through use, participation, learning, adaptation, and collaboration rather than through the transfer of embedded value alone.
The second implication concerns how organisations behave.
When value is created through exchange, successful businesses naturally become organised around the exchanges that made them successful. Revenue streams, performance metrics, operating processes, investment criteria, and management incentives become aligned around protecting and extending those exchanges.
As a result, organisations are often nudged towards incremental innovation. Incremental improvements strengthen existing exchanges while preserving established sources of revenue. They are easier to justify, less risky to implement, and more consistent with prevailing performance metrics.
Radical innovations present a different challenge. They frequently require entirely new exchange flows while threatening existing ones. For incumbents, the obstacle is rarely technological capability. More often, it is the willingness to interrupt already existing profitable exchanges.
Examples
The razor-and-blade business model illustrates the centrality of exchange flows. Firms such as Gillette, Canon, and Nespresso generate value not from a single transaction but from a continuing sequence of exchanges. The initial product establishes a relationship, while subsequent purchases sustain the revenue stream. Much of modern business can be understood as the design, protection, and expansion of such exchange systems.
Kodak provides a well-known example of trying to protect the exchange flow. The company invented the digital camera in 1975, developed digital imaging technologies, and later acquired a photo-sharing platform. Yet Kodak struggled to move beyond its highly profitable film business. The challenge was not a failure to recognise digital technology, but a reluctance to abandon the exchange system that had made the company successful. (See Anthony, S. D. (2016) “Kodak’s Downfall Wasn’t About Technology”, HBR.)
Blockbuster faced a similar dilemma. Although the company developed strategies that could have competed with Netflix, leadership ultimately remained committed to the existing economics of physical stores and late fees. The organisation protected the current flow of exchanges while the market shifted elsewhere. (See ex-CEO John Antioco story)
Even organisations with strong innovation capabilities are not immune. Xerox PARC generated many of the technologies that shaped modern computing, yet Xerox failed to capture much of the resulting value, they failed to exploit them.. Pharmaceutical companies and large technology firms often manage these transitions more successfully because their business models anticipate that new products will eventually replace old ones. Nevertheless, innovation capability alone is insufficient. Organisations must also possess the willingness and operational capability to commercialise innovations that may undermine their existing businesses.
New entrants face a different situation. Without established exchange flows to protect, they are often more willing to pursue radical innovation. Their challenge is not overcoming organisational inertia but building entirely new exchange systems from scratch.
Seen through this lens, value-in-exchange does more than explain how firms create revenue. It shapes what organisations notice, what they measure, which innovations they pursue, and which opportunities they overlook.
Let’s progress together through discussion…