Thinking about value

Today’s customers expect more ... and more

Thanks to globalization and the internet, today’s customers have access to an immense marketplace of products and services. The internet has brought increased transparency to the availability, selection and user experience of products and services in both B2B and B2C markets. This, together with the accelerating pace of new technologies means that customers’ expectations are ever more demanding of products and services and the businesses that compete to supply them. Simply put, customers expect more:

More function and performance in the products & services that they buy.

More quality and experience in buying and using products and services.

And of course - more for their money.

The challenge for suppliers

This increase in customer power creates more challenges for the businesses that supply them. Businesses can no longer expect their customers to be loyal – they have to earn their repeat purchasing by continuing to meet their customers’ purchasing goals better than rivals. Let’s consider some examples:

ShopCo is a small hardware shop and it’s competing against online stores such as Amazon, selling China-sourced products, and large hardware retailers such as B&Q.

KnowCo is a business consulting firm facing increased competition from new local competitors in its international markets and online 'freelancer' platforms.

MakeCo is a manufacturer of engineering equipment competing with Far Eastern and Eastern European low cost rivals that have entered their markets.

All these businesses are facing the competitive impact of a globalized and transparent market. How do they establish differentiated offerings that will attract and retain customers against low price competitors?

It’s not just about price…

Many businesses respond to such market challenges by seeking to become more competitive on price. They either do this by sacrificing profit margins or cutting their costs. But it is not possible for most businesses to be a ‘low cost competitor’ – due to their geographical location, their fixed costs, small scale or limited business improvement competencies.

KnowCo has already trimmed some of its administrative support costs and moved to less expensive offices. MakeCo has sourced some new lower-cost components and applied Lean in their business to reduce costs. ShopCo has negotiated a rent reduction from their landlord and changed to a lower cost electricity supplier.

But there are other ways of differentiating value that can be more attractive to customers – such as enhancing the brand, adding functionality, improving quality or customer experience. Businesses need to understand their different customers and their goals to be met by purchasing a product or service. They must step into their customers’ shoes. Specifically they need to fully understand the jobs that customers need doing – and for which they will purchase a product or service. They must see the world as their customers do, gain a good understanding of their needs and determine how value could be best improved for them. These insights can then be used to help enhance existing offerings and develop new ones for customers.

What is needed is a broad approach to innovating value

‘Value’ can be a somewhat nebulous term – and many businesses do not fully exploit the range of value elements to optimize the value proposition they offer to customers. In my experience many businesses do not have a clear understanding of the value requirements and priorities of their target customers. This can even apply in large sophisticated businesses which can over-focus on areas of their value proposition that have been key competitive strengths in the past, at the expense of other areas of value which are now more important to their customers.

To help clients make a broader exploration of offering value, over the past four years I developed and tested a model of value. The 'value table' model provides a simple mechanism for reviewing existing products and services, assessing how well they meet customer requirements and identifying opportunities for value innovation. I've used this model in consulting projects with clients and in teaching with business school students and it has proved to be effective. Here’s a short introduction to the model and examples of how our three businesses might use it to develop new responses to their competitive challenges.

1. Brand Promise

Brand promise is represented in the model by the ‘tablecloth’ – it’s the first point of customer contact with the offering. It's a combination of a business’s marketing messages of the value its offerings provide and what is perceived by existing and potential customers. The brand promise is what meets customers’ implicit needs (e.g. emotional goals) – so is key when multiple offerings can meet customers’ explicit needs (e.g. functionality). For example, Apple’s brand promise is that of being a premium provider of products, offering status and style. If the brand promise is not perceived by a consumer to meet their implicit needs then they won’t buy it – whatever the strength of the other value elements. So typically a customer seeking to buy an iPhone would not be interested in a ‘no-name’ Android phone even though it might offer similar or better functionality at a much lower price. For they are not just buying a ‘phone’, they are buying the brand promise of status, fashion and excitement.

KnowCo has launched a marketing campaign to promote its leading consultants' expertise and reputation as being 'thought-leaders'. They are also enhancing their client case studies and references - to position the firm as 'premier' advisors and differentiate themselves from local competitors who lack the firm's depth of experience and track record. Their tag line is 'Because your business is worth it'.

2. Form & Function

Form and Function are represented by the ‘surface’ of the table. Together they encompass the nature of the offering and the material value provided to customers. The Form in which the value proposition is provided can be a product, service, hybrid offering or alternatively a platform. The Function of the offering is the core element of the value proposition and it typically has to at least meet the customer’s minimum explicit requirements to be considered as a purchase option. There are a number of ‘sub-elements’ of value that together represent the functionality: Features, Performance and Aesthetics/Design.

MakeCo is working to servitize its core products with new complementary services in installation, support and maintenance with a new pricing model enabling customers to buy pumping and on-site generators as a service. This reduces customer capital spend and their need for technical support skills and plays to the strength of their existing field services network. ShopCo is enhancing their customer offer by adding a small cafe in a corner of the shop featuring local produce and it is also looking to offer additional services in the shop using partners, such as dry cleaning. KnowCo is examining the opportunities to deliver some of their basic assessment and diagnostic consulting services as web-enabled digital services.

3. Cost

The cost to the customer of an offering is more than just its purchase price. The customer will often consider the ‘total life-cycle cost’ which can easily exceed the purchase price. Life-cycle cost includes elements such as setup cost and operational and maintenance costs.

MakeCo has redesigned their maintenance plans for their key pumping products to improve reliability and up-time and thus reduce lifetime costs for their customers. KnowCo is leveraging their well-proven diagnostic tools and templates to provide a fixed price assessment service for new clients which can be offered at a lower price yet enable good margins due to the extensive use of existing IP.

4. Quality

The quality of the offering, specifically how well it meets the brand promise, the performance specification and customer expectations of build, finish and operation, is an important value element. However at the point of first purchase the customer view of quality will not be based on experience but on a mix of perception and feedback from existing users - gained increasingly from internet forums and social media.

MakeCo has worked with its field service personnel to identify the most common problems encountered in installation and user operation and put in place changes in installation procedures and user training to improve customer quality. In tandem is has created a number of video case studies of its pumps and generators in customer sites and put them on its YouTube and LinkedIn channels to help influence potential customers.

5. Time & Place

These two value elements are combined as they relate to the purchase, fulfillment or use of the offering - for example where and when it can be bought and used – rather than aspects of the product or service itself. The internet has enabled major innovation in these areas through 24/7 availability and fast delivery. More prosaically, the local ‘corner shop’ has always offered the convenience of locality in exchange for higher prices and a reduced range.

ShopCo is making use of its location and unused space to offer additional services including laundry and dry-cleaning, a cafe and daily paid parking convenient for the local train station. MakeCo is developing a 24/7 online remote support and diagnostics service for its customers, targeting remote installations, to enable common problems to be addressed quickly and reduce equipment downtime.

6. Experience

The final table leg represents the experience of customers across the life-cycle of acquiring and using the offering. A consumer may choose to buy a particular car because they have had a great service from the local dealer - even though rival brands have better performance. In such a case they effectively rate service experience ahead of functionality in their value weighting.

ShopCo has found that many of its customers are older and struggled to easily find items in the store due to lighting and shelf positioning. Working with a regular retired customer for advice, the owner has improved the shop lighting and moved the more popular items for these customers to the middle shelves. KnowCo has reviewed and improved its processes and training in dealing with client calls, emails and office visits to improve responsiveness and quality and a better client experience.

A practical approach to value analysis and innovation

As the business examples demonstrate, the value table enables a detailed and structured assessment of the value makeup of an existing or proposed offering. It can be used to support the development of new products or service concepts, to review the value provided by existing offerings (as part of improvement activities) and it can also be used to assess competitor offerings. It is a simple and easy-to-use tool and can be effectively applied by any business to provide a broad review of product or service value. 

This article is based on extracts from Alastair’s latest book ‘Thinking about value’ – available on Amazon in paperback or Kindle version.

Alastair Ross has consulted to industrial and professional services businesses for over twenty-five years in strategy, innovation, process & service re-engineering. He is the Director of Codexx Associates Ltd and also delivers MBA and MSc programmes on innovation and consulting at the University of Southampton Business School.