Compelling Customer Value is at the Heart of Every Success
Customers vote with their wallets
A business is nothing without its customers – they are the life blood of cash flow. It is profoundly unwise to take customers for granted or treat them as stupid. They make sophisticated choices on the value they receive in the context of their purchase. Get it right and sales will grow; get it wrong and customers will ‘vote by keeping their wallets closed’. The speed with which such a change may happen can be remarkable. The rapid growth in sales and plane utilisation and hence margin at Ryanair resulting from its charm initiative is an example of how sensitive the balance of customer acceptance can be. In contrast, brands can be punished in short order; the case of Nokia’s fall from grace to the point of being sold to Microsoft shows how customers’ preferences can shift very quickly.
Companies compete on value delivery
Companies compete through the creation and delivery of value to customers. At its simplest, customer value is created when the perceptions of the benefits to be received from a transaction or relationship exceed the total costs of ownership. That cost of ownership includes the fact that in most transactions and commercial relationships the life cycle cost will be significant in relation to the initial price. For example, in buying a car customers will be concerned about the fuel economy, the insurance rating, the taxation class, the tyre wear and the cost of maintenance; they will also be concerned about the resale value and the depreciation on their initial investment. Buying a modern phone is more than about making calls – it is also a function of ease of use, the Apps that are available, the time that may be saved by having instant access to the internet, and so on.
The perceived benefits are context sensitive and experiential as well as practical and tangible. Benefits go beyond the ‘hard’ tangible features of a product or service to include the ‘softer’ intangibles: for example, the brand name or reputation of the manufacturer or supplier.
Price and quality are at the heart of every customer decision
Since money is the basis of exchange, customers will always balance the soft intangibles against the price of the product or service. They decide whether the pros and cons of the purchase are ‘worth the price’; and those decisions are not set in stone, preferences change over time. A premium brand such as Apple maintains its price position because the ease of use and associated brand image conferred on owners are perceived as real benefits, even though there are cheaper tablets in the market. Quality is the parallel primary attribute of purchase decisions; brands that compete primarily on price, such as Aldi and Lidl, perform nearly as well on quality as the premium supermarket brands. A recent Which survey showed that the discounters’ savvy customers– who may well also shop at premium supermarkets for other products - are prepared to give up some of the benefits of choice and shopping ease to take advantage of low prices for nearly equivalent quality.
Market disruptors find new value combinations
Companies that grow quickly in sales and market share have found a new combination of customer value that is compelling to a segment. Either the perceived benefits have increased in relation to the price or similar benefits are made available at a lower market price – or some combination of the two. This is shown in the diagram and it is important to note that a disruptor will push into decline other companies whose competitive advantage is diminished.
Value opportunities can be identified through analysis
The book, Business Operations Models: becoming a disruptive competitor introduces the fact that new combinations of value creation can be analysed and predicted. We call this listening to the “voice of the customer”. Given the sensitivity of the choices made by customers and the speed with which preferences can change, it is a crucial capability; it should be on the marketing agenda constantly. The statistical technique is called conjoint analysis and it provides a deeper understanding of the psychology of customer choice; it exposes quite simply the implicit importance that a customer attaches to the separate elements of the purchase decision.
Case studies show that using these insights can help companies to focus on the limitations of their current positioning and prompt corrective measures. However, putting right limitations is only about achieving equivalence; being a market disruptor is about radically changing the value mix.
What does it take to be a disruptor?
• Disruptors understand equivalence and then step beyond it.
• They find ways to operate on much lower costs and pass the pricing value onto customers
• Alternatively, they find ways to reach into their customers’ value chains, giving them net savings in their total cost of ownership along with improved quality.
With the phenomenal speed of change in markets, it should be a core skill for Boards to link market preferences to operational configuration to discover new value combinations. They ignore this perspective at their peril.