Customer Value Proposition
“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
– Sam Walton
When companies aren’t growing, management typically points their finger at marketing or sales, hence the average tenure of a CMO is 18 months. 99% of the time, blaming marketing or sales is the wrong answer. The real answer is there are issues with the customer value proposition, which is simply customers see more value in competitors’ products and services.
When a CEO says I’ve got a marketing or sales problem, I often reframe the problem as a customer value proposition problem. Marketing and sales are simply an amplification of a customer value proposition. Amplifying a broken customer value proposition is like advertising crap, and no amount of advertising is going to make more people want to buy more crap.
How do Costco and Trader Joe’s, two retailers that spend nothing on advertising grow year after year? Because customers trust that Costco and Trader Joe’s are giving them more value than competitors.
The real job of management is to constantly improve the value customers get from their products and services in a way that creates sustainable competitive differentiation and drives financial results. And, if they do it right and sustain it, the company will grow for a very long time.
What is Customer Value?
On the surface, customer value seems like a simple concept, but by no means is it simple. Customer value is a complex cocktail of rational, emotional, and subjective benefits that customers perceive minus the price they pay.
Customer Value = Customer Benefit – Price Paid for Product
The price paid for a product or service is typically straightforward, with the exception of trying to figure out residual, maintenance, and repair costs for some products and services.
Customer benefit is a tricky aspect of this equation. First, customer value must be compared to the value created by competitive products and services. customers don’t make purchase decisions in a vacuum; they typically compare the perceived value they will get from buying your product or service versus a competitive product or service. Second, customers can derive benefits from the entire customer value proposition & journey, including distribution and promotion.
So, let’s dig into this concept of benefit a bit more. Customers buy products and services to get some sort of benefit from them, make their lives better in some way, solve a problem they have, and make them feel good. The act of shopping and buying accesses both sides of the brain…the rational and emotional. Hence, there are two main categories of customer benefits: rational benefits and emotional benefits. Rational benefits can be objectively measured, while emotional benefits are up to the interpretation of individuals.
Customer Benefits = Rational Benefits + Emotional Benefits
Examples of Rational Benefits
– Features – what a product does
– Performance – how good a product does what it’s supposed to do
– Saves Time
– Saves Money
– Improves Health
– Ease of Use
– Reduces Risk
Examples of Emotional Benefits
– Tastes, Smells, Sounds, Looks, Feels Good
– Relationship Building
Grow the Wedge
For all those management teams that want to grow a company…Grow the Wedge. Companies that are constantly trying to improve the benefits their customers receive, while also trying to drive down prices and costs, are the winners. Growth is an output of more loyal customers and new customers, which is an output of customers believing they are going to get better value from one company over another.
If you are constantly driving improvements in customer benefits and/or pricing, you’ll stay ahead of the competition, for business and strategy is a constant battle between who can provide the most customer value in a particular market.
How do you understand Customer Value?
To understand customer value, you have to understand the rational and emotional benefits of your products or services vis-à-vis your competition. I encourage you to read about the voice of the customer and benchmarking. Here are some best practices to do this:
Rational Benefit Benchmarking
One of the simplest and most insightful exercises to do is a product or service performance benchmarking analysis. Figure out the most important rational benefits of your product or service and what features or performance measurements are important to those rational benefits. Figure out 2-3 competitive products and services to compare yourself to and either research and find the data or do your own testing to see how the important features or performance measurements of your product or service compare to competitive products and services. At Goal Zero, we used to call this analysis competitive cage fights, as we imagined throwing our solar panels into a cage to fight competitors’ solar panels in a fight to the death. We used to compare solar efficiency, output, compatibility (with phones and batteries), and durability. It is really enlightening to simply put the prioritized features or performance measurements on a piece of paper with objective comparisons to competitors.
Emotional Benefit Benchmarking
Some products are all about the emotional benefit (e.g., music, perfume, jewelry). For these types of products it typically does come down to personal tastes. Though, most products are a mixture of rational and emotional benefits. You need to understand the relative value customers place on rational vs. emotional benefits. You can conduct a survey asking them to rank emotional (e.g., design, look, brand) and rational benefits together. Much like rational benefits, emotional benefits are typically in comparison with competitors. So, in the same survey, you’ll want to have questions that get to the relative ranking or preference of emotional benefits across different brands.
Price and Customer Value
While you can always decrease the price to improve customer value, it can be a dangerous proposition. Dropping prices can reduce the perceived emotional benefits of a product or service, and create a price war. Though if you are overpriced vis-à-vis competitors, and you don’t have an equal or better brand or design than competitors, you should most likely reduce the price to equal out the relative difference in customer value. Strong brands typically don’t use price as a growth lever, until they come out with a new generation of products with superior features and design, enabling them to drop the price of the older generation of products. You only have to look as far as Apple iPhone’s pricing strategy, where they try to hold the price on newer models, and then drop the price on older models, once the newer models are released.
Drive the Customer Value Wedge
One of the largest elements of any growth strategy is simply figuring out how you can drive customer value versus the competition. So, prioritizing which rational and emotional benefits are important and determining strategies to improve them, will get you going down the road of growth. And, on the flip side, figuring out how to consistently drive down your cost structure, so you can improve pricing, will give your growth insurance policy, that you can activate in the event of competitive pressure, macroeconomic factors, or just to crush the competition. Many of the tools we cover are strategies to drive the customer value wedge, with some of the most useful tools being innovation, emergence, lean, use cases & requirements, agile, adoption curves, and roadmaps.
DOWNLOAD THE CUSTOMER VALUE TEMPLATE WORKSHEET
To get you going on improving customer value, purchase the Customer Value PowerPoint with an overview and templates on customer value. Purchase the PowerPoint by clicking on the link below.
What’s included in the Customer Value Template Worksheet:
1. SERVICE VALUE PROPOSITION BENCHMARKING
We’ve included a service value proposition benchmarking template. You should make sure the service value proposition dimensions are the important ones to your industry. For instance, in retail the 5 dimensions retailers compete on are Selection, Service, Convenience, Experience (Shopping), & Value. The quick way to fill in the data is to brainstorm with an internal team and use relative rankings versus competitors. The more accurate, but the longer way to fill in the data is to execute a customer benchmarking survey or a customer journey/ethnography exercise.
2. PRODUCT VALUE PROPOSITION BENCHMARKING
We’ve included a product value proposition benchmarking template. You should make sure the product value proposition dimensions are the important ones to your industry. You should especially expand the core features dimensions since those are often the most important with physical products. The quick way to fill in the data is to do some research and see if you can compare technical and/or feature specifications between products.
3. CUSTOMER NEEDS TO SOLUTIONS EXERCISE
We’ve included a product and service template for this exercise to generate new ideas for existing products or services. The first thing you need to do is make sure the value proposition dimensions are aligned with your benchmarking or with the dimensions that are important to your industry. Then brainstorm the needs customers have across each dimension, with a focus on those needs that aren’t currently met by anyone, or gaps you may have against competitors. Then focus on potential solutions to those needs, especially solutions that would be hard to replicate by competitors. Then score your ideas by customer value improvement and ease and cost to implement. These scores can feed into the product/service/feature prioritization matrix.
4. FEATURE / PRODUCT / SERVICE PRIORITIZATION MATRIX EXERCISE
This is a great template to help generate ideas and prioritize them. The two axes of the matrix are “Improvement in Customer Value” and “Effort & Cost of Implementation”. Those ideas that are high customer value and low effort and cost to implement are the low-hanging fruit you should focus on.
NEXT SECTION: SUSTAINABLE COMPETITIVE ADVANTAGE
I hope you've gotten some new ideas and perspectives from Stratechi.com. If you want some one-on-one support from me, Joe Newsum, set up some time here. I'm a McKinsey alum who has also been the COO of the 9th fastest growing U.S. company, managed $120 million marketing budgets, led the transformation of 20,000 employees, successfully started two companies from scratch, and amassed a load of experience over my 25-year career. I really enjoy coaching clients and they get a ton of value too. You can see some of their testimonials here. I have deep experience with this topic, strategic planning, career development, scaling up, workshops, leadership, presentation development & delivery, ramping up new roles, and much more. Read my take on developing a strategy. Click here to learn more about me or book some time.
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