David Stoughton of ValueKinetics writes:
Wonderful, really, how recessions demand that we focus. Wonderful and, unless we're really careful, destructive. Business is being forced to take stock in a way that it hasn't done for years; the downturn at the turn of the century was a cakewalk by comparison, for most anyway.
Potentially one of the most destructive features of the new focus on cost is management belief that value is a zero sum game. That to conserve the returns, or limit the losses, to shareholders some things have to go - staff, product development, services. If the interests of other stakeholders suffer, so be it.
I don't deny the need for austerity, but those managers need to be very, very, careful. Careful about their brand equity, careful about knowledge walking out the door with the employees, careful about falling behind the competition and, above all, careful with the loyalty of their customers.
This recession is proving steep and deep, we don't yet know how long it will last. Few managers have seen one like it before, but there are people who can tell them; the old war stories are being trotted out as a rapid primer. They should think hard first though, there is real danger in behaving as though this recession were like the last big one. The underlying rate of change is faster, competition is fiercer, and markets and consumers are more demanding. Businesses can't just go below decks, batten down the hatches and wait for the storm to pass - many of those who do will be shipwrecked by the time it's over.
It's those consumers I want to focus on here. I haven't detected among them the kind of patience required to wait until business comes out of its shell; politely to stop the merry-go-round of their own activities while managers tinker in the engine room. Conspicuous consumption may be out, but the round of social interaction and media reprocessing goes on - perhaps even a little more madly.
Generation Y and is coming of age, and its successors are not far behind. They bring with them a native ability to use communication platforms and social media that drives a constant swirl of change; an always-on dialogue that simultaneously changes tastes, behaviours and expectations. And they are educating up. Many in Generation X and even older are adopting some of the habits, if not the mindset, of those younger than them. That is where danger lies for business, things move fast in this environment. Already behind before the downturn, companies could find themselves off the playing field by the time they emerge from their reverie. So, a good time then to review what creates value for this demanding generation.
Three prime dimensions of customer value
Amid all the marketing jargon and the competing claims made during price wars, it's distressingly easy to oversimplify what creates value for customers by focusing on narrowly defined benefits. Such analysis tends to miss many of the distinctions that count and, as a result, concentrate on too narrow a set of attributes to be useful. So, without trying to be comprehensive here, I propose to explore three different perspectives.
Functional value
This is the best known realm of customer value. Its focus is twofold. One aspect is fitness for purpose. Does it do what it says on the tin - is it really in fact a good mousetrap at all? How does it compare with other mousetraps?
So for a hotel, for instance, attributes of this form of value will concentrate on the size of room, quality of bed, quietness when it counts, facilities such as reception, dining and bar provision, the decor and, of course, service quality.
The second focus is on relative price. Is this offer, on these terms, good value compared to others?
Thorough value studies of this kind allow companies to draw value curves that show customers' perception of performance against expectation for different segments, benchmark against key competitors, and differentiate themselves by varying the mix of features at which they propose to excel. When aggregated performance scores are compared against relative price for all key products in the market, relative price/performance and strategic positioning can be determined and, if necessary, adjusted.
First developed in detail in the 1980's as part of the quality movement, this is an important toolkit that is regularly forgotten and, as regularly, rediscovered. Just last year, Harvard Business Review published an article trumpeting the launch of a new strategic tool, which turned out to be price/performance scoring in an, essentially, unchanged form. It's basic and should never be disregarded. But in these times, good performance on functional terms is seldom a differentiator. Most functional value niches in most markets are occupied, and Lean Management, coupled with Six Sigma and other quality tools, has ensured that most basic products and services are competitive at their price point, and that they do broadly what it says on the tin. Other insights into customer value are needed if we are to get a real grasp, especially when customer demand is driving the market.
Social value
Many products and services are drawn into the social whirlwind, either as signifiers or as grist to the mill. There are, once again, two critical aspects of value here. The first is belonging, and concerns potential use in proclaiming identification or individuality. Establishing membership of the tribe or group is a key task in social interaction. Beyond membership comes distinction, often through minor variations in the customisation of the same product. Members of a tribe want to be, as the hawkers in the streets of Mumbai have it, "same, same, but different". So the ability to customise can be important.
Attributes of the product or service that enable these forms of signalling are critical value drivers. Once a product or service is adopted by a tribe it is likely to become exclusive within that tribe. This is a winner-takes-all competition, but only within niche markets. Tribes must also differentiate from each other, so adoption by one may lead to rejection by others.
The other key aspect of social value is self-esteem; the ability to display, or to produce, things that either reflect an enhanced me back to myself through the approbation of others, or enable me to gain a measure of renown amongst peers. The inherent reflexivity of modern identity lends huge value to those things that enable me to evoke positive feedback from others. If my display also leads to a real increase in social standing among my peers that value is redoubled.
The problem for brands with these forms of value is that, unlike functional value, they are hard to measure and not inherently controllable, though they may be influenced. Not knowing how to measure or control them, nor even how to get defensive customers to take notice, is not an excuse for not evaluating these attributes as best we can. The rewards for success are so high, and the pickings so meagre if no-one takes notice, that it is insane not to focus on this dimension of value if it is at all relevant.
Experience value
No, not the promotional "experiences" that are the latest fad of marketers determined to prove they're "in touch". I'm talking about the form and tone of the interactions the customer has with the company, its partners or distributors, throughout the buying cycle; from first contact with its marketing to upgrade, renewal or defection.
Only recently have most companies paid real attention to this aspect of customer value, and performance is very patchy - differing in quality, not just between companies, but for different channels and services within the same company. True, some companies have made huge progress in measuring and managing the impact of company process and employee behaviour on customer acquisition and retention. Then again, so often, even among the best practitioners, marketing is left to run free, bombarding customers with inappropriate and ill-timed communications that undo much of the patient work being done elsewhere
Let's get very clear about one thing, unlike social value, experience value is measurable, at least in its impacts, and it is controllable. But leveraging it requires a very different, cross-functional, management style that many find too hard to manage. Well here's the killer for them, unlike functional value, experience value is a differentiator. If you're not measuring and managing this you're losing the race. To do so well requires considerable sophistication, because the attributes that matter change at each stage of the buying cycle, and for each channel of customer contact. I'm not even going to attempt to enumerate the variables here, they are necessarily unique to the product, channel and service mix.
Measure and manage the relevant dimensions
Clearly the balance of importance between these value dimensions will vary from sector to sector and across different categories of product and service. I doubt that the social value attributes of baked beans make a huge amount of difference - but then, on second thoughts, I can imagine circumstances in which they might. Equally the relative importance of experience will depend heavily on how much contact there actually is. As usual discretion is needed when choosing where to expend the effort.
I stress them all here because, as capital dries up and losses mount, managements have started to swing the axe. Important contributors to value are going, along with the dead wood. If companies don't know what's valuable and what's not, and if they fail to preserve the ability to respond to changes in expectation, they risk their very ability to survive, What it takes to flourish now is very different from what it took in the seventies and eighties. Lose sight of that and you might well lose your business, and get cursed to boot by those very shareholders your actions are trying to protect.
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