There are three drivers that determine the value you deliver to your customers. Like anything in your business, it’s important that you’re able to both measure and manage these drivers so that you maximize your sales and profitability. Many companies are able to charge a price premium for their offering within their category because they deliver a superior value in the mind of their customer. So how do customers evaluate this? Are there levers that can be pulled to change the ways customers value your offering versus the price they pay? How do you measure all of this?
The first driver is your actual product or service as you designed it internally. This is classic product management and your teams can clearly and objectively measure the effectiveness of your product or service in terms of internal quality measurements, design specifications and benchmarked outcomes. If your company manufacturers surgical instruments, for example, your team can quantify and measure the precise width of a surgical blade, the length of the handle, the style of the handle grip, etc. These measurements and facts can then be objectively compared to competitors products and you can determine the relative quality of your product versus the market. When it comes to this driver, you already have all the information you need to understand the price/value relationship and to change components that can change that relationship.
The second driver of value for customers is their perception of your product/service. This is where things get more complex. You have a product – you’ve designed it to certain specifications, but at the end of all that effort, the value to the customer is only what they perceive of those specifications. For a variety of reasons, they may be unable to accurately assess the full value of what you’ve built. In business-to-business settings, this challenge is particularly acute. The customer’s skill level, sophistication, complexity, and need for customization are often interdependent to their evaluation of the product. In other words, the product’s or service’s value to the customer is highly dependent on the customer’s ability to use it to its full benefit. An example of this can be in the area of healthcare medical devices. Let’s say that a doctor has just purchased a very expensive cardiac catheter for a particular procedure. That catheter has been designed to very exacting standards, but will ultimately be evaluated by the customer (the doctor – and by extension, the hospital) based on the skill level of the doctor and medical staff. If the doctor struggles to properly insert the catheter – it could be a product design problem or it could be a skill problem – the two are interdependent – the perception of the customer will win the debate, causing the customer to devalue the product. The same evaluation happens every day, in every industry. This challenge highlights a critical point – one of the biggest drivers of value is your customer’s perceptions. As a company, you have to have a systematic way of collecting, analyzing, and understanding those perceptions clearly or your product/service will miss the mark and be undervalued.
The third driver of value for your customers is their evaluation of your competitors. It’s critical to recognize that your customers know things you don’t know. They know what it’s like to work with you and they know what it’s like to work with your competitors. When they evaluate your product or service, they’re assessing it in light of your competitive environment. Here again, a competitor may have a technically inferior product or service that gets valued higher by the customer because that competitor has done a better job of integrating the product into the experience of the customer or into their level of expertise or understanding. Many companies have turned to elaborate training and education programs to aid in the value they bring to customers – better educated and informed customers tend to make sharper, more sophisticated evaluations of products and services. This is a big advantage to well-designed products seeking a premium position in the marketplace. The challenge is that you can’t assume that the customer will take the initiative to educate themselves – you have to build that into their overall experience with your company – from the field sales team to implementation to ongoing support. This evaluation of your offering goes well beyond training your customer – it’s about every point of integration your business has with your customers and how your competitors handle each of those areas as well. Are your sales people better than your competitors? What about your service and support teams? How would your customers evaluate your logistics/delivery process vs. your competitors? What about order placement? There are as many factors to understand as you have customer touch points. You need to understand what they think of your competitors in each of these areas.
When it comes to understanding the customer’s value for price relationship there are three factors. One of those (your internal design specifications) you have great insight into and complete control over. The other two are more challenging and more impactful on customer buying decisions. It’s critical that business leaders build measurement systems to understand customer perceptions of their products as well as the perceptions of competitive products, in a systematic, disciplined, and action-oriented way. Without this insight directly from customers, companies will be forced to continuously drive their pricing down and face erosion of their revenue and profitability.