Principle 3: Customer Perception of Value (Item 4)
Providing what your customers value – now and in the future –
must be a key influence in your organization's direction, strategy and
action.
You should be working to eliminate (or minimize) all of the things
that are part of your products and services but which are not of value
to your customers. For example, all those `you must do it like this
to use it' things, eg price, payment method and terms, ease of use,
ease of access, availability, timeliness, accuracy, reliability.
Most businesses see their products and services just from their own
eyes — what they see the product does and how much it cost to make
and deliver. Customers see your product from their eyes — what
they see the product will do for them and what it is worth to them.
The gap between these views of the product is often enormous.
From the customer's perspective, your product will include phpects
such as:
- payment terms and conditions
- access to be able to purchase
- advice on how to use the product
- how the product is delivered
- perceived status from using your product or service
- reliability
- the number of times they have to contact you to be able to get the
product to work to their satisfaction
Most companies see their products or services in terms of what they
designed. However, from your customer's perspective, those same products
and services include phpects that you probably overlooked during design.
These phpects can be the source of dissatisfaction. If you work on removing
them during your product/service design, this can give you competitive
advantage.
If a single deal were big enough when you are working one-on-one with
a buyer, you would have worked through these issues. For thousands of
small deals with anonymous customers, most organizations do not. And
lose this advantage to organizations that do.
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Our new car will feature leather seats,
a 10 disc CD player and central locking.
Although it may be nice to have a car with leather seats
and a CD player, other things may be more important to me.
- I may want a car that is off the road for maintenance
only once every year.
- When I go to the dealer, I want to be treated courteously
and with respect despite my lack of knowledge.
- When I have the car serviced, I want to know what the
bill will be in advance.
- If I have to wait, I would like comfortable chairs and
a cup of coffee.
- I would like early warning of likely problems.
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Some of the things you supply or see as part of the "product",
the consumers of the product might not like at all. See box for an illustration
of a customer feels about what he or she is consuming. And what is an
add-on. Lito Tejada-Flores wrote this is in Skiing magazine.
Most suppliers mistakenly think everything in their product offering
is what people want to buy. They fail to realize that some of the overall
product is not appreciated.
Skiing
Skiing is not packing for a trip, or shopping for new skis.
Skiing is not putting on chains or parking the car, buckling
the boots or buying a lift pass.
Even riding the lift doesn't count, although we're closer
– the snowy scene sliding backward beneath us, the frosted
trees, the ribbon runs unrolling towards us, skiers flitting
by beneath our feet like extras in a movie, some other movie,
not our movie.
You get off the lift. You're moving now, gliding. You're
almost there ... but the last few words of a conversation
still float along with you as you adjust your pole straps,
your goggles. And then from one moment to the next, it's all
gone.
Time stops. Skiing starts.
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In Its Not Luck, Goldratt presents a very compelling argument
about customer perception of value.
The value your customers place on your
product is based on the benefit they believe they will get from using
the product.
The value most companies place on a product
is based on the effort they had to put into the product.
That is, most managers' perception of the value of the products they
sell is heavily influenced by the efforts required to design, produce,
sell and deliver the product. Because of this, the company is likely
to set its prices according to a `cost-plus-margin' formula; ie product
price is set equal to product cost plus a reasonable margin.
One thing that is not in your customer's `value index', is how much
it costs you to bring the product or service to the customer. The customers
do not care what it has cost you or all the trouble you have had in
providing the product or service. Your costs are not part of their perception
of value. When you price according to `cost plus margin', you are thinking
about this from your perspective, not your customers'.
There are very few managers in the world who price on `what the customer
sees as value'. Most managers price according to the `cost plus margin'
formula. This means that opportunities for increased margins are lost,
because of a false assumption about what customers will pay.
Most companies are stuck in the belief that the prices that customers
are willing to pay do not leave enough margin. And blame the problem
on the customers forcing them to cut margins or sell `below cost'. Why
assume the customer is not willing to pay more for your product and
its services? Provided you package it right and your competitors cannot
match the offer, you can probably ask and receive a premium, if it is
in the customer's benefit. A very harmful assumption is that your product
is a commodity (ie all products are the same and sold purely on price).
Find something that the customers value that you can do that others
can not.
Every day we drive somewhere we see hundreds of examples that proves
people do not always buy the lowest price. Cars. If we all bought the
lowest price, we would all be driving the same low price – basic
model. The hundreds of different makes and models proves over and over
again that we buy many things other than a basic car for the lowest
price possible. We buy image and prestige as well as features and benefits;
feelings, emotion and trust as well as CD players and color.
The real estate industry is another example. Are all houses the same?
Think of all the types of houses, apartments, units, town houses, flats.
One, two, three, four, ten bedrooms. Stand alone house. Part of a 200
unit, 30 storey complex. Holiday house by the sea, ski lodge, fishing
cabin. In leafy suburbs, in down town ghettos. All are different to
suit the different needs and expenditure of different people. Location,
who lives in the neighborhood, closeness of schools, shops and transport,
resale values. When you last bought a house, did you buy only on price?
No way!
Yet the myth persists that people buy mainly on price. You don't do
it yourself – why do you think your customers do?
Swiss watchmakers knew that the key to their business was meticulous
and miniaturized design of mechanical watches. That `core competency'
was made redundant by the introduction of electronic watches. A technology
change that the Swiss ignored and that swept most of their industry
away.
Consider what happened here from the customer value perspective. The
customers valued accurate time delivered by a small implement on their
wrist. They did not see as value the intricate miniature mechanism
that the Swiss watchmakers were so clever at. When a cheaper electronic
version became available, customers deserted in droves. If you can avoid
it, why pay for something (eg, an intricate miniature mechanism) that
is not really part of the product you wanted (accurate time)? (Unless
you want the prestige of displaying a watch that cost you $5,000.)
What are the parts of your products and services that your customers
don't value but are tied into what you deliver? These – as with
the Swiss watchmakers — might be your core competencies. And, like
the Swiss watchmakers, even if you can't believe it, one day those phpects
of your product and service that you now charge for will become irrelevant
by a change in technology or shift in thinking.
Your business should try to `create' value for your customers.
Few businesses actively try to create value for their customers. Most
have stopped their thinking at providing what their customers think
is value for money. Providing what your customers want and value may
not be enough. Increasingly often, your product and service becomes
part of your customers' products and services. Each of those customers
downstream from you is also trying to make money. Most businesses have
been forced to understand that it is important to keep prices low. Prices
are passed on as costs.
What does `creating value' mean? The product or service would add significantly
to the customer's potential to make money or to their life style. Products
and services that have done this have always done better than those
that do not.
This is not just about eliminating dissatisfiers from existing products.
If that was all it is about we would all be driving T-model Fords with
all the dissatisfiers removed. Few customers would be satisfied with
that. (On second thoughts, maybe that is what present day cars are -
T-model Fords with the dissatisfiers gradually being removed.)
Requirements are always changing. You must always be searching for
new customer perceptions of value. Things that satisfy your customers today will
become the worst things in their life tomorrow – either because
technological changes give new options or familiarity leads to contempt
or changes in thinking (such as environmental consciousness).
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