Define and Quantify Customer Value - Reveal the Needs
Recently while having an evening coffee with Dr. Raju Konduru, a business acquaintance and a dear friend, the topic of customer value came up. In the early morning Raju went to get his bike repaired. As is usual in India, he was asked to wait during the repairs; he went to a nearby tea stall for his morning tea. While sipping his hot morning tea, he started observing a cockroach lying on its back struggling to get up. It was obviously injured and needed some support. Raju also observed a group of ants frantically searching for food. He saw that the ants were about to move to a direction away from the cockroach. He was itching to tell the ants that the cockroach was nearby. The food these ants were desperately searching for was so near to them, yet they could not see it and were about to lose it. The role of an innovation champion is much the same â€“ connect the searching ants to the cockroach, connect various needs and their solutions so that synergy is created faster, cheaper and without failure.
To do this, a champion not only needs to be at a higher vantage point (where he can see both the ants and the cockroach), but also needs a deeper understanding of the behavior of ants â€“ that they are searching for food, that the cockroach is a possible food option for the ants and that an injured or dying cockroach definitely is an easily available food item. The champion needs to know the customer’s needs and connect them to the relevant solutions. In this example, the ants are Raju’s customers. But suppose Raju’s customer is the cockroach? In this case, Raju needs not only to indicate to the cockroach the clear and present danger of ants eating it up, but also help the cockroach get up on its legs and move away from the ants.
What Is Customer Value?
Customer value is so fundamental to businesses that it is sometimes completely ignored. It gets hidden under layers of actions and decisions. Companies may believe that they know what value they are delivering, but they may not be able to easily define it. So what is value? How does one know whether value is being created in the work one does? Is it created optimally? At what cost? For whom? Does the customer know what is valuable? Is value the same as what the customer demands? How can value be defined and measured?
Are You the Customer of Your Products/Services?
It is imperative for a company to understand and empathize with its customers before defining value â€“ and remember that there will always be a trade-off between total benefit versus total cost. The customer will continuallyevaluate that trade-off. A salesman’s role is to convince the customer that the benefits the customer perceives are the best that money can buy. The salesman may not keep the relationship going if the value remains a perception only. This calls for an end-to end customer value model which runs, adapts and is refined as the customer relationship progresses.
Models of Customer Value
Marketing and innovation expert professor Mohanbir Sawhney, has described customer value as, “The perceived worth of the set of benefits received by a customer in exchange for the total cost of the offering, taking into consideration available competitive offerings and pricings.” This definition encompasses seven fundamental lessons of customer value shown in Figure 1.
Tyson Browning, assistant professor of enterprise operations at Texas Christian University, has reviewed some logical and mathematical expressions for customer value. Figure 2 summarizes the value models.
In the March 2006 article “Customer Value Proposition in Business Markets” in Harvard Business Review, James Anderson, James A. Narus and Wouter Van Rossum claim, “â€¦.there is no agreement as to what constitutes a customer value proposition â€“ or what makes one persuasive.” They classified value propositions into three types â€“ all benefits, favorable points of difference and resonating focus.
- All benefits: The suppliers list every perceived benefit delivered by their product or service. This method requires a standardized list to be prepared for all customers in all scenarios; however, this leads to what the authors call benefit assertion without any actual benefit to the target customers.
- Favorable points of difference: Based on the customer’s awareness of alternatives, this requires the supplier to have knowledge of alternatives to his own offerings. The proposition is for the supplier to articulate the ways in which his offering is different (and better) to the alternatives. This leads to what is called the value presumption â€“ an assumption that points of difference articulated by the supplier are beneficial to the customers.
- Resonating focus: The suppliers need to make their offerings superior on key elements of value that are most relevant to the customers. The supplier’s offerings must demonstrate and document their superior performance. In addition, the offerings must clearly display the supplier’s sophisticated understanding of their customers’ business problems.
It is clear from these few views that the terms “value,” “customer value” and “customer value proposition” tend to be overused, as companies and customers incorrectly assume that the terms are easily understood by one and all. In fact, value may be the least understood concept in business parlance.
Customer Value Framework
There are two key dimensions of any customer-supplier scenario: 1) how well the customers know what they need (customer needs are hidden and not clearly articulated) and 2) how well the suppliers know what the customers need. (See Figure 3)
These two dimensions create fourscenarios/boxes:
- Known-known: The first box represents the deterministic world â€“ the focus is on delivering quality. The gold standard in customer value propositions is creating a resonating focus with the key needs of the customers. When these needs are clear and known to suppliers and customers, the customer value is measured and reflected in delivery quality â€“ how efficient, how robust and how timely the service is. Parameters such as system availability, reliability and robustness become more relevant and contribute more to customer value. This is mostly the case in established, commoditized products and services, where typically the certainty of service and determinism of the product are a given. In this case, however, customer value can be enhanced by building a congenial relationship with the customer through all customer touch points. Innovation or improvement in this case is typically in the way the delivery happens or in otherwise creating a unique customer experience.
- Known-unknown: The supplier has to discover what clients need by following the path of customer intimacy â€“ getting to know the customer better. This requires scanning, observing, seeing, detecting, examining and recognizing the client’s needs through a deep intimate process should be based on trust and confidence. The delivery quality strategy of Known-known fails in this box. Here, the insights that the client has need to be captured through multiple interactions and touch points.
- Unknown-known: The supplier has to let the customer learn through a process of orchestrated customer learning. Elements of known solutions or needs are highlighted through exploration workshops, interactions and designed experiences so that a customer’s hidden needs are revealed. The finesse and diplomatic skills of suppliers besides the stickiness of their solution becomes an important component of this strategy as the customer is guided through the process.
- Unknown-unknown: Where no player knows the needs and where maximum synergy and value can be co-created. In this scenario, value net deep dive is a model for discovering and creating value. The first problem is fundamentally accepting that unknown, but not knowing can be perceived as a weakness. Accepting ignorance is the first step toward learning and creating.
The supplier and the customer can accept that they do not know the “value,” but have faith that their mutually distinct capabilities will help create what in military parlance is called a common relevant operating picture (CROP). The value net framework is a starting point to create the CROP for both sides. Once the needs are understood, then targeted solutions for specific needs can be created.
The value net, as described in the book Co-Opetition: A Revolution Mindset That Combines Competition and Cooperation by Adam Brandenburger and Barry Nalebuff, is a complete map of business relationships and a shared template for discussions of strategy. The value net framework helps in understanding the connections among stakeholders. A deep-dive into the value net makes oft-hidden dependencies, constraints and complexities visible to everyone concerned.
Using the Customer Value Framework
To use this framework, it is necessary to begin by understanding how much the supplier knows about its customer needs and how much the customer knows about its own needs. Consider an asymmetry in perceptions of what the supplier and customer know â€“ if the supplier and customer think they both are in Box 1 (both know what the customer needs), but they are actually in Box 4 (neither knows the needs). In this case they will both be focused on delivery quality â€“ and the best quality solution may be developed, delivered and implemented. This, however, does not solve the problem leading to the potential of rework â€“ a significant transaction failure.
Given the challenge of starting off by knowing the needs of the customer, a supplier should always start in Box 4. By diving into the value net, the need will emerge for both sides, taken them to Box 3 (if the supplier understands the need) or to Box 2 (if the client understands the need) â€“ ultimately reaching Box 1 where delivering quality becomes the focused strategy.
In a nutshell, the framework has four steps:
- Value net deep dive
- Customer intimacy
- Orchestrated customer learning
- Delivering quality
Customer value is one of the least understood business concepts, yet it is a fundamental part of every business. It is important to start with a value net system of the business â€“before locking onto key customer needs. The customer value framework helps suppliers understand their clients and leads to success for both.
Navneet Bhushan is the founder / director of an innovation co-creating firm, Crafitti Consulting Pvt Ltd. He has worked close to two decades in managing and developing IT, innovation and productivity solutions and has worked in large commercial and government organizations. He is the principal author of Strategic Decision Making – Applying the Analytic Hierarchy Process published by Springer, UK, 2004. His current research interests include complexity, open innovation and globalization. He is a visiting faculty member at Welingkar School of Business Management. Contact Navneet Bhushan at navneet.bhushan (at) crafitti.com or visit http://www.crafitti.com.