If a tree falls in the woods and no one hears it, does it make a sound? If your offering has value that customers don’t perceive, can you charge for it?
Price is limited by perceived differential value. So if you are busy creating value through market research, design, R&D, better customer service, or some other aspect of the business and customers don’t perceive it, you’re just losing money (and wasting lots of time and energy). With everyone trying to cut expenses (both in purchasing and cost of goods sold), now is a good time examine where you think you are creating value and where your customers are actually perceiving it.
The first test is whether your customers actually know about it. Everyone says they have “great service.” If you think you truly have better service, you need to be able to tell your customers why. For example, if you always get a person in 3 rings or less when you call a toll free support line, you can highlight that. Some customers won’t care. They’d rather go with a cheaper provider who doesn’t even have a phone number on their website. (This is where unbundled comes in.)
Next, make sure you highlight the areas you’re different. If you spend a ton of time and money talking about the ways you’re just like the competition, you aren’t doing anything to create differential value. Apple, which does a great job at commanding premium price points through strong perceived differential value, has been stepping up the attack here. As computer prices continue to fall– the fastest growing segment of the market is sub-$400 “netbooks” — Apple is selling machines costing 2-7 times that amount. They introduced a new manufacturing process that fashions the core frame of a notebook out of a single piece of aluminum. Not only does this make machines relatively lighter and stronger, but it’s hard for other companies to copy. So what? To encourage people to care, they showed a video when they debuted the new product line, and posted it on their website. The video shows actual blocks of aluminum going through “13 separate operations” to become a new Macbook.
They also claim an 8 hour battery life on their highest end notebook. Rather than just claiming longer battery life, though, they used another video to highlight why their innovation– from design to manufacturing– produces better results. They are saying that other computer makers who use off-the-shelf components might save a few bucks, but they can’t innovate like this. (The videos also sidestep the fact that these factories are not actually Apple factories at all.)
When Nike started putting “Air” in its shoes, few people noticed. When they managed to cut away part of the outsole so you could actually see the bubble inside the sole, sales skyrocketed. They “visibilized the technology.”
Now, you have to make sure that customers actually care about your great innovation. Thinking from a slightly different perspective, you can also target prospects who are likely to place value on the results of your effort. We have seen cases where a company’s “Gold” customers always got free express shipping, regardless of whether they actually cared about it. This was a huge expense, especially as shipping costs rose in 2008. Instead of being a differentiator, it was just something that customers took for granted, because they had never built the value story around it.
Lastly, if a customer does not value something that you think is tremendously valuable, take it away. Then you protect your premium with the customers who do, while protecting your margin on those who don’t. Often, customers who claim they wanted you to match the competitor’s lower price will relent when you offer to match their lower price and lower service level.
Starting from the inside out like I describe above is a way to treat the symptoms. You really want to start by figuring out what the customer values and working back from there to deliver it to them. However, this is not always possible, especially in the short term.
With a lot of companies at risk for negative growth for 2009, make sure your effort is in the right place. Areas where customers perceive strong differential value will generate a great return. Areas that customers do not value do not create a good return and divert valuable resources from those that do.