All customers buy on perceived value. Unfortunately, Walmart’s advertising has led us to define value as lowest price. We’ve forgotten that there are value promises beyond lowest price in today’s recession.
Value is a mental scale with benefits on one side and costs on the other. Both sides contain tangible and intangible, emotional, functional and/or social factors. More benefits, more value, a formula Target exploited and Sears forgot.
We stay in business if the customer exchange (benefits for price customers pay) is consistently profitable for us or, if we’re a venture-financed start up, promises profitability.
Value promise and profit potential are interrelated. Understanding this interrelationship explains how to win.
Way #1. Build the lowest cost structure for delivering required benefits. Your higher margins can be channeled back into the business to create further advantage. McDonalds dominates Wendy’s.
Way #2. Offer relevant, hard to copy benefits. You keep some of the excess of benefits over costs as a price premium, and customers get more value than they’d get with the lowest priced competitor. Subway steals market share from McDonalds.
Conclusion. If you can’t be your industry’s Walmart, avoid becoming its Sears. Before you try to improve a copycat business, engage in business model innovation.
Am I being too optimistic? Can everyone engage in business model innovation, carving out a unique value promise? Or, is business won by marketing and selling excellence as copycat companies duke it out?
For insight on business model innovation and business model differentiation, read my recently released book, Beyond Price.