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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?
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For insight on business model innovation and business model differentiation, read my recently released book, Beyond Price.
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I think you are being fundamentally realistic. One of the most difficult issues is comprehending your value chain well enough to make decisions that both allow you to excel where your value is centered and cut costs where it is not. This can be a desperately confusing maze where you have to negotiate between your company’s desired value equation and what your customer understands/accepts as value. Unfortunately, if you are unable to communicate your equation well enough then maintaining price differentiation, or even preference under equal pricing, becomes impossible. The real difficulty I have seen time and again is accepting the need to cut a cherished feature when the customer sees no value in it and it may actually be confusing perceived value.
Great point Fred. Sometimes, you are selling to the wrong customer—find the one that does value your difference. Or, the market may be segmenting. Be more to come up with a lower-cost version of your offering before a disruptive innovator does so. At times, ineffective communication about the value of a feature is a root cause of the conflict. I like to watch how effortlessly Apple shows us the value of their many applications. Finally, you may just be seeing your business from an internal lens. What’s “great” from an engineer’s perspective for example may not be valued from the customer’s perspective.
Kay