DRIVEN BY VALUE
“Products and services deliver fundamental elements of value that address four kinds of needs: functional, emotional, life changing and social impact. In general, the more elements provided, the greater customers’ loyalty and the higher the company’s sustained revenue growth”
Customers evaluate a product or service by weighing its perceived value against the asking price. Though marketers focus on managing the price, what customers truly value can be rather difficult to pin down and psychologically complicated. Often an emotional benefit such as reducing anxiety or providing entertainment acquires the same importance as a functional one, such as saving time. There are several effective research techniques to analyze and understand what stimulates demand for different combinations of product features, service standards, and pricing. However, even these tests hardly generate consumer response beyond traditional preconceived notions of value.
Discovering new concepts calls for anticipating what else people might consider valuable. Though the value proposition of a particular product or service ultimately rests on the experience of the consumer, universal building blocks of value exist that create opportunities for companies to improve and build on their performance, providing newer combination of values in current markets or newer ones.
Years of research reveal 30 elements of value that fall into four categories: functional, emotional, life-changing, and social impact. While some elements of value are inwardly focused and primarily address customers’ personal needs, there are others that help the customer to seamlessly navigate the external world and deal with its complexities.
Most marketers are familiar with Maslow’s hierarchy of needs, which seeks to explain that human actions arise from an innate desire to fulfil needs ranging from the very basic (security, warmth, food, rest) to the complex (self-esteem, altruism). The assumption is that people cannot attain self-actualization without meeting the physiological and safety needs. On the other hand, the value pyramid is a heuristic model, with the most powerful forms of value being on top. To deliver on those higher-order elements, at least some of the functional elements required by a particular product category must be provided.
Growing Revenue: To test whether the elements of core value can be tied to a company performance, specifically customer relationships and revenue growth, an online survey was conducted with more than 10,000 US based consumers about their perceptions of nearly 50 US-based companies. The findings revealed that the companies that performed well on multiple elements of value had more loyal customers. Secondly, companies doing well on multiple elements grow revenue at a faster rate than others. Strong performance on multiple elements correlates with higher and sustained revenue growth. Amazon, for instance, illustrated the power of adding value to a core offering. In creating Amazon Prime in 2005, the company initially focused on delivering cost reduction and saving time, and then expanded to include streaming media (access and fun/entertainment), unlimited photo storage on Amazon servers (reducing risk), and other features. Each new element attracted a large group of consumers and helped raise Amazon’s reach and standing. Now Prime has penetrated nearly 40% of the US retail market.
Patterns of Value: In managing the value side of the equation it must be understood how the elements translate to successful business performance. Across all industry sectors, perceived quality impacts customer advocacy above all. After quality, critical elements vary from industry to industry. While sensory appeal is a close second in the food and beverage industry, access and heirloom (i.e. a good investment for future generations) matter in consumer banking. The appeal of smartphones, as evinced by Apple, Samsung, LG, all reveal the multiple elements of value like connecting, saving time, organizing, fun/entertainment. Digital firms are often considered by consumers as offering greater value, with many online firms gaining edge over their brick-and-mortar counterparts on the promise of saving time and avoiding hassles. However, brick-and-mortar businesses still win on some emotional and life-changing elements. For example, they score high on badge value, attractiveness, and affiliation and belonging. Consumers used to getting help from employees in stores give much higher ratings to retailers, and it goes without saying emotional elements have probably helped many a store-based retailer stay in business.
Putting the Elements to Work: Ultimately the elements of value are meant to solve business challenges and address revenue growth. Instead of overhauling products or services, companies can start by understanding which elements are the most important for their industry and how they stack up against competitors. If a company falls short on crucial elements, it should plug them before proceeding to add new ones to their value proposition.
Making value hunt a priority, organizations can establish a discipline around improving value in the following key areas:
New product development: The value model can not only birth new ideas for new products, but also add to existing ones, for instance connecting with consumers in a new way, or integrating with other software applications for evolved offerings.
Pricing: Higher price accrues directly to profits when demand is constant. Yet, price escalation can alter the consumer value equation. Thus any decision on price change should consider addition or expansion of value elements.
Customer segmentation: While companies practice a method of segmenting customers into demographic or behavioral groups, any opportunity to improve value must consider where the company stands on the various elements of value that is being (or not being) delivered. It would be unwise to hail a product that seems to deliver great value, but actually poses customers with great difficulty in getting service or technical support.
Abraham Maslow unravelled the promising potential of psychology. Value too remains rooted in psychology, though its elements make it much less inscrutable and amorphous. Organizations must seek to harness or creatively add value to their product, service, or brand, so as to reach out to consumers who are its true beneficiaries.
Based on Harvard Business Review South Asia September 2016 ‘The Elements of Value’ by Eric Almquist, partner with Bain & Company’s Customer Strategy & Marketing practice and the global head of consumer insights for Bain, John Senior is a partner with Customer Strategy & Marketing practice, and Nicolas Bloch, coleader of Bain’s Strategy practice.
Written by Neena A Ghosh Roy, Chief Architect – Learning & Development, Aidias Consulting Group
Date: 1 September 2016