Ever asked yourself how customers evaluate your product or service when trying to decide whether to buy it or not?
Before buying, customers look at two things: the price of the product or service versus its perceived value. If the perceived value of the product or service is worth the price you are asking for, they will have no problem paying that price.
Similarly, companies can grow revenue and increase profits by focusing on these two things: price and value.
Price is the easiest to manage between the two, and therefore, this is what most marketers focus on.
For instance, increasing the prices can lead to an immediate bump in profits.
Similarly, lowering the price can lead to an increase in demand for the product, and therefore lead to more sales.
Managing value, on the other hand, is a bit more difficult. This is because what consumers truly value is psychologically complicated and can therefore be difficult to understand or describe.
This is because the perceived value of a product or service lies in the eyes of the beholder, or the customer in this case.
For instance, one person might buy a Nike shoe because it is functional [helps them run better], while another person might buy the same shoe because it is the same kind of shoe worn by top athletes.
So, how can companies actively manage value or provide more of it to customers when value is seemingly subjective and so difficult to pin down?
While value ultimately lies in the eye of the customer, there are some universal building blocks that people use to define value.
Understanding these building blocks of value gives companies an opportunity to improve their existing products and services or create new ones.
In a bid to understand what customers value in products and services, researchers Eric Almquist, John Senior and Nicolas Bloch [all from Bain and Co] conducted a research and came up with a model known as the consumer value pyramid.
THE CONSUMER VALUE PYRAMID
Following their research, Eric, John, and Nicholas identified 30 elements of value, which are the basic, discrete attributes that define value in its most essential form.
For any product to be successful in the market, it has to satisfy one or more of these elements of value.
The 30 elements of value are grouped into four categories: functional, emotional, life changing, and social impact.
These four categories are arranged into a four level hierarchical model – with functional needs at the bottom and social impact at the top – to form the consumer value pyramid. Below is an illustration of the consumer value pyramid.
Like I stated earlier, every product or service needs to provide value in at least one of these elements for it to be viable.
The more elements of value you provide, the more likely that your product or service will have greater appeal in the market.
In addition, having the right combination of value elements can lead to stronger customer loyalty, sustained revenue growth, and a greater willingness for customers to try out your product or service.
At the same time, it is good to note that your product doesn’t have to meet each and every of these needs in order to be successful. Even Apple, which was one of the best performing companies in the research, only did well on 11 out of the 30 elements of value.
In their research, Bain & Co partnered with an online sampling and data collection company known as Dynata [formerly Research Now] to survey over 10,000 consumers in their US about their perceptions of almost 50 companies based in the US.
In the survey, the researchers were not simply looking for customer statements on whether a certain product attribute is important or not. Instead, they wanted to find out the underlying motivation behind these statements.
For instance, if a customer said that she liked her bank because it is convenient, they sought to understand what made the customer think the bank is convenient.
In this case, convenience could be broken down into elements such as reducing effort, eliminating hassles, saving time, or simplifying things.
Similarly, when a customer who owns a $10,000 Leica Camera said that he loved it because it is of high quality and takes high quality pictures, exploring the motivations behind buying the camera revealed that the underlying motivation was actually the element of self-actualization, which manifests itself in the pride that comes with owning the same kind of camera that has been used by famous photographers for centuries.
As you might have noticed from the consumer value pyramid, this model seems quite similar to Maslow’s hierarchy of needs.
This is because the conceptual roots of the consumer value pyramid are actually based on Maslow’s hierarchy of needs, which was introduced by psychologist Abraham Maslow in 1843.
According to Maslow’s hierarchy of needs model, the motivation behind all human actions is an instinctive need to fulfill needs, which range from needs that are basic to our survival, such as food, security, water, rest, and so on, to more complex needs, such as power, self-esteem, expression of creativity, and so on. As a marketer, you are probably already well versed with Maslow’s hierarchy of needs concept.
The consumer value pyramid is similar to Maslow’s model in that it looks at the motivations that drive the behaviors of people as consumers.
According to Maslow’s model, the needs at the bottom of the pyramid are fundamentally more important [not necessarily more satisfying] than those at the top of the pyramid.
The assumption is that it is impossible to try to meet the needs at the top if those at the bottom have not been met. For instance, if your need for food or water has not been met, you would make sure this need is met before trying to meet needs such as creative expression or morality.
The consumer value pyramid also follows a somewhat similar line of thought. In order to deliver the elements of value at the top of the pyramid, a product or service also needs to provide the elements of value at the bottom of the pyramid.
For instance, even if you made the most aesthetically appealing car, no one would really buy it if it doesn’t move [time saving, effort reduction.]
However, it is good to note that the consumer value model is not theoretically perfect. Therefore, there are a variety of combinations that may result in successful products and services.
Despite the fact that we live in a modern, rapidly changing world, the elements of value identified in the consumer value pyramid are not new by any means. Most of them have been in existence for centuries. However, the mode of manifestation of these elements of value is what keeps changing over time.
For instance, in the past, connects – one of the functional elements of value – was provided by couriers who delivered messages by word of mouth.
This element was later provided by the Pony Express.
The invention of telegraph and the telephone once again changed the manifestation of this element of value. Today, with the internet, it is provided by platforms such as email, social media, communication services such as Skype, text messaging, and so on.
It is also good to note that the importance and relevance attributed to these elements of value will vary depending on the demographics of your target market, the culture, the industry, and so on.
For instance, elements such as self-actualization and self-transcendence might not mean much for a struggling farmer in a third world country. Elements like makes money, reduces cost, and reduces risk, on the other hand, are very important to this farmer.
THE IMPORTANCE OF UNDERSTANDING YOUR CUSTOMERS’ VALUES
Understanding your customers’ values and then consistently delivering these values can lead to improved business performance, according to the findings of the research by Bain and Co.
In the study, the researchers asked over 10,000 consumers to share their perceptions of close to 50 companies based in the United States.
In the study, the respondents were asked to give one company a score of between 1 and 10 for each of the 30 elements.
The customer needed to have bought a product or service from the company within the six month period before the study in order to be eligible to score the company.
In cases where a company had major branded divisions, the interviews were conducted based on these divisions, rather than the entire company.
The researchers then compared the scores given by the participants to the company’s recent revenue growth and the company’s Net Promoter Score [NPS].
The Net Promoter Score is a metric that is popularly used to measure customer loyalty and advocacy.
Before carrying out the study, the researchers had two hypotheses.
The first hypothesis was that companies that had a high score on multiple value elements would also be enjoying higher customer loyalty than the rest.
The findings of the study validated this hypothesis. Companies that had a score of more than 8 out of ten for at least four of the 30 elements from more than half of the participants had a NPS score that was triple the NPS of companies that scored more than 8 in only one element.
They also had an NPS that was 20 times higher, on average, to the NPS of companies that did not score 8 or more in any of the elements.
This is a clear indication that the more value elements you can deliver, the more likely you are to have more loyal customers. Some of the companies that had a score of more than 8 for at least 4 of the 30 elements include Apple, Amazon, Samsung, USAA, and TOMS.
However, this does not mean that you should try to cram all the 30 elements into your product or service.
Even the highest scoring company – Apple – had a score of 8 or more on just 11 out of the 30 elements.
What this means is that companies should strategically choose the value elements they want to deliver to their customers, rather than aiming for everything.
The second hypotheses was that companies that companies that had a high score on multiple value elements would also experience faster revenue growth than the rest.
Once again, the results of the study found this hypothesis to be true.
The companies that had a score of 8 or more on at least four out of the 30 elements had experienced recent revenue growth that was about 4 times higher than the revenue growth of companies that scored 8 or more on just one element.
Many of the companies that performed well on multiple elements had a good idea of where they stand compared to their competitors and have been committed to strategically adding new elements to their products and services over time.
The researchers also tried to find out whether these value elements could help to provide more insights into the astounding growth in market share exhibited by pure-play digital retailers.
The study confirmed that there was a link between these value elements and this astronomical growth.
For instance, Amazon – which has experienced huge market share growth since it was founded – scored highly on 8 elements, most of which fall in the functional category.
Delivering these value elements played a huge role in helping Amazon to gain market share.
For example, when the company launched Amazon Prime in 2005, this new service introduced unlimited 2 day shipping for a flat rate fee of $79 per year. By so doing, they provided two functional value elements – saving time and reducing cost.
Later on, Amazon Prime expanded to include services such as unlimited cloud photo storage [risk reduction] and media streaming [entertainment/fun plus provision of access].
For each value element Amazon delivered, it gained a large amount of customers.
Today, Amazon holds almost 50% of the ecommerce market share in the United States. Delivering more value elements also made it possible for Amazon to increase the price of Prime to $99 per year without seeing any fall in demand.
ALL THE ELEMENTS ARE NOT CREATED EQUAL
In order to make it easier for companies to manage the value side of their products and services, the researchers were also interested in finding out how the value elements influence the success of a business. Are there some elements that are more important than others?
Does focusing on value elements near the top of the pyramid lead to greater success, or should companies put more focus into functional value elements? Do customers prefer the same values in digital only companies as compared to omnichannel companies?
The researchers identified patterns that show that not all the value elements are equal. They found some to be more important than others.
For instance, the perceived quality of a product or service was seen to have the most impact on customer advocacy across all industries compared to any other value element.
Without this element, your product will most likely do dismally, regardless of how much you try to compensate for lack of perceived quality with the other elements.
Aside from quality, most of the other important value elements are dependent on the industry.
For instance, in consumer banking, the most important elements after quality were provision of access and heirloom [a good investment that can be passed on to future generations].
Actually, owing to the close relationship between money and inheritance, heirloom was found to be a very important value element in financial services in general.
In the food and beverages industry, the most important value element after quality is sensory appeal.
The researchers found that smartphones are wildly popular because they provide multiple value elements, such as time savings, integration, connection, effort reduction, fun/entertainment, organization, variety, and provision of access. It is therefore not surprising that smartphone manufacturers achieved some of the highest ratings in the study.
Below are the top five elements that influence customer loyalty depending on the industry.
DIGITAL FIRMS ARE PERCEIVED TO DELIVER MORE VALUE
Many customers perceive digital companies to be providing more value compared to brick and mortar businesses, owing to the fact that digital businesses make customer interactions easier, faster, and more convenient.
Therefore, it is not surprising that digital companies scored relatively high on value elements such as avoids hassles and saves time.
For example, online clothing and shoe retailer Zappos had twice as high ratings on these two elements compared to its traditional competitors.
It also outscored them on several other elements. Zappos attained high scores on 8 of the 30 elements, which is way higher than traditional apparel retailers.
Similarly, Netflix also got higher rankings than traditional TV service providers.
In value elements such as therapeutic value, cost reduction, and nostalgia, Netflix scored three times higher than traditional TV service providers. Netflix also scored higher on variety compared to other media providers.
BRICK AND MORTAR BUSINESSES STILL HAVE A CHANCE
The research found that omnichannel retailers scored higher on value elements that fall in the emotional and life-changing categories.
For instance, omnichannel retailers were two times more likely to get high scores on elements such as affiliation and belonging, attractiveness, and badge value compared to purely-digital retailers.
They also found that consumers who had received assistance from employees as they shopped were more likely to give these retailers a higher score.
The study also found out that companies that got higher rankings on the emotional elements were more likely to have a higher Net Promoter Score on average compared to companies that got higher rankings only on functional elements.
This shows that, by fusing digital [which perform well on functional elements] and physical [which perform well on emotional elements] channels, businesses are more likely to perform better compared to focusing exclusively on one of these channels.
This explains why some digital businesses are going physical.
For instance, primarily online retailers such as Bonobos and Warby Parker have started launching physical stores, and online trading company E-Trade has started opening physical branches.
PUTTING THE ELEMENTS TO WORK
Knowing about the elements of value is not enough.
Businesses need to be able to take advantage of these solve business challenges and grow revenue.
Here, businesses have two options;
- They can look for ways to make improvements on the elements that form their core value. This will in turn allow the businesses to meet the needs of their customers more effectively.
- They can add more value elements to their products and services. This will allow the business to enter new markets that they did not serve previously.
In order to use the elements of value to solve business challenges and grow revenue, businesses should start by doing a research to understand the elements that are the most important for their industry.
They should also try to determine how they are performing on these elements compared to their competitors.
If a business is lagging behind on one of the elements that are crucial in its industry, it should focus on making improvements to this value element before attempting to add new value elements.
After making sure that the crucial value elements are at par or better than the industry standard, the business can now look for ways through which they can provide new types of value.
To determine which types of value to add to their product, businesses should start by interviewing current and prospective customers and try to understand what their priorities are, what frustrations they face, the compromises they are forced to make when purchasing their products and services, and so on.
Using the information gained from these interviews, companies can then try to find out which value elements can be added to better satisfy their customers or to attract new customers.
WRAPPING UP
When looking for ways to grow revenue, a lot of managers focus solely on price, because an increase in price while demand remains constant can quickly lead to higher profits.
Unfortunately, an increase in price changes the product’s value in the eyes of the customer, which might lead to decreased demand.
Therefore, instead of focusing solely on price, companies should find new ways of providing more value to the customer.
Finding new ways of delivering value can also help companies grow revenue by making a case for the creation of new products and services.