Customer Value

The Purchase Tipping Point refers to the buying decision and how it tips from uncertainty about which is the best choice to certainty that you have made the right decision.

It’s not to be confused with the Profit Tipping Point, the name of my free report to help business owners make more profit.

You’ll have experienced the purchase tipping point yourself many times and there are two different decisions.

1. The decision to buy something.
2. The decision to buy the particular item.

Your internal dialogue will go something like this…

“That’s nice.

So is that.

I can’t afford both and I probably shouldn’t buy either.

But I deserve a treat.

Then one of

• I’ve done very well recently
• I’ve worked hard this week
• I have resisted temptation and not bought anything for ages
• I’m feeling down and I need cheering up
• I really need it – my current one is old, shabby, broken or worn out

Which should I buy?

[Notice the first purchase tipping point decision has been passed because you’ve gone from not buying to deciding to buy something]

I really like both.

That one’s more practical but the other is so stylish.

I wish I could buy both.

But I can’t. I mustn’t.

Come on which do you want most?

That one.

[This is the second purchase tipping point as you move from a generic purchase decision to a specific one.

How Do You Influence The Purchase Decision?

I’m planning to write a lot more in my blog about how you influence the purchase tipping points:

• The decision to buy a generic product or service
• The decision to buy a specific product or service

I believe not looking through the customer’s eyes is a common failing in many marketing and sales books and courses. I’ve argued for a long time that your job is to make it easy for a customer to buy.

It may seem obvious but when you look back at your own buying, you’ll see how often businesses stand in the way of you buying and stop you from tipping positively at either or both of these purchase tipping points.

The Purchase Tipping Point & Mistakes In Communication

One thing businesses are very bad at is not understanding where you are in your buying cycle as a potential customer. This means you get a mismatch in communication.

There are only four combinations – two right and two wrong.

• Before purchase tipping point 1 (deciding to buy generic)
  The right way – to explain why a generic purchase is right and lay the groundwork for why you should make a specific choice.
  The wrong way is to concentrate on why the customer should buy from you. The customer isn’t ready to be sold, just helped to make the initial tipping point decision.
• After purchase tipping point 1 but before tipping point 2 (deciding to buy a specific item.)
  The right way is to explain why your specific product is right for them and is different and better than those products available from competitors.
  The wrong way is to explain why buying the generic product is the sensible thing to do.

The Purchase Tipping Point & Emotional & Logical Reasons To Buy

The idea of the purchase tipping point can also be applied to the emotional and logical reasons for buying. You can see this in my sample of internal dialogue above.

To make the purchasing decision, you want ticks for both logic and emotion.

You can know you need something and not want it.

You can want something and not need it.

Either way, you can find that you can’t justify buying.

The Purchase Tipping Point & The Pain Of the Problem Versus The Pain & Gain Of The Solution

Pain and the desire to reduce or avoid pain motivates you to make decisions but there is also pain involved with buying solutions to the underlying problems.

I don’t smoke but it’s well established that smoking is bad for you so the logical thing is to give up. But there is pain involved in quitting (withdrawal symptoms, increased tension and irritability, gaining weight). People who continue to smoke haven’t been able to reach the decision tipping point and to stay on the right side. In this case not smoking is considered more painful than smoking and suffering the high risk of serious health problems in the long term future.

I am overweight and, after losing a few kgs, it seems to be creeping back up. Not as high as it was before I was ill, so I still have plenty of clothes to wear. I’d like to lose weight but I haven’t hit the decision tipping point where my exercise goes up and my calorie consumption goes down. Just like in the internal dialogue above, I find myself thinking “I’ve been a good boy. I deserve a treat” and I have another chocolate bar.

Two Questions

Have you noticed that you have this internal dialogue as you work your way through the two tipping point decisions involved in buying? Have you noticed how some companies and sales people help you “tip positively” towards making the buying decision whilst others seem to do their best to get in the way?

Secondly, if you’re selling a product or service, have you identified ways that you can;

• Help your customers to tip towards making a buying decision?
• Identified ways that you might get in the way and then put together an action plan to stop these things happening?

In particular, pay attention to the understanding where the customer is in his or her buying journey and make sure that you are selling the generic product when you need and educating the customer on choosing their appropriate buying criteria and then selling your specific product as different and better than your competitors.

I learnt about the Customer Value Performance Matrix from reading Customer Power by David Swaddling and Charles Miller which they called the Customer Perceived Value Performance Matrix.

It is another 2 x 2 matrix – like the Innovator’s Portfolio Matrix – that I find myself wondering “why didn’t I think of this?”

The Customer Value Performance Matrix

The customer value performance matrix lets you look at your individual customer value attributes and convert them into a SWOT analysis by identifying the strengths, weaknesses, opportunities and threats.

The two axis are:

• Relative performance which identifies good and bad attributes.
• Relative importance from the customer’s perspective.

According to Swaddling and Miler you can calculate your relative performance of each attribute based on the customer’s next best alternative. This may be difficult to determine since it requires you to crunch through the customer value numbers to determine which is the best alternative (see Managing Customer Value).

Alternative ways would be to

• Average the attributes across your main competitors and compare your performance against the average. This risks over-assessing your strengths and opportunities if there is one outstanding competitor who has a clear advantage, but if that’s the case, you can use that competitor as your benchmark in the customer value performance matrix.
  .
• Picking the best customer value attribute performance from all the competitors which would be a tough test.

On the other axis, Relative Importance, Swaddling & Miller draw the cut-off line at 12.5%. I believe this depends on how many attributes you track in your customer value formula. If you’ve got five attributes then the dividing line would be 20% with a possible sample of importance ratings of 35%, 25%, 15%, 15% and 10%. If you’ve got eight in your customer value formula, then the 12.5% is appropriate.

SWOT From The Customer Value Performance Matrix

Strengths – high relative performance (i.e. you’re better than your competitors) but low relative importance. The customer value strategy would be to maintain performance.

Weaknesses – low relative performance and importance are low priority improvement targets unless they are order qualifiers and performance is below the threshold or risks falling below it.

Opportunities – high relative performance and importance – these are the competitive advantages of the business, the key factors of difference.

Threats – low relative performance but high relative importance – these attributes are priorities to the customer but the company does not perform as well as competitors. These are priorities to improve the underlying capabilities.

Putting Customer Value Into Perspective

Customer value can seem a complex, intangible concept when you start working with it but techniques like the Customer Value Performance Matrix help to make it much more relevant to sceptical management since it guides priorities and decisions.

When I was reading Business Innovation For Dummies by Alexander Hiam, I came across the Innovator’s Portfolio Matrix.

I think it’s a powerful way to think about differentiation in your product mix.

What Is The Innovator’s Portfolio Matrix?

It is a 2 x 2 matrix (much loved by strategy consultants of course) with uniqueness on one axis and profitability on the other.

Profitability is measured through the margins you achieve but it’s up to you to decide what’s a high and what’s a low margin in your business or industry. There can be a long debate on the right margin information to use but I favour contribution margin (after variable production and sales costs) and all other directly attributable costs which would disappear if the product was taken away. This would therefore include advertising costs for the product and any special promotional deals with customers.

Uniqueness is an assessment of how your product compares to its close competitors. If it’s a commodity with all competitors selling the same basic item, then unique is very low. If it is totally only supplied by you, then your uniqueness is high. The best assessment of uniqueness is from your customers and non-customers in the market but that means a market survey. You can make your own assessment provided you try to look through your customer’s eyes.

The Four Cells

The four cells in the product portfolio matrix are:

• Develop – high uniqueness, low profitability
  .
• Maximise – high uniqueness, high profitability
  .
• Update – low uniqueness, high profitability
  .
• Eliminate – low uniqueness, low profitability

When a new product concept is brought to market it is unique but no one knows about it or understands its advantages. While selling prices are high, production costs may also be high because there’s been little benefit from accumulated learning and there’s a big marketing job to be done to educate the market.

If things go well, the product moves out of the Develop stage to the Maximise stage where profits are high and uniqueness is maintained.

Unfortunately success attracts imitators who will also have high costs at this stage and will want to shelter under your price umbrella. Profitability can stay high in the short term but to maintain it, the uniqueness needs to be renewed through additional product innovation.

If it isn’t normal competitive forces will mean that the product is commoditised and prices and margins are competed away in the scramble to win volume from customers who know they only need to focus on price comparisons rather than a more complicated value assessment.

How Do Your Products Fit In The Innovator’s Product Portfolio Matrix?

The logic of the Matrix is clear but it’s power to help you to think through your strategic issues only really becomes apparent if you plot your products into the matrix.

It can help you to add in elements into your SWOT Analysis:

• Products in the Maximise cell represent both a strength and a current opportunity.
  .
• New products in the Develop cell represent an opportunity that is worth pursuing.
  .
• Older products in the Develop cell could be an opportunity or a weakness – while the product is uniqueness, that uniqueness doesn’t appear to support a price premium. This may be because the uniqueness isn’t appreciated by the market (the weakness) or it might be because you are under-pricing.
  .
• Products in the Update cell are a threat – while profitability is currently good, unless you do something to restore the differentiation, you can expect prices and margins to fall sharply as customers exert their buying power in negotiations.

What Do You Think Of The Innovator’s Portfolio Matrix

I’m kicking myself that I hadn’t thought of this 2×2 matrix because it is such a neat way to summarise the differentiation issues within a business.

I like it but I’d like to know what you think of this Matrix so please leave me a comment.

For about the last 25 years I have been fascinated by the concept of customer value – what you get for your money when you buy.

When we buy, we instinctively get a feel if what is offered represents good value for money based on what we want and our experience of buying and using similar items.

Buying involves choices.

Do we buy this one, that one or not buy either?

OK sometime we buy both but more often, buying one means not buying something else.

To help decide we look to the value that we as customers will get from using and/or owning the item.

I’m typing this on a PC, I get my value from using it.

If I had a low mileage Lamborghini Miura in the garage (and sadly I don’t), I may not be prepared to drive it because it would cause the car to lose value as a classic car investment. Instead, I’d get my value from knowing that I own one of the most iconic cars every made and also from walking into the garage to admire its stunning beauty.

Photo courtesy of motoryen.

What Is Customer Value?

Customer value is the key concept in developing differentiation strategies for your business.

Robert Woodruff has recognised that customer value comes through three levels:

• Attributes and product features

• Consequences of owning or using the product

• Goals and values behind the motivation to buy

A Customer Value Example – Buying A Classic Supercar

So if I was to go out and buy a Lamborghini Miura, then I may set myself a few product attributes to help make the choice.

• The colour – I have to admit that the gold Miura in the photo does look snazzy but I have a 1/18 model of a blue one that looks terrific too.
• Mileage – I could set a maximum mileage limit of 10,000.
• Condition – recently restored with original parts, immaculate.

Those would help drive the consequences – to feel good, to take pleasure from looking at it and treat it as an asset which will appreciate in value.

But it doesn’t explain why I want the Miura and not a Ferrari or Aston Martin. They are fine cars and could achieve similar consequences.

We need to go higher to find out why only a Miura will do.

And that relates back to falling in love when I saw one as a nine-year-old and being in a tizzy for days.

Sadly I’m rather too pragmatic with money to go out and buy a Miura, even if I could afford one.

When I go out looking for a new car, my first question is “do I fit in it?”

I’m a big chap and struggle for headroom, legroom and in some cars, width as well. I probably couldn’t fit into the Miura so it’s just as well that driving it isn’t one of my aims.

If I don’t fit – a qualifying attribute – the car fails and is dismissed from my consideration.

Once I’ve got myself a short list, I start looking at other factors like design (a subjective attribute linked to how I feel owning it, driving it and imagine what others think when they see me with it.)

Then I’m interested in practical issues like cost of ownership (depreciation, miles per gallon, service costs) and how inconvenient it is to have it serviced and maintained.

Customer value is a combined assessment made up of positives (the car makes me feel great) and negative (costs and service issues).

It’s also relative.

Customer Value Is Relative

Customer value is most easily assessed in comparison to a similar product.

The food in this restaurant is good but it’s even better at this second restaurant.

I like this wine very much because of its fruity flavours but I’m not so keen on this one.

My accountant does my tax returns on time but I think this one could give me better business advice.

Customer value is also relative to the price we pay.

This wine is great value for money at £5 per bottle. It doesn’t taste quite as good as this one for £25 but it’s much better value for money.

Other Customer Value Articles

Two diagram approaches to customer value are very useful for helping the management of a business understand customer value concepts and how their strategic position compares to competitors.

Customer Value Map

Customer Value Attribute Map – known as the strategy canvas in the Blue Ocean Strategy book.

The Strategy Clock is a very useful way to think about possible strategy moves and changes in positioning.

I hate airlines.

I hate that you are supposed to be at the airport two or three hours before the flight.

I hate the long check-in queues.

I hate the baggage rules, and I hate that other people seem to get away with flouting them and I don’t.

I hate the security process which is so incredibly slow and makes me take off my coat, my shoes, my belt, spill my change and keys on the floor and still the alarm goes off so I have to be individually searched.

I hate the fact that when I get into the departure lounge I can’t sit down.

I hate the fact that my boarding gate is closer to my destination than where I started.

I hate that the plane is late to board and even later to take-off because of the French air traffic control strike.

I hate that my seat is built for a midget and I have to squeeze in and sit all scrunched up and then the jerk in front insists on reclining his seat as soon as the flight is underway.

I hate the plastic food that is served up and the miniature bag of peanuts that I can’t get in.

I hate that I get knocked (because I’m in the aisle seat) whenever anyone walks past.

I hate that if I do nod off, it’s duty free time when I don’t want the stuff.

I hate how long it takes to get off the plane because they won’t open both doors.

I hate the long queue through passport control.

I hate standing at the carousel seeing everyone else get their bags, wondering where mine have got to.

I hate being rammed by some old biddy who can’t drive her bag on wheels.

I’m certainly not a satisfied customer of the airline. My expectations are low but each time I keep thinking that there must be a better way.

But I still fly.

And this is the big difference between the idea of customer value and customer satisfaction.

You can have an experience which leaves you very satisfied but you don’t want to do it again.

And you can have an experience, like flying, which isn’t satisfactory but you’ll buy again and again.

That’s because flying has some big advantages.

First, if you’re flying off on holiday, you have two days of pain but it sandwiches seven, ten or fourteen days of pleasure, fun and relaxation which can provide memories which will last a lifetime.

Second, flying is better than the other methods of travel.

I love South Africa and hate the ten or eleven hour flight but I don’t have time for the two week cruise just to get there.

I love Italy and the two hour flight from the UK is a breeze compared to the pain of driving down to Folkstone, going through the Tunnel, having to drive across France and then brave the crazy Italian drivers only to find that there’s nowhere I’m brave enough to park when I get there (there’s a reason why many Italian cars are small and dented).

There are a lot of advantages in flying which make it the obvious way to travel.

The experience sucks but I have to admit that the airlines provide me with customer value and that’s why I buy.

You may see me on your next flight.

I’m the big chap looking grumpy near the screaming baby.

The title of this book by Pam Ingmire is

Creating Winning Value Propositions 2.0

In my review posted on Amazon.co.uk, I gave the book a 4 Stars rating. This means it is Good to Very Good.

Here is my book review.

A well defined process

This is a very sensible, clear process for developing a value proposition. [continue reading…]

The full title of this book by Marco Lucchina is

The Camel Theory: Design and execute your unique value proposition

In my review posted on Amazon.co.uk, I gave the book a 1 Star rating. This means it is Very Disappointing.

Here is my book review.

Very hard to read.

I’m beginning to think it’s hard to write well about customer value, value propositions and similar topics. [continue reading…]

The full title of this book by Malcolm McDonald and Grant Oliver is

Malcolm McDonald on Value Propositions: How to Develop Them, How to Quantify Them

In my review posted on Amazon.co.uk, I gave the book a 2 Stars rating. This means it is Disappointing.

Here is my book review.

Very disappointing. High expectations not delivered

How well businesses differentiate themselves in the eyes of their potential customers is a bit of a hobbyhorse for me.

I believe it’s often one of the fundamental problems that lie at the heart of underperformance in business. It’s also an area I find fascinating. [continue reading…]

Consumers are private individuals buying for themselves and their families but how do they choose what to buy out of all their options?

Obviously it is going to vary based on the product. Someone won’t buy a car using similar value attributes to buying pet food for their dog.

Are there common value attributes for these B2C deals and relationships? (B2C refers to business-to-consumer.)

Strategy consultants Bain think so and shared their thoughts in an article in the Harvard Business Review.

The Elements of Value by Eric Almquist, John Senior and Nicolas Bloch from the September 2016 Issue. (You can read the full article on the HBR website and two others for free.) [continue reading…]