How Creating Value for Your Customers Can Give Your Business a Competitive Edge
Every business seeks to create value for its customers. Companies that create greater value generally are more successful than those that deliver less. But if every company is seeking the same goal (greater value), then why do some succeed and others fail?
What is creating value all about anyway?
Know your customers
Creating value begins with understanding your customers. A vague picture is not enough. You must know them intimately: their desires, their goals, their concerns, their lifestyles, etc.
How else will you know precisely what they want...and what they're willing to pay for it?
Consider Southwest Airlines. In 1973, Southwest cut its fares between Houston and Dallas in half in a price war with competitor Braniff International Airways, a move that threatened to bankrupt the upstart airline. Worse, the low fare didn't draw large numbers of flyers.
Why? Because flyers between Houston and Dallas didn't care about price. Most were corporate executives who didn't even handle their own bookings. What they cared about was luxury.
Eventually, Southwest realized its mistake. It bumped airfares back to $26 a ticket and offered a complimentary bottle of Chivas Regal to each passenger. Executives, suddenly able to expense flights and get free liquor, swarmed to Southwest.
Understanding your customers also means knowing which customers to keep and which to let go. The old axiom "the customer is always right" is not a bad starting place for entrepreneurs, but in reality it makes little sense to invest in difficult customers that offer little return.
“Unforgiving customers may be too costly to serve,” acknowledges Lior Arussy, president of customer experience transformation firm Strativty Group in an article for Harvard Business Review. “Obnoxious, profanity-laden customers will damage employee morale. Individual customers with frequent calls to customer service are not ideal either.”
Knowing your customers gives you the ability to identify the good investments and cut loose the bad ones.
Price and value
Entrepreneurs are constantly tinkering with prices. You cut prices to get customers in the door; you raise prices to lure those clients who believe higher prices mean better quality.
It's important to remember, though, the basic purpose of pricing:
The perfect price point offers short-term gains to your customers in order to achieve long-term gains for your company.
Consider your average customers. How do they evaluate short-term gain? Your average customers will estimate how much they are willing to pay for your product or service and then subtract what you are actually charging.
The greater the distance between these points, the greater the perceived short-term gain.
But offering the lowest price is not necessarily a winning strategy. Your average customers have another number in their heads as well: what they believe your product or service is actually worth. In other words, how much you have to charge to break even.
When your prices are so low that customers can't imagine how you make a profit, they will start to question the quality of your product or service. They wonder which corners you are cutting.
This is why knowing your customers is so crucial. You must know what price they are willing to pay, what price they find excessively cheap, and the precise sweet-spot in-between.
Make sure your short-term pricing serves your long-term goals. If your customers feel $19.99 is a great deal, then you're only losing money by charging $9.99.
Increasing value (not just lowering price)
Adding value is not merely about adjusting prices. According to Seth Kahan, author of Getting Innovation Right, better value comes from increasing one of three elements:
- Impact
- Intensity
- Application
To increase impact, adjust the consequence of doing business with your company. A perfect example is Chegg, the textbook rental company. Other companies offer similar rental services, but whenever you rent a book from Chegg, the company plants a tree in locations around the world. Environmental activism becomes an additional consequence of doing business.
Increasing intensity means offering greater potency. Imagine two HVAC installation services. Both offer quality units and service, but one company offers to file local, state, and federal rebate forms on your behalf for free. That's more intense service.
To increase application, offer a wider array of uses for your product or service. Let's say you teach yoga classes. In addition to regular classes, you decide to record your sessions with alternate poses adapted for elderly participants. Offering these videos on your website and social media increases the application of your service.
Intangible value
It's important to remember that value is both relative and subjective. For every customer, there are certain intangible factors that create value. Since intangibles appeal to certain customers and not others, we again come back to how well you know your customers.
Which intangibles will appeal to your customers? Intangible value factors are:
- Nostalgia
- Morality
- Respect
- Patriotism
- Valued member
- Social awareness
Intangible value has become more and more important in recent decades with the increasing influence of Millenials, who as a generation spend their money differently than previous generations, preferring socially-responsible companies and businesses they see as healthy, transparent, and ethical.
In fact, a Nielsen study concluded that 66% of consumers are now willing to pay more if products and services come from businesses committed to positive social and environmental impact.
Conclusion
Creating value is the key to sustaining a profitable partnership with your clients. But you can't create value if you don't know your customers. No matter if you're just starting your company or you've been in business for decades, you can never know enough about your customers.
Don't overlook the fact that value is about more than price. For most customers, price is only one factor of many.