Looking to become the superior value provider in your industry? You are if you want to keep your customers from going elsewhere, says R. Eric Reidenbach, Ph.D., principal and founding partner of VALTec Group, Inc. and co-author (along with colleagues Reginald W. Goeke, Ed.D. and Gordon W. McClung, Ph.D.) of Dominating Markets with Value: Advances in Customer Value Management. Furthermore, it's the only way to keep your company profitable in the long run.
"You must do everything in your power to create loyal customers," says Reidenbach. "They are less price sensitive, less eager to negotiate on price, less likely to 'shop around' for better deals, and less likely to defect. Our clients tell us that their costs of customer acquisition run 5 to 10 times the costs of customer retention. In other words, providing the value that keeps a customer loyal is much more profitable than providing just average, non-differentiating value that pushes customers into your competitors' hands."
Below are nine tips from Reidenbach on becoming what he calls an Undisputed Value Leader:
- Learn the difference between price and value. When a customer says that something is "a good value," he does not mean that it's the lowest price he could possibly find. What he means is that the product or service is "worth it"—worth the price he paid. In south Louisiana there is a Cajun word called "lagniappe" (lanyap) which means a little bit extra for the same price, a similar concept to "a baker's dozen." This expression connotes the central idea of value. VALTec defines value as "the interaction between customer benefits and the price that the customer is willing to pay to acquire these benefits."
The Common Law of Value: "It's unwise to pay too much, but it's worse to pay too little. When you pay too much you may lose a little money, that is all. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the job you bought it to do. The common law of business balance prohibits paying a little and getting a lot. It can't be sustained. If you deal with the lowest bidder, it's as well to add something for the risk you run. And if you do that, you will have enough to pay for the something better." — Anon
FACT: Boosting customer retention by 2% can have the same effect on profits as cutting costs by 10%.
- Realize that becoming a value-driven organization is not easy. Before you take on this gargantuan task, be aware that you are choosing a tough row to hoe—but the results are very much worth the effort. Ultimately, becoming a value-driven organization requires understanding what the customers in the market, or better yet, what customers in various market segments you serve, mean by value. Remember that value, like beauty, is in the eyes of the beholder.
What is your competition doing? You need to know! Because customers make value judgments based on what your competitors are doing, so must you. Value does not exist in a vacuum. By itself, it is a measure or concept lacking power and robustness. However, when used within a competitive framework, value alone predicts loyalty and performance.
Throughout the process, it's important to make the distinction between Value Drivers and Price Drivers. Value Driver is the term used to identify specific value benefits such as responsiveness, credibility, and dependability. Price Driver may refer to a number of pricing components such as satisfaction with price, fairness of price, the company's willingness to negotiate price, and/or customer perceptions of the relative competitive position of price.
- Determine the market segments or product lines that are critical to your future. Too often, companies try to conduct a value analysis without any coordination with their overall strategic growth initiatives. Obviously this is not a good idea. You cannot be all things to all customers and it's foolish to try. Likewise, it's impossible to offer superior value to every customer that wanders across your radar screen (all of whom have different ideas about what value even means). Figure out which segments and product lines provide your organization with the best opportunities for growth. Here is where you will conduct your Customer Value Analysis.
- Map out your Value Stream from start to finish. Called Value Stream Analysis (or VSA), this is the heart and soul of becoming an Undisputed Value Leader. Basically, you pick apart every process involved in serving the market niche you have identified as most critical, figuring out exactly how value is currently being delivered and how you can deliver it more effectively and efficiently.
You are going to be looking carefully at the comprehensive set of activities and communications that collectively creates and delivers value to the customer. The starting and stopping points of this process may surprise you. It actually begins with the customer need for a product or service, and ends with that customer's belief that he has received something of genuine value.
- Put together strong Value Analysis Teams. These teams should consist of five to seven people from different functional areas of the organization. These are the people who are directly involved in doing the actual work. They will become the vehicles for conducting the analysis and, ultimately, taking ownership of the Value Stream. Be sure to choose people who will tell you how their particular system actually works, not how it's supposed to work. You need team members who are willing to be honest about the shortcomings in their areas.
List the departments and functional areas involved in the Value Stream you want to analyze. Because you may not know which ones are actually involved, you may find it useful to list all the departments and functional areas in your company, then delete them at a later date. Don't be surprised if there is a discussion or debate as to exactly which departments or functional areas should be included; the team will have different perspectives on this.
- - You will find that the perspective and knowledge set each team member brings to the analysis is indispensable. Typically, bringing these people together proves that most employees do not know what all is involved in the creation and delivery of value. Once they "toss their work over the wall" they have no idea what happens to it further down the line. Therefore, the analysis itself fosters cross-departmental understanding—which will later promote the buy-in necessary for becoming an Undisputed Value Leader.
- Identify ways in which value delivery processes can be improved. The problem most companies notice right away is that they can spot plenty of things that need to be "fixed." To determine which issues to focus on, you will need to go back to your customer's definition of value.
- VALTec has found a whole list of symptoms that helps clients locate potential bottlenecks in their Value Stream. Here are just a few of them:
- - Many hand-offs between departments. Whenever work is transferred from one department to another, there's a risk of faulty communications. As such handoffs increase, the risk multiplies exponentially. How many times have you called a company with a customer service problem only to be told "that's not my department"? This is a prime example of too many hand-offs.
- - Unusual situations or too many exceptions. Most companies do fine as long as customer situations fall within predictable, expected guidelines. It's when exceptions arise that employees begin to drop the ball—and when companies begin losing customers. That's why it's so important for all employees to be prepared, equipped and empowered to solve unusual problems.
- - Failure to capture information. There are many situations in which employees acquire information but fail to retain that information in a systematic way. Customer inquiries are frequently dealt with in an ad hoc manner, with no systematic procedure for capturing and storing information about that inquiry. Such information would be very useful in analyzing lost sales or in following up with customers at a later date.
- - Poor utilization of reports. Sometimes large numbers of reports are generated by the information system, but these reports are not getting to the people who would benefit from the information. Or, the "hard copy" is simply put on the shelf and forgotten.
- When it's time to implement process improvements, don't drop the ball. By the time you've analyzed your existing Value Stream, identified opportunities for improvements and charted a new course for improved value delivery, you must develop a work plan to implement the changes. The hardest part has already been done. Now that you know where you are and where you're going, it will be relatively easy to identify the actions or steps required to take you there. At this stage you must set clear, specific goals—with deadlines—and make sure someone is responsible for getting them done. This is what will ultimately distinguish your Undisputed Value Leadership program from all the other "flavor of the week" business initiatives your company has tried.
- Know that what constitutes value today will not necessarily define value tomorrow. Once you've become an Undisputed Value Leader, do not think that your work is done. You can't afford to rest on your laurels! Gordon McClung discusses this mistake in great detail in his documentation of the battle for competitive advantage between Wal-Mart and Kmart (see www.valtec.com/bluelight.htm ). As he points out, Kmart failed to alter its original understanding of value over time while Wal-Mart clearly understood this issue, and effectively responded to changing definitions of value.
- - Once you've implemented your process improvement program, you must begin monitoring improvements in value delivery. How will you know when you have achieved your objectives if you don't measure performance related to those objectives? In the absence of systematic monitoring, any improvements that might be achieved are often short-lived. You cannot manage what you don't measure!
- Get ready to celebrate bottom line results. What can you expect from your transformation into an Undisputed Value Leader? The answer is, a great deal. For instance, you can leverage your value position to:
- Increase share of the customer
- Increase market share
- Increase goodwill
- Improve cross-selling efforts and results
- Avoid the trap of price competition
- Increase profitability
- Decrease operating costs
- Enhance word of mouth
- Decrease negotiation and bidding of customers
See? As Reidenbach told you earlier, becoming an Undisputed Value Leader is the key to long-term profitability. The above list should clearly show you why.
About the Authors:
R. Eric Reidenbach, Ph.D. - Principal and founding partner of VALTec Group, Inc., Dr. Reidenbach has pioneered the development of techniques in value analysis, customer retention, benchmarking, and continuous improvement. He has extensive experience in marketing research, measurement, instrumentation, and modeling. Dr. Reidenbach is the former CEO of Datafax Company, a consulting firm specializing in survey research. He received a Ph.D. in Marketing from Michigan State University. Eric also has a strong consulting background. Former clients include the Pentagon, the Naval Research Labs, Walt Disney World, Benetton Spa (Italy), and McDonalds. Work for these clients ran the gamut from development of value based instrumentation to the deployment of value driven systems to enhance organizational productivity.
Reginald W. Goeke, Ed.D. -Principal and founding partner of VALTec Group, Inc., Dr. Goeke has pioneered the development of techniques in the measurement of customer value, inter-industry benchmarking of value management and the analysis of Value Streams. He received his doctorate from the University of Illinois and has extensive experience in measurement and instrumentation. Dr. Goeke is a former department chair at Pennsylvania State University. He also has a strong consulting background in the deployment of market value information. He has been involved in the development of value-based strategies for such companies as Caterpillar of Australia, Gough, Gough and Hamer (New Zealand), Westrac Equipment (Australia), Joy Mining Equipment and Southern LINC.
Gordon W. McClung, Ph.D. - Principal and founding partner of VALTec Group, Inc., Dr. McClung brings a strong background in Marketing Management. He has a doctorate from the University of Pittsburgh and more than 25 years of marketing/management research experience. Dr. McClung has held the positions of Director of Marketing at IMI, Marketing Manager at AT&T, Marketing Analyst for American Standard, and Management Consultant with KSA. Prior to co-founding VALTec, Gordon honed his skills in engagements with industry leading firms such as Holiday Inns of America, Silver Springs Sportswear, Caterpillar, Inc., Dow Chemical, Kmart, U.S. Postal Service, BellSouth, and Nikkei Research (Japan). Dr. McClung has pioneered the development of techniques in customer value information systems, customer retention, and value management.