Producing value sits at the very heart of business strategy and competitive advantage. It’s the reason Singapore Airlines, for example, consistently makes it to the top airline list and why Toyota, for instance, is rated so highly among its peers.
But “value” is a term that is surprisingly misused and misunderstood. There are many places to trip and fall when it comes to “creating value” due to wrong assumptions about what is valuable to stakeholders. A good way to avoid this trap is to reflect where your company sits on these three scales, which you should do in the order presented.
1. Commoditized vs. Customized
A few years ago, I was conducting my strategy workshop for a group of managers from different industries. I was pointing out that value is created by many factors, and I told the group that it is usually a mistake to lower prices in the push for competitive advantage because price does not equal value. Trevor, an executive from BHP, Australia’s largest mining company, piped up with: “What if you’re a price taker not a price maker?”
BHP sells iron ore, metallurgical coal, copper, and other minerals around the globe. Trevor was referring to the fact that BHP sells “commodities.” I offered my suggestions on other areas of possible differentiation, like on-time delivery and customer service. But these aren’t big drivers of choice when it comes to buyers in Chinese companies. They tend to take these things for granted. Even the quality of the products isn’t a differentiator as coal, iron ore, and other minerals are graded to a specification. In other words, Trevor was right, price does equal value in the eyes of a customer when all other strategic factors in the purchase decision are equal, which often occurs with commodities.
But I was right, too. Many other products and services are customized rather than commoditized, and, in these cases, price doesn’t equal value. Steve, for example, is CEO of a kitchen design and installation company specializing in large and expensive homes. When his inquiries dropped, he leapt to the assumption that he was “too expensive.” So, he embarked on a round of price cutting. But was cost really the issue? To find out, we assisted by interviewing some of his clients who chose a competitor. A typical example was Jenna.
She’d sought three quotes for the kitchen of her large home. “They came in at different prices, naturally,” she said. “I could have bought a new car at the prices supplied.” She explained that the kitchen contractor she chose wasn’t the cheapest. More important to Jenna were four other factors: innovative design (she spent a lot of time with each contractor trying to find the best design solution), work quality (recommendations from previous customers about kitchen finishes), customer service (easy to deal with and good listening skills), and quality of inclusions (the brands of dishwasher, sink and taps recommended).
The final factor, she said, was “trust.” It was “very important because she wasn’t going to be there every day checking on the installation of plumbing and electrical fittings.”
Your position on the scale of commoditized vs. customized depends on how much unique value you contribute to your products, which is why you need to start with this scale. If you’re in the business of supplying raw materials, it may be that you don’t add much value. This means that lowering your prices is your only option to increase competitive advantage. But this is not the case for most businesses. Your “value add” can include all sorts of factors from the experience of customers with your service to the quality of your materials. These are value factors that customers are willing to pay more for.
The next scale helps you figure out what kind of value you provide.
2. Rational vs. Emotional
Some years ago, I was CEO of a business that made trusses and frames for houses. These were prefabricated in our factory, loaded onto trucks, and hauled to a customer’s building site. We provided everything a builder needed to erect the skeleton of a house. I was charged with turning the business around from a loss to a profit. This required us to achieve a competitive advantage. So, we needed to understand fully the criteria customers employed to judge “value.”
Value for builders is determined by weighing up price against other strategic factors. These include product quality (the product must meet specifications and stay together during erection), delivery (being on time is important, delays cost money), and customer service (technical advice and dealing with any issues). For builders, our customers, the purchase decision was very rational, involving carefully evaluated costs and benefits.
But not all products and services add value in such a rational way. Angeline is a Product Manager of a well-known international cosmetics company. Its products are sold mainly through large retail department stores. I asked her about “value” for her consumers, the users of the cosmetics.
She replied that “the decision isn’t purely rational as image is very important. Consumers become emotionally connected to a brand.” She added, “that’s why we link our products to well-known celebrities.” She also pointed out that online influencers are becoming increasingly important: “They can make or break a product.”
Finding your place on the rational vs. emotional scale involves scrutinizing your customers’ decision-making processes. Are they influenced by any emotional factors or are they able to set emotions aside entirely and take a hard-nosed and rational approach? Many consumer decisions include an emotional component and the involved companies’ advertising is a dead giveaway. Think of the ads we see for products like cars, travel, or soft drinks. These ads position the products via branding and image to maximize non-rational value factors, such as celebrity endorsement and high-end imagery.
This brings us to the third scale, which helps clarify how the customer chooses you.
3. Assessable vs Unknowable
Picture this. Julie is driving home from work, and she realizes that she needs milk, bread, and rice. She doesn’t want to line up at a supermarket, so she pops into her local convenience store. In making this decision she evaluates price (she’ll pay more than at the supermarket), customer service (quick and pleasant), location (handy, on her route home), product range (they have what she wants), hours of operation (they are open) and store presentation (clean and well organized).
All this is very assessable by her, and she comes to the decision to steer into her local convenience store rather than the busy underground car park at the supermarket. The criteria relevant to her decision are known and can be evaluated by her.
But in other cases, this isn’t the situation. Take the case of my friend Jim, who recently had a knee replacement. I asked him how he chose his surgeon. “He was recommended by my local doctor,” he said. “He appears to have a good reputation. But, boy, he’s expensive.”
Jim’s decision wasn’t based on price. In fact, I’ve yet to hear anyone say that they’ve just had their hip or knee replaced by “the cheapest surgeon in town.” So, what was it based on?
Jim didn’t have the specialist and technical knowledge to assess value. His perception of value was based on reputation and word of mouth. He assumed these factors would be reflected in the price — so the higher the price, the better the value.
If you’re in the business of selling products or services to customers who don’t have the background knowledge to know exactly how they work, you need to figure out your place along the assessable vs unknowable scale. Customers making purchases in these areas are forced to rely on other sources of information to make their buy decisions. You must ensure that you’re presenting well across those other sources.
That’s why Jim’s specialist includes reference to a great deal of recent research from reputable teaching hospitals in the literature he provides to patients in pamphlets, on his website and in person. He also includes detailed descriptions of the cutting-edge technology he uses, to demonstrate he’s up to date. Finally, he includes many testimonials from former patients telling their stories in their own words.
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This article first appeared on hbr.org
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