How To Develop Value Based Marketing Strategies

Begin With Two Simple Questions

At 50,000 feet the marketing strategy focuses on two sets of decisions:

  • Deciding which customers to serve
  • Deciding how to serve these customers

Which Customers To Serve

Why Care About How To Serve Customers

Under intense world wide competition companies are faced with a clear choice - “Differentiate or Die” to quote Jack Trout. The challenge is how do you create a differentiated product? The solution begins by giving customers a reason to choose your product over the alternatives.

Giving Customers A Reason To Choose Your Product

If customers in the target market find unique value in your product offering then you have given them a reason to choose your product over the competition. This is what Peter Doyle referred to as the differential advantage.

Chosing Customers

Why worry about choosing which customers to serve? Clearly you have to find the customers who will see value in the unique value/benefit offered by your product.

Customer Selection

Selecting these customers is just as important as the product design, unfortunately though the customer selection process garners nowhere near the attention that goes into product design.

There are at least three components to this choice of customers:

  • Customers who find value in your unique benefits
  • Customers who help you build value
  • There are enough target customers to support the revenue goal

Customers Who Find Value In Your Unique Benefits

We can illustrate this with a simple example from consumer marketing. People subject to stomach bleeding caused by taking asprin will select Ibuprofen or acetaminophen as a pain killer. The first case is explained with the aspirin example but the second case is worth further consideration:

Customer Who Help You Build Value

Some customers are bad for you! Sounds like heresy I know but its true. Some customers help create value, while other customers destroy value. This comes about because some customers consume so much resource that they eat up the profits made on other sales.

Examples of customers destroying value

Examples of customers destroying value Destroying Value in Semiconductor Test

In this example we discuss how in spite of meeting customer demands a vendor still failed to win an order and ended up spending a huge amount of money with no return. How Customers Drove The Developer To Exhaustion In this case we look at a software product in which a nieve developer tried to please all his customers until eventually he burned up all his resources, including himself, and finally just abandoned the product.

How To Serve Customers

Its All About The Customer Experience

Its worth remembering that in its early days of consumer marketing much of the emphasis of was on using marketing communications to persuade people to buy products. While this emphasis still remains the key to getting customers to buy your product in the 21st century is to provide value. Unfortunately this phrase is so trite it has no value in the conversation. Go out into the world and you will be overwhelmed in a tsunami of claims about the value that products provide, and how the mission of companies is to delight their customers. Value is delivered in tangible and non tangible ways.

Tangible

  • Cheaper air fares
  • Pain Relief
  • Safer Food
  • Time saving
  • Etc. Etc.

Intangible

  • A feeling of well being from wearing a particular fragrance or designer clothing
  • A sense of well being from being well organized
  • Being entertained - why is the idol of the current teenage generation derided by their parents generation?

Examples

  • Southwest Airlines - a value exchange
  • ITunes - the value in organization and convenience
  • Social Networking - Replacing the letter/phone with instant updates
  • Un-boxing An Apple Product - Who can be first to get a video to the web?

Customer Experience Is Essential

The recognition of the value comes essentially from the experience of the customer with the product. Even in very tangible situations where you can measure the ROI for a piece of capital equipment this is still true. In this case the experience is not only the measurable effect on the performance of the business but its also things like how easy the product is to install, to use and the quality of customer service. Product design therefore has to be all inclusive, it has to embrace the user in such a way that when customers come to use the product their experience will reinforce the idea that what they paid for was good value for the money.

How Do You Find Value For Customers?

The process of finding value for customers is perhaps the hardest part of developing value based strategies.

There are a number of ways that companies approach this problem:

  1. Inspiration:

I’ve got a great idea. Let me make the product and then I’ll need a great marketing campaign and some great salespeople to convince people to buy it.

  1. Market Research

Ask customers that they need and want.

  1. Solving Customer Problems

Understand the problems and issues that customers are facing and develop solutions that help them improve their performance.

Discussion

Inspiration

The above approaches are ranked in order of initial difficulty. In the first case having the idea might be effortless in a moment of inspiration but the resulting challenges of sales and marketing after the product is made might present formidable challenges unless the value of product is self evident. That isn’t to say that you can’t succeed with this approach, pet rocks still stand out as an improbable success, and there are plenty of other examples where moments of inspiration have produced very successful products.

Market Research

Market research provides an opportunity to understand customers immediate needs and wants. In essence the idea is that they will tell you what they want and perhaps what they will buy. There are, however, a number of difficulties with the approach.

  • The view of customers tends to be constrained to their immediate needs. Not because they are not thinkers but in general they don’t have the time to daydream about future possibilities. Steve Jobs said it well when he said that “customers don’t see round corners”. The result very often, but not always, is that products based on market research tend to be predictably “evolutionary”, for instance you move from USB 1.0 to USB 2.0 because customers demand more speed. Features like this are in the must have category (think Kano Model) as opposed to the unique features that will create a differential advantage
  • There can be problems with the market research approach. Very often the tools used are closed ended and force customers into make artificial choices. Open ended questions can reveal a lot more information, the challenge is that people doing the interviewing have to be skilled at listening and formulating new questions in the moment to get useful information from the customer

Solving Customers Problems

The final approach, helping to increase customer performance, is really an outgrowth of the last point, trying to understand customers with open ended questions. The goal here is not to identify the next set of features but understand the performance challenges faced by the customer and develop solutions that will help them improve their performance - think tractors over horses. This might mean that you have to have a better understanding of the customers business or goals than they do.

If you can improve the customers performance you can justify higher prices that will lead to increased profitability. To return to the introduction of the tractor for farmers the capital outlay for a farmer might have been considerable but the productivity improvements were substantial enough to justify the price. This is a fair exchange of value.

Let’s take the easier route

Creating a differential advantage is clearly a hard row to hoe. So you might ask why not just do a “follow the leader strategy”? Just let others build market success and then make copycat products that sell for a lower price? However, this approach presents its own set of challenges:

  • If you sell for a lower price you have to be able operate with correspondingly lower expenses than your competitors. If you make the assumption that your competitors are bright and have done the obvious things to reduce their costs then you have the challenge of inventing new ways to do the same job – you need to innovate but this time you need an innovative business model as opposed to marketing strategy.
  • This is a difficult strategy to follow if you are following companies with deep pockets. If you are a small company they can drop their price to drive you out of business.

Of course if you have no interest in building the value of your company then don’t worry about it but if increased value is your focus then innovation is important to you.

Creating A Unique Product

Clearly if a product is to have unique features these features must be present in no other product on the market. At the core of this approach is innovation. Using innovation in this way might be applied in a number of ways:

Invention

Inventing something entirely new in the way of products or process

Adaption

Using known technologies to add features

Slimming

Trading off features to optimize a product for a particular customer segment

An Exchange Of Value

For a value based marketing strategy to work effectively there must be an exchange of value. That is to say if you can deliver a unique value to a customer they in return must return value to you, the company.

How Is Value Returned

Value FROM customers may be returned in several ways:

  • Pricing - By paying a price that increases the Free Cash Flow of your company
  • Customer Loyalty - The price of acquiring customers can be very high. There are two ways in which a customer can return value through their loyalty:
    • By making repeat purchases, this reduces marketing costs
    • By making direct or indirect referrals to other customers. With the advent of the web this has become particularly important

Profitability

Effective Pricing Lead to Profitability

There are two components to the subject of profitability – the price you charge and how much it costs you.

As noted previously we are looking for opportunities to improve customer performance, for businesses this inevitably means economic improvement, so that premium pricing is fully justified. This aspect of the pricing has to do with the benefits that accrue to the customer as a result of using the product. However, the other side of profitability is the cost of delivering the solution. If products are expensive to develop, expensive to make or require a lot of free customer support then the effects of premium pricing can quickly be destroyed.

Product Design - Differential Advantage

As noted earlier its important that products are designed with a “Differential Advantage” if a value based marketing strategy is to be successful.

Defining Differential Advantage Through Criteria

Peter Doyle looked extensively at what consitutes a “Differential Advantage” in his book “Value Based Marketing”

He suggested the following criteria:

  • Must be seen by customers as having value to them in improving their performance or experience
  • Unique
  • Profitable
  • Sustainable