Why businesses must innovate to create customer value
Customer value creation is quickly becoming a topic of discussion in most C-suites and boardrooms. The reason is very simple: if you don’t create more customer value, your only recourse will be to cut prices, which will turn into a race to the bottom.
As experienced business leaders, we all already know:
- What customer value means
- What our customers value most when it comes to products and services like those we deliver
Unfortunately, we probably have misconceptions and outright errors in our thinking that will totally invalidate our plan to innovate to create customer value.
Defining Customer Value
Simply put, customer value is the difference between what you get (the outcomes) and what you pay (the cost). Outcomes matter most to the buyer.
However, the above definition is too simplistic. At Middlesex Consulting, we define customer value as:
“The buyer’s perception of tangible (economic) and experiential (emotional) net improvements (benefits minus costs) to business outcomes (profit, CSAT, etc.) resulting from using or owning the supplier’s products and services, compared to all alternatives.”
The two elements of this definition that you may not have discussed internally are:
- “The buyer’s perception”
- “Compared to all alternatives”
The Buyer’s Perception
No matter what anyone in your company says about your customer’s needs and wants, there is only one person whose opinion truly matters: your customer. They are the only people who can quantify the benefits they receive and the alternatives they can consider instead of doing business with you. And they are the people who will decide where they spend their money.
Your marketers, salespeople, support people, and executives have opinions about the value you deliver to customers. However, since they are not walking in the customer’s shoes, they only have opinions – not facts. They have strong biases because of prior industry experience; maybe they worked for a customer or two, and perhaps they believe everything they hear from customers. But they are also the people who are shocked when a good customer abandons your company for a competitor.
Customer needs, and wants are not fixed but instead change based on the following:
- Competitors’ offerings
- Internal process changes
- Demand
- Cost structures
- Globalization
- Forecasts
- Business climate
Compare All Alternatives
When someone is considering buying a product or service, they should consider all alternatives. The customer could consider the following options:
- Continue doing what they are doing (that is, do not buy anything)
- Upgrade their existing equipment to gain new outcomes
- Look at all suppliers, not just the incumbents or those local to their plants
- Either outsource or insource, depending on what they are currently doing (e.g., instead of adding more incoming inspection capabilities, they can discontinue incoming inspection and put all the risk of defects getting into production on the supplier)
- Redesign parts, processes, or assemblies (3D printing is influencing this alternative)
- Change traditional specifications (like adding the 10-year total cost of ownership, annual energy consumption, or environmental impact)
- Make the new purchase the first of an across-the-board technology upgrade (think IoT)
Desired Outcomes Can Rapidly Change
Recently, Thomas conducted a poll to find out what matters to industrial buyers. Buyers rated these factors on a scale of 1–5, with five being the most important. Here are the top six factors:
- Delivery performance: 4.45
- Cost: 4.2
- Quick turnaround times: 4.03
- Financial stability: 3.94
- Quality certifications: 3.93
- Industry experience: 3.91
But, if a hospital immediately needs to buy 250 ventilators because of COVID-19, do you think that cost would be second on the list, or do you think their desired outcomes would be:
- Delivery performance
- Quality certifications
And do you think that compatibility with their existing vents would be necessary? I don’t.
This is why the business must innovate to create customer value.
The Opportunity to Rethink Your Value Proposition as a Result of COVID-19
Many businesses are or will be cash-poor for the next few quarters. Depending on their industry and specialty, they may be in that situation much longer. This creates a great opportunity for manufacturers to pivot to subscription-based offers and new pricing models that save buyers cash.
Here are a few examples:
- We should move from outright selling equipment to providing an operating lease, where the initial cost moves from CapEx to OpEx, and the maintenance and consumables costs are rolled into one monthly payment.
- Move to an input-consumed model where the buyer pays based on the amount of material the product consumes in the production process. For example, for a 3D printer, the customer may pay $X per pound of plastic dispersed through the print nozzle.
- Move to an output-based model where the customer pays the equivalent of a royalty based on units produced instead of outright purchasing. Rolls-Royce has been doing this with jet engines since the 1960s with its “power by the hour” scheme.
In 2018, Bain & Company identified several elements that B2B companies value. These offers tick the following boxes and create different types of value (shown in parenthesis).
- Acceptable price (table stakes)
- Innovation and cost reduction (functional value)
- Simplification, risk reduction, decreased hassles, reduced efforts, and commitment (ease of doing business value)
If your customers are strapped for cash and generally “not feeling the love,” rethinking your business model will change their purchasing calculus and give you a competitive advantage. You can increase your long-term revenue and profit picture, although with a short sales shortfall because the item is paid for over several years. However, you still own the equipment at the end of the OpEx-favored processes. Then, the user can:
- Renew the package for additional years.
- Purchase the product from you for a one-time charge
- Return it to you to remanufacture and either resell or place it in another facility as on a new OpEx payment plan
As a final point, a recent article in Barron’s summarized Bank of America Analyst Andrew Obin in a GE research report:
“It might take years for demand for new planes to recover, but he thinks GE’s aftermarket parts-and-service business will rebound much faster. What’s more, profit for aftermarket service is higher than for new engines. New equipment is sold at essentially break-even levels. The money is made in services. As a result, Obin thinks GE aviation profit margins will approach prior levels by 2022.
There are lots of ways to win!
About Middlesex Consulting
Middlesex Consulting is an experienced team of professionals with the primary goal of helping capital equipment companies create more value for their clients and stakeholders. Middlesex Consulting continues to provide superior solutions to meet the needs of its clients by focusing on our strengths in Services, Manufacturing, Customer Experience, and Engineering. If you want to learn more about how we can help your organization create more value for your customers, please contact us or check out some of our free articles and white papers here.
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