Note: If you are like me and believe that creating customer value should be the primary focus of a business then jump straight to this post. However, if you believe that focusing primarily on creating shareholder value is the best strategy then read “The Quest For Growth Is Driving CEOs” by Taddy Hall at the Chief Executive Network. Then follow up with this post to get a complete cause-and-effect type analysis.
Introduction
Are you responsible for maximizing or helping to maximize shareholder value? Are you tired of hit-or-miss actions and the annual or bi-annual cost reduction drill? Are you searching to identify a better way forward?
The better way is about creating more value for your prospects and customers than your competition.
Peyton Marshall, Chairman & CEO LeveragePoint Innovations Inc., wrote:
“Embedding customer value in a B2B organization has tangible benefits quantified in a number of studies in the pricing literature. The evidence suggests that implementing a Value-based Pricing strategy improves EBITDA by an average of 8%¹ and that the ROI of investing in value-based strategies ranges from 130% to 900%. ²”
¹ See John Hogan, “Building a World-Class Pricing Capability: Where Does Your Company Stack Up?” Monitor Group Perspectives, 2008.
²See Stephan Liozu and Andreas Hinterhuber, eds., The RoI of Pricing, Measuring the Impact and Making the Business Case (Routledge, 2014), especially the chapter by Stephan Liozu, “RoI and the Impact of Pricing: The State of the Profession.”
This post describes the disciplines currently used by B2B companies to create customer value, which lets the businesses enjoy their well-earned increase in shareholder value.
Why customers buy
The most important concept is that prospects and customers buy products and services because they believe the benefits they will obtain exceed the cost of the purchase. They buy from you because they think the net difference in benefits minus price from your company, the value you create, is better than they can obtain from any other source they know about. This is what Customer Value Creation is all about.
How does creating customer value help grow shareholder value?
Phillip Kotler’s classic Principals of Marketing answers this question as follows:
In other words, shareholder value is the reward for creating customer value.
What is customer value?
To fully understand the process leading to customer value creation, we must first understand customer value. At Middlesex Consulting, we define customer value as:
“The tangible (rational) and/or experiential (emotional) net improvements (benefits minus costs) to customer outcomes resulting from using or owning the supplier’s products and/or services, compared to all alternatives.”
Customer value has two parts
1) The tangible piece, e.g., our robot, will increase the production rate of your line from 360 items per hour to 540 items per hour while maintaining your quality level.
2) The experiential piece, e.g., when customers see how you make your product, they will feel more comfortable buying from you because of the high overall quality and output level.
When customers perform their value calculations, the weighting of the tangible and experiential factors will vary depending on the product/service in question, how it is used (the context) and what is happening at a particular point in time. Here is an example:
You use your car to commute to work and when you are out on social occasions. You are at the point when you purchase an expensive sports car (Ferrari or Lamborghini) because it is fun to drive and a real head-turner on a date. Let’s assume the vehicle backfires when you shift from neutral to first gear. When this happens while going to work, you shrug your shoulders at the drivers around you and grin inside. But what happens if it backfires while you take a customer to lunch? Lots of embarrassment. Same situation but in a different context and values created or destroyed.
How creating customer value and shareholder value works in today’s business B2B world.
Five skills and disciplines are being joined to form a well-coordinated process to create customer value. The first four are shown in the bottom tiers of the following graphic. The fifth discipline, Customer Experience, permeates the primary four fields plus the customer’s perception of the actual value your business believes it is delivering.
Only the first piece, innovation, was discussed before the turn of the century. The other four disciplines began hitting the business radar screen after 2000. The desired outcome, customer value, was always there but rarely made it into the general business conversation.
Let’s discuss each in turn.
Innovation
The most critical piece of information is that successful innovation requires the creation of customer value. Otherwise, the idea is just that – an idea. And the best way to create customer value is to spend time observing and talking with customers in their workplace to identify the business outcomes they are attempting to create.
The desired outcomes are the beginning point in a top-down design process that asks the team, “what are all the ways that our prospect can create her required outcomes?” After identifying all possible ways, the team searches for the easiest, cheapest approach or offers the most significant opportunity for I.P. creation.
Prototype the approach, expose a few prospects to the resolution, and see how it is received. To be successful, you may require multiple iterations of the process. Work this process backward until you know the best solution for your customer and company.
Once you have a working solution, you must figure out how much to charge.
Value Pricing
Wikipedia defines value pricing as
“Value-based price (also value optimized pricing) is a pricing strategy which sets prices primarily, but not exclusively, according to the perceived or estimated value of a product or service to the customer rather than according to the cost of the product or historical prices.”
According to Software Pricing Partners,
“Pricing is the most critical decision a software company can make before a product launch. No other variables under management control are more effective at creating revenues and overall business value–or destroying it. Yet how to license, package and charge for software capabilities and services remains the most under-exploited aspect of the software business model.”
I am positive this can be said for all products and services.
And according to Roberto Rivera, Pricing Strategy Expert at Price on Value,
“If you believe that price should be largely based on customer value then you must be able to measure it. To measure customer value you go through the process of identifying the unique features of your offering vs. a competing offering and translating those features into customer benefits and then into customer economic value.”
This would be a straightforward process if everyone perceived the economic value of individual benefits identically, but in the real world, this hardly happens. Each prospect operates in a unique environment with unique pressures and perceptions of economic value. As I said previously, the valuation could change due to changes happening in the business. These changes can quickly make an ROI calculation outdated and useless for a win faster than you can blink an eye.
This challenge was the impetus for sales enablement tools.
Sales Enablement
Sales enablement (S.E.) provides the sales organization with the information, content, and tools that help salespeople sell more effectively. The foundation of sales enablement is providing salespeople with what they need to engage the buyer throughout the buying process.
According to an e-book produced by the Sales Enablement Group for CallidusCloud, companies that benefit most from evolving to an S.E. system are those with some combination of the following attributes:
- Sell complex B-to-B products
- Sell large product portfolios
- Sell products that require some degree of knowledge transfer to understand and deploy
- Sell to multiple buyers, each with unique needs
- Sell products that promote new concepts or changed paradigms
This list includes enterprise software, medical, analytical, life sciences devices, transportation, communications equipment, and most other capital equipment businesses use.
Do not underestimate the challenges of dealing with a buying committee of multiple buyers with unique needs. Operations, purchasing, and financial people each have their own goals that often compete with each other and the rest of the organization.
Sales enablement includes tools like sales training, use cases, and an ROI calculator. To create the ROI calculator, a software analyst works with the value-pricing analyst to turn the pricing analysis into a template in which each buying team member can enter an economic value for her perceived costs and benefits of the potential purchase. Each ROI allows the individual member of the buying committee to negotiate a recommendation with the other committee members. And, as with innovation, there may be multiple iterations of the ROI calculation process before consensus is reached.
If you have done everything correctly, you have the P.O. By now, the real fun begins!
Customer Success
Let’s start with the Customer Success Association:
“For any business that depends upon continuing income streams from its customers, the choice is becoming clear. You either actively manage your customer relationships as strategic portfolio assets, or you effectively cede control over them and your company’s future to chance and/or the competition. Customer acquisition is only the very first step in what must be a long-term, scientifically engineered, and professionally directed strategy.
What is Customer Success Management? The emerging role is about a solution to the core issues of customer portfolio development, retention, and expansion. Customer Success Management is an integration of functions and activities of Marketing, Sales, Account Management, Professional Services, Training, and Support into a new profession to meet the needs of recurring revenue model companies. There are three necessary building blocks for this emerging profession: an in-depth knowledge of the customers, effective knowledge of the product being sold, and extensive domain expertise.”
In most cases, the customer success team owns the customer relationship from order receipt to end of life. Here are the primary responsibilities of a Customer Success team:
- Customer Engagement
- Retention / Churn Prevention
- Customer Education / Training
- Renewals / Expansion / Upsell
- Onboarding
- Customer Support
They usually have revenue responsibility for retaining, upselling and cross-selling the customer.
Their initial role is to ensure that the customer’s time-to-value is equal to or shorter than promised during the sales process. Then, they must keep monitoring how much value their products or services create. Failure results in customer churn – someone leaves the customer base.
In most companies, customer success is either part of customer support or absorbs that function. The right people in critical roles will quickly resolve the organizational issues. But, if the wrong people are in the leadership positions of the customer-facing organizations, the customers will soon feel the friction and possibly vote with their feet.
The notion of Customer Success began as a named department in 1996 at Vantive, an on-premises traditional software vendor. Siebel on Demand had a Customer Success group in 2004, and Salesforce started its group in 2007. They faced the challenge of ensuring that their software products quickly created value for their customers. Also, they were beginning to migrate their business model from an outright sale with 95+% margins to a recurring revenue model with 60 to 70% margins and opportunities to up and cross-sell. The new model worked very well. Soon, the concept was adopted by non-software companies that understood the value of creating customer value, retaining their customers, creating annuity revenue from services and supplies, and upselling and cross-selling. This concept is here to stay.
Customer Experience and Creating Customer Value
At Middlesex Consulting, we explain Customer Experience (CX) this way:
“Gartner defines customer experience (CX) as “the customer’s perceptions and related feelings caused by the one-off and cumulative effect of interactions with a supplier’s employees, systems, channels, or products.
Customer satisfaction (CSAT) is based on how these perceived feelings compare to the customer’s expectations. Customer loyalty, the likelihood of recommending the company or purchasing again, closely correlates with CSAT. Growth and share price, for public companies, is correlated with loyalty.“
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We all know that many businesses have been making significant investments in CX. And the question is, “is there a payoff for the investment?” According to Maritz, a CX software and consulting firm, there is a significant benefit.
The message is that businesses with a high CX maturity are three times more likely to enjoy a high financial and retention rate than those on the lower end of the spectrum.
CX is so important to your customer value creation efforts because all the disciplines, but especially innovation, customer success, and customer value creation itself, are heavily influenced by the perceptions of the prospects and customers. These perceptions are based on comparing their experiences to their expectations, which is what CX is about.
Without understanding how your customers feel about doing business with you throughout their journey, you will be lost in how to create and demonstrate the value you promise. And bad experiences destroy value!
Sustaining the Efforts For Creating Customer Value
If your company is organized somewhat, as discussed here, and your teams are doing the job you are asking them to do, then:
- Your customers will feel appreciated and will understand the value you deliver
- Your customer will cut you slack if and when your team has a problem
- Your customers will want to work with you to create new products or services and improve your current products and services because they trust your team and want to avoid changing partners.
In other words, this model is sustainable. In August 2019, I published this post, which updates the state of the business today, creating customer value. Welcome to the new world!
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 additional customer value, please get in touch with us or check out some of our free articles and white papers here.