The Value Equation: How to Keep Your Customers Coming Back

Competition is a brutal fact of life in the world of business. It is a dog eat dog world, a zero-sum game in which there are both winners and losers. To make your life more complicated, you confront not just the competition, but rather multiple competitors, each with its own strengths and weaknesses.

So, how can you consistently win the game? The short answer is that you create loyal customers by providing them with ongoing superior value. This in turn leads to superior financial results. Professor Malcolm McDonald’s research shows that with just a 5% improvement in customer retention, it is possible to gain a profit rise of between 20 and 125%. That’s a game winner.

Following is a simplified version of a model we call the value equation. Stripped to its bare essence value arises in the confluence of product and service with the total cost to the customer. Or to put it in commonplace words, “value is what the customer gets for what the customer pays.”

Interestingly, taken together the four elements below encompass the customer’s total experience.

Also apparent is that maximizing the equation’s solution, or in other words, maximizing perceived customer value requires maximizing the numerator (green boxes) while minimizing the denominator (red boxes).

All well and good. But how can you move from theory to practical application? Following are some steps to this end.

As W.E. Deming famously said, “In God we trust, all others must bring data.”

1. Learn the desired customer experience from the customer.
To quote Deming once more, “Without data you’re just another person with an opinion.” In other words, don’t take management’s word for it; go directly to customers to get the real picture. In particular, learn from customers their expectations of an ideal supplier relationship. We use this information to develop highly specific, targeted and customer-driven surveys that measure the gap between expectations and customer-perceived performance. The findings identify and prioritize areas needing improvement.

2. Understand where you stand against your competitors in delivering value to customers.
Economist Bradley Gale and his associates some years ago developed a tool called Customer Value Analysis (CVA). This consists of tools and displays consistent with the logic of the value equation and that vividly depict how competitors in a market compare with each other in delivering value. In the classic CVA plot, the Y axis is relative customer perceived price and the X axis is some measure of customer perceived quality, often a customer satisfaction score. The resultant diagonal trend line is the line of average value around which competitors typically cluster. However, customer satisfaction as a measure has become increasingly discredited, a sentiment we share for many reasons. We much prefer to use an overall measure of the customer’s perceived total experience: the average gap between expectations and perceived performance as seen below.

In this actual data exhibit, the market can be categorized as largely undifferentiated with all but one of the competitors tightly clustered near the average value line. The outlier (F) offers a better customer experience than the others and therefore can and does charge premium prices. Our client (A) used the data to markedly improve differentiation and market share. Sales improved substantially as did margin and sales force retention increased.

3. Workshop the results.
Data is waste unless it is used to change or improve something. Then it is gold. Consultants know all too well the report, full of insight and horrifically expensive, once submitted, left to grow old on a shelf somewhere. Develop an action plan with milestones, periodic checkbacks and remeasures, and clear agreed responsibilities. Also create a communications plan that includes customers as well as employees. Don’t try to do it all with internal resources. Use professional facilitators who can bring objectivity, energy and useful insights to the task.

If you wish to discover how Promising Outcomes can help you implement a more state-of-the-art way to gather, analyse and display customer and employee data, contact us below for more information.

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