The perceived value proposition offers a significant challenge to any business. It requires that a business have a fairly complete understanding of the customer’s perception of benefits and costs.
Although market segmentation may help a business better understand some segments of the market, the challenge is still getting to understand the customer. In many cases, customers themselves may have difficulty in clearly understanding what they perceive as the benefits and costs of any offer.
How then is a business, particularly a small business, to identify this vital requirement?
The simple answer is that a business must be open to every opportunity to listen to the voice of the customer (VOC).
This may involve actively talking to your customers on a one-to-one basis or It may involve other methods of soliciting feedback from your customers, such as satisfaction surveys or using the company’s website. Businesses may engage in market research projects to better understand their customers or evaluate proposed new products and services. Regardless of what mechanism is used, it should serve one purpose—to better understand the needs and wants of your customers.
Good research in the area of customer value simply means that one must stop talking to the customer—talking through displays, advertising, and/or a website. It means that one is always open to listening carefully to the VOC. Active listening in the service of better identifying customer value means that one is always open to the question of how your business can better solve the problems of particular customers.
Businesses should address the following questions when they attempt to make customer value the focus of their existence:
What needs of our customers are we currently meeting?
What needs of our customers are we currently failing to meet?
Do our customers understand their own needs and are they aware of them?
How are we going to identify those unmet customer needs?
How are we going to listen to the VOC?
How are we going to let the customer talk to us?
What is the current value proposition that is desired by customers?
How is the value proposition different for different customers?
How—exactly—is our value proposition different from our competitors?
Do I know why customers have left our business for our competitors?
Who Your Customer Is—and Is Not
At the beginning of this article, it was argued that your central focus must be the customer. One critical way that this might be achieved is by providing a customer with superior value. However, creating this value must be done in a way that assures that the business makes money. One way of doing this is by identifying and selecting those customers who will be profitable.
Some have put forth the concept of customer lifetime value, a measure of the revenue generated by a customer, the cost generated for that particular customer, and the projected retention rate of that customer over his or her lifetime.
This concept is popular enough that there are lifetime value calculator templates available on the web. The Harvard Business School calculator looks at the cost of acquiring a customer and then computes the net present value of the customer during his or her lifetime.
Net present value discounts the value of future cash flows.
It recognizes the time value of money. You can use one of two models: a simple model that examines a single product or a more complex model with additional variables. One of the great benefits in conducting customer lifetime value analysis is combining it with the notion of market segmentation. The use of market segmentation allows for recognizing that certain classes of customers may produce significantly different profits during their lifetimes. Not all customers are the same.
For many small businesses, particularly very small businesses, formal market research may pose a problem. In many small businesses, there may be a conflict between decision making made on a professional basis and decision making made on an instinctual basis. Some small business owners will always decide based on a gut instinct. We can point to many instances in which gut instinct concerning the possible success in product paid off, whereas a formal market research evaluation might consider the product to be a nonstarter.
In 1975, California salesman Gary Dahl came up with the idea of the ideal pet—a pet that would require minimal care and cost to maintain. He developed the idea of the pet rock. This unlikely concept became a fad and a great success for Dahl. Ken Hakuta, also known as Dr. Fad, developed a toy known as the Wallwalker in 1983. It sold over 240 million units.
These and other fad products, such as the Cabbage Patch dolls and Rubik’s Cube, are so peculiar that one would be hard pressed to think of any marketing research that would have indicated that they would be viable, let alone major successes.
It’s not about pop culture, it’s not about fooling people, and it’s not about convincing people that they want something they don’t. We figure out what we want. And I think we’re pretty good at having the right discipline to think through whether a lot of other people are going to want it, too. That’s what we get paid to do. So you can’t go out and ask people, you know, what’s the next big thing.