Is it worth it? For all the hard work of sales, marketing and product development teams, that’s the only question customers are really interested in. They don’t see the excting new features that designers added to the car; they want to get from A to B efficiently and comfortably. They’re not interested in the innovation behind the latest power drill; they want to put a picture up in the living room.
The idea that customers want companies to solve a particular problem or meet a specific need – rather than to create the perfect product – has been recognised for some time [1]. But many organisations still struggle to think in those terms. And that means they don’t get to grips with how customers go about answering the all-important “is it worth it?” question.
One useful way to make the leap is to focus on “action generators” – the customer-centric dimensions of an offer (product / service) that will solve the customer’s problems, and therefore encourage them to make a purchase. Approaching product development and sales with this mindset should change the way that companies think about their value proposition – and for the better.
Viewed through this customer-centric lens, every offer is essentially a sum of customer benefits. Indeed, the consultant Bain identified 30 to 40 possible different benefits or “elements of value” in B2C and B2B markets [2]. Broadly speaking, these benefits can be functional – what do I get as a customer? – or emotional – how do I feel. Think of this sum of benefits in terms of a bag offered to the customer: the value bag.
That bag, of course, carries a tag – the price that customers are expected to pay in order to access those benefits. Comparing the bag and the tag leads to the key question that customers keep asking themselves: is it worth it (IIWI)? This is the underlying question that all customers ask, often hundreds of times a day, whether implicitly or explicitly. This question applies for all offers, from mundane products (should I get the local painkiller or buy Advil?) to more sophisticated purchases (should I buy a Peugeot or an Audi), to B2B equipment (is it worth it buying high performance Valmet paper making machines?). Whether we are aware of it or not, customers are all “IIWIt-ers”. In economic parlance, the difference between the bag and the tag is the economic value to the customer, or the customer incentive to purchase (CIP). If the tag is higher than the customer’s evaluation of the bag, there is no incentive to purchase: it is simply “not worth it”.
“Comparing the bag and the tag leads to the key question that customers keep asking themselves: is it worth it (IIWI)?”
The bag with the tag concept is important because it explains why the price point, very often, is not the deciding factor in any purchasing decision. Presented with two competing products, consumers will compare the CIPs of the two offers, and, subject to resource constraints, they will go for the offer that maximizes their CIP, rather than for the one with the lowest price tag.
This is the core of the value proposition. When the sales team returns from an unsuccessful pitch and complains they were asked to sell something that was too expensive, they could well be wrong. Rather, the CIP was not high enough. The customer’s evaluation of the bag was not worth the tag when compared with the competition.
This brings its own challenges. Developing such an offering is more complex and nuanced than simply winning the price war. To succeed, businesses must assess the value customers place on each benefit in the bag – and how that might vary between customer types (even, in some cases, between individual customers). This calls for the quantification and monetization of each value element of the bag. This is a journey by itself – but firms may not have the choice.
The bag and the tag are the core, the primary action generators, but as companies look to increase the incentive to purchase, there are three other ideas worthy of particular attention: risk, data and purpose. Although they’re inside the bag, these three things are so powerful that they are effectively action generators in their own right. Think of them as “drag”, “lag” and “flag”.
First, it is important to acknowledge that every purchase carries an element of risk for the customer. Purchasers worry about whether the product will really do what they want it to, for example. They’re concerned that it might prove insufficiently robust, or that their needs will change over time, rendering the product’s benefits less valuable than expected. In this sense, the bag with a tag includes a drag: a degree of risk that will counteract some of the value of the other things inside.
Inevitably, this has an impact on the purchasing decision; the greater the risk perception, the more it will undermine the incentive to purchase. However, companies that recognise this drag can find ways to mitigate it. The as-a-service model can be powerful here; when customers buy a product as an ongoing service – renting a piece of equipment rather than buying it upfront, say – their risk is reduced. They know they can return it if it breaks down or simply if they no longer think it is worth it.
Calculation number two relates to the increasingly important imperative to provide the customer with value through data. These days, any offer generates data that could be useful for both parties. Connected offers in particular create a valuable data stream. Think of the printer that alerts its owner that it will run out of magenta ink, and which will directly reorder it from the supplier, or the telematics information generated in each truck that tells transportation firms 24/7 where the trucks are and how they are driven.
For consumers, the potential to reduce spending on an ongoing basis using the data lag looks especially appealing in the current era of constrained household budgets.
Think of the data stream as the “lag” benefit. In addition to the immediate upfront value that the product offers, customers also get further value over time as they use it – increased availability of the printer, for example, and more efficient fuel consumption for the truck. This data lag increases the total incentive to purchase. And as digital transformation in every part of the economy accelerates, this data-driven dimension will become ever more relevant.
The third consideration is also connected to a growing trend: sustainability. Today’s customers are often looking for products with a societal purpose – they want to feel that they are doing some good to society by making this choice. The environmental impact of a product is significant in this respect, as are considerations such as the business’s record on issues ranging from inclusivity to human rights.
Think of this element of the value proposition as the flag. To what extent does a particular product appeal to purpose-focused customers? Is it flying the flag for sustainability, society, or something else that matters to people? As customers become ever more interested in what businesses and their brands stand for, the flag becomes an increasingly key action generator.
Thinking in terms of these five action generators creates new possibilities (as well as headaches) for sales and marketing teams. The move to an as-a-service proposition is just one example of how this mindset could give businesses cause to rethink the very nature of their core offers.
Certainly, models that decouple ownership from purchase – tire companies that sell a certain number of kilometres of travel, say, or aerospace companies selling engines for a set number of flight hours – are growing in popularity because there is much less drag in the value proposition.
But other action generators are getting attention too. With data, for example, in many product areas, the race is on to deliver as much value-generative information to customers as possible. For a manufacturer, the value of an assembly line that can anticipate maintenance requirements, and thereby minimize production downtime, is enormous. For consumers, the potential to reduce spending on an ongoing basis using the data lag looks especially appealing in the current era of constrained household budgets.
As for the flag aspect, again, customers’ expectations are only going to increase. In part, this reflects changing social perspectives. But customers may have stakeholders of their own who are concerned – the purpose flag may be important to their employees, investors, and suppliers, for example. In which case, this dimension takes on additional importance.
The bottom line is that marketers need to shift to thinking of every offer as a bag of benefits with a price tag, and to pay specific attention to three elements of the bag: the risk drag, the data lag and the purpose flag. This will enable them to keep a customer-centric approach. These action generators focus their effort on five key dimensions so that companies can develop offers that their customers really want.
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