Ed Rensi, the CEO of McDonald’s said:
“We are in the value business”.
John Thompson, chair of Microsoft said:
“Get fewer, smarter, people to deliver more value to customers faster“.
So what do they mean by value?
Well, I’m pretty sure what they don’t mean by value. They do not mean aim the cheapest offer in the marketplace. Being the cheapest, focusing on price alone, does not automatically produce best value in the minds of consumers. Don’t think of how much value you give to customers; think how much worth customers see in your offer.
By focusing on price alone, rather than the wider marketing mix, you risk your products and services being seen as commodities Indeed, many products formerly seen as commodities, such as Albert Bartlett potatoes, are now marketed on a wide range of marketing mix factors, not just price. To enable this a product halo of associated brand factors and service elements has been bolted on to the physical product, a particular variety of potato.
If you focus on price and limit your vision to the physical product. If you do not care about the product surround of benefits and services, then all consumers have to judge your products on is the price. In such circumstances the only winner is the company that can sustain low margins over the long-term.
This creates a world of perfect competition, where goods and services are identical and the only marketing factor is price.
Such a position doesn’t square with Evian being able to charge a 10% additional premium on bottled water, or Starbucks being able to charge 20% extra for a cup of coffee, or branded salt being 10% more expensive than a supermarket own brand.
People develop brand preferences. They derive value from brand identifiers, both tangible and intangible. brands are familiar and they bring expectation of ‘worth’. Evian don’t sell water, they sell purity.
You are not selling physical products alone. You are selling additional benefits, tangible and intangible, some of which fit within the self actualisation needs described in Maslow’s hierarchy. Aim to sell a benefits package not just purchase value. Represent worth in the minds of consumers.
Porter describes three ways to deliver value:
- Charge a lower price than your competitors
- Help your customers lower other costs
- Add benefits to make your offer more attractive.
To win through lower pricing, you need to aim for price leadership. But this strategy requires deep pockets and the ability to produce in volume. You need to be able to exploit economies of scale and to exploit the experience curve.
As an undergraduate, I sat in many a seminar looking at case studies where firms focused on cutting costs but in doing so reduced their capacity and lost economies of scale. Factory closures designed to improve efficiency and cut costs just reduced the firms cost base to a level where margins were unsustainable.
This is the strategy of the category killer. The example of a category killer often quoted in academic texts is Toys R US. The firm formerly famous for Geoffrey the Giraffe aimed to have the largest selection of toys at the cheapest prices. Of course, Toys R Us is no longer around having gone bankrupt a few years ago.
Another way to offer low cost to customers is to look for those who are willing to give up certain benefits for a lower price, e.g. offering mobile phones that can take calls but which don’t have cameras or MP3 players embedded.
You can also look at cost unbundling e.g. delivering items adds £100 to the retail price, so unbundle that cost and charge £80 separately for delivery. this adds £20 to the profit margin.
There are significant limitations on a low cost strategy. In particular, it can be extremely difficult to sustain a low price, low margin strategy over the long-term. Look at what happened to Toys R Us, to Woolworths or to Carillion.
Can you offer value by reducing your customers other costs. This is a well used strategy in B2B and industrial markets. It requires the ability to show your target customers that despite a higher price your products and services offer better value over time.
For example Caterpillar offer guarantees that their earth-moving equipment breaks down less often, can be repaired quicker than the equipment of competitors, that it will last longer and it will have a higher second-hand value.
Other firms will offer customers value by reducing peripheral costs. BT do not just supply IT and telecommunications equipment. They offer management services so customers can outsource the running of ITC provision. Effectively BT becomes a partner in the business. Other firms offer exceptional guarantees that, if cost savings cannot be identified the value of promised savings will be subtracted from the offer price.
Can you help your customers reduce their ordering and supply chain costs. This could be as simple as reducing the required administrative paperwork or even by just adding a an automatic re-order button on your website.
Can you help you customer lower inventory costs e.g. by adapting your systems to cope with their just in time stock control systems? Can you offer on consignment sales (what used to be known as Sale or Return). Can you offer to outsource your customers inventory management?
Can you offer customers reduced processing costs by improving yields, reducing waste and rework, reducing labour costs or reducing energy costs?
Can you help reduce administrative costs by offering 24 hour helplines, shipment tracing and offering better customer accessibility.
The third way of offering more benefits to consumers for an equivalent price to that of your competitors. You offer value-added products and services. You offer customisation. Look at car manufacturers such as Mini who offer mass customisation to consumers through leveraging new technology and just in time manufacturing.
Can you offer faster and better service? Can you offer coaching and training provision around your core product? Can you offer software tools expanding the functionality of your hardware? Can you offer membership benefits.
In conclusion, can you offer value to target segments by:
- Lowering costs below the level of your competitors allowing prices to be cut whilst retaining margins?
- Offering services, guarantees and functionality which helps your customers reduce other costs?
- Offering value-added?