When evaluating products or services, customers will compare perceived value with quotations. It is common for marketers to devote too much time and effort to managing the price factor in the equation, because raising prices can immediately stimulate profit growth. But what do consumers really care about? This is difficult to ascertain.
The size and nature of the value of a specific product or service depend, of course, on how the customer looks. But the fundamental elements that make up value do exist, so it is possible for companies to improve their performance in the current market or enter new markets. Establishing a rigorous model of consumer value will help companies plan new combinations of value delivered by their products and services. Our analysis shows that the right combination can improve customer loyalty, enhance consumers'willingness to try a particular brand, and maintain revenue growth.
We identify the "30 value elements", that is, the most basic and discrete basic characteristics (see the Pyramid of Value Elements). These factors can be classified into 4 categories: functional category, emotional class, changing life class and social impact class.
Most elements have existed for hundreds of years or longer, but their forms change over time. In different industries, cultures and populations, the relationships among factors are different.
Our first hypothesis is that companies that perform well on multiple value elements have the largest number of loyal customers. This survey confirms this hypothesis. Overall, companies with at least half of the respondents scored eight or more points on four or more factors (including Apple, Samsung, USAA Insurance, TOMS Shoes and Amazon) had three times as many NPS as those with only one factor, and 20 times as many as those without. Obviously, the more elements you have, the better, but it is obviously unrealistic to integrate all 30 elements into a product or service. Companies must strategically choose their own elements.
The second hypothesis is that firms that perform well on multiple factors grow revenue faster than other firms. Companies with high scores on four or more factors are three times faster than those with high scores on only one factor. Winning companies know how to compete with competitors and methodically choose the new value elements they want to deliver (although most of them do not use our models).
Next we investigate whether the value factor can explain the phenomena that retailers specializing in digital products have seen an alarming increase in market share. This hypothesis is also affirmed in practice. Amazon, for example, scored high on eight essentially functional elements, demonstrating the importance of adding value to core products and services. Amazon's choice of product performance corresponds to some of the value elements of our model. Amazon, for example, created Amazon Prime in 2005 (for $79 a year, an unlimited two-day arrival) with an initial focus on cost reduction and time savings. Amazon subsequently added Prime features, including streaming (providing access and fun / recreation), unlimited storage of photos (reducing risk) on Amazon servers, and so on.
To help companies think about how to manage the value element of the equation more directly, we want to understand how the value element translates into excellent performance. We use our own data to discover 3 patterns of value creation.
Some elements are indeed more important than other elements. In all the industries we've studied, perceived quality is the most influential factor on customer benefit endorsement. Products and services must reach a minimum level of quality, and the results of other elements cannot compensate for the serious shortcomings of quality.
Each industry has different judgement on the key factors which are next to quality. (see which elements are most important? ")
Consumers think digital companies offer more value. Well designed online business can make many consumer interactions easier and more convenient. So companies that specialize in digital products excel at saving time and avoiding trouble, such as Netflix, which scored three times as much on cost reduction, soothing value and nostalgia as traditional TV service providers. In addition, Netflix scored higher on diversity than other media providers, suggesting that Netfilix can effectively convince customers that the company has more film resources without objective data support.
Entity companies still have advantages on certain elements. Full channel retailers score higher on some emotional and changing elements of life. For example, they are twice as likely to score high on logo value, attractiveness, affiliation and subordination as pure e-commerce. Consumers who get help from physical shopkeepers rate all-channel retailers far higher than other retailers; indeed, emotional factors may help retailers from physical stores maintain their operations.
In addition, on average, companies with high scores on emotional factors tend to have higher NPS than those with excellent performance only on functional factors. This finding is consistent with the previous analysis by Bain. Bain's analysis shows that digital technology has been changing entities rather than destroying them. Combining numbers with physical channels is actually more powerful than any single channel.
Preparation for application
If a company leader sees value elements as growth opportunities and focuses on value enhancement, then value elements can play the greatest role. Value elements should be at least as important as cost management, pricing and customer loyalty. The company can build up a management framework around the following key aspects of value enhancement.
New product development. Our model can inspire creativity in developing new products and adding new value elements to existing products. For example, managers may ask: can we have new contact with consumers? Will our customers benefit from the new application software? Can we add comfort value to services?
Price. Managers generally regard pricing as one of the most important levers in demand management, because raising prices directly increases profits when demand remains unchanged. But price increases also change the consumer's value equation, so any discussion of price increases must consider adding value elements.
Customer segmentation. Most companies have a formal approach to dividing customers into groups according to demographic characteristics or behavior in order to analyze the value desired by each group of customers and then develop products and services that deliver these elements.
Once there is an opportunity to increase value, managers start investigating existing and potential customers to understand the performance of the company on the value elements that have been passed or not. Product and brand research should be carried out, because the investigation of the two will bring different insights. For example, the product itself may pass a lot of value, but it is difficult for customers to get service or technical support.
Value elements also have organizational dimensions: someone in a company should be responsible for thinking, managing and monitoring value. A top executive of a pay TV company is disappointed at the success of Netflix. He told us: "I have a lot of people who focus on improving product performance and services, but no one really thinks about consumer value as a whole."
The concept of value comes from psychology, but value elements can make psychology more specific and reduce its mystery. It can help managers add value to brands, products and services in a more creative way, thus winning the support of consumers, the true judges of value.
Eric Almquist, John Senior and Nicholas Bloch
Eric Armquist is Bain's partner in customer strategy and marketing, and Bain's global director of consumer insight.
John Senior is Bain's customer strategy and marketing partner. Nicholas Bloch is one of Bain's strategic business leaders.
Liu Xiaowei and Jiang Huirong's editor
This article is abridged. See the Chinese version of the Harvard Business Review, September 2016, Discovering the Real Needs of Customers with Value Elements.