In Part I I covered the difference between benefit and value. Now we’ll go one step further.
Knowing what benefits are relevant and most important to a customer in satisfying a specific set of needs is critical to understanding their buying habits.
Example: Virtually identical food processors from the same manufacturer are offered at a variety of retailers. Since the features are essentially the same, so are the advantages offered (following the FAB model). So why don’t all purchasers buy it from the store selling it at the lowest price?
Because the benefits derived by a buyer don’t all come from the product (or service) itself. Those that are realized from other purchase factors can and do provide sufficient additional value for some buyers to justify paying a higher price at a different retailer:
- Convenience: another retailer is closer to the buyer’s home
- Familiarity, loyalty: The buyer frequently shops at another retailer, knows the store well so is comfortable there, likes its employees, return policy, etc.
- The buyer would never be caught in THAT store and does not want to be seen as someone who needs to go to that extreme to save money
- The buyer is so well off that he shops in high-end stores exclusively, and is therefore willing to pay the highest available price to maintain that image
Knowing what a customer considers as value in a buying situation is also critical to assessing how attractive an offer will be.
Example: A company has a manufacturing process with an annual operating cost of $10M. A vendor offers new technology that can reduce that cost by $2M per year. Management approval requires that all such investments be paid back in two years or less. That is, the savings over the first two years must exceed the cost of the purchase.
|Price Scenario||Price for new Technology||Benefit (savings) after two years||Value after two years|
(Ignoring present value calculations…) If the cost of the technology is $4M or more, the company will not make the purchase because it has concluded it will derive no relevant value from it. But, you ask, won’t the manufacturer realize savings of $2M/year from the investment after the second year? Yes. And doesn’t that also represent value for the company? Yes it does, but not with regard to this buying decision. The purchaser’s rule says that the savings derived during the first two years is to be considered as the only measure of value for making this purchase. It’s their game, so they get to set the rules.
Businesses that don’t have in-depth knowledge of what is truly most important to its buyers will invest in and promote capabilities that do little or nothing to make their offerings more compelling. And they’ll wonder why all their ‘improvements’ have done little to contribute to an increase in sales.
Example: A supplier undertakes a major effort to add features to a product when its current version is more than sufficient to meet the needs of its target customers. Although its investment may add additional advantages, it results in the product having no higher value because those customers will see no incremental benefits for themselves. Because the product is no more a compelling a buy than it was before, the investment was essentially wasted (at least for this segment of the market).
Taking this example one step further, if that supplier then promotes its improvement to its customers, the reaction will be somewhere between, ‘So what?”, and, “why did they waste their time on that when [fill in the blank] is what really needs attention.” This mistake unintentionally communicates that the company really doesn’t know what’s important, nor where its strengths and weaknesses are in the eyes of its customers—not good for the brand image! And if an increase in sales was forecasted to come from that investment, the company will take hits on both the revenue and cost sides of the business.
Proper comprehension and use of the terms ‘benefit’, ‘value’ and ‘cost’, along with accurate, in-depth understanding of how their customers define each of them for the products and services it sells, is key to making the right decisions about what to include and not include in a company’s offerings and the way it does business.