Let the Customer Define the Value
A company recently asked us to help them better understand how their target market is likely to respond to a new computer software product under development. But, when we talked about the timing of this work, they indicated that they wanted to “get past some technical hurdles, first,” and then they could think about the market research.
Since they were calling us for the first and only market research work on this proposed new product, we advised them that they were doing it in the wrong sequence. Numerous studies and many experts have repeatedly concluded that the most common cause of new product development failure is market research that is “too little, too late.”
Good market research very early in the development process is actually an insurance policy against spending a lot of money on a product or product features for which customers won’t pay.
In the case described above, what if there is not a sufficient market for the new software even if the “technical hurdles” are overcome? Wouldn’t it be better to know that before resources are expended to solve those technical problems? Or, on the positive side, what if the features causing the technical problems aren’t highly valued by prospective customers? Perhaps those hurdles don’t have to exist at all!
There is simply no good reason to fail to listen to the marketplace for guidance in developing a new product before those significant development costs are incurred.
The rule that prudent and savvy managers follow regarding market research is, “If the result of our decision will impact the customer, then we should ask the customer for input into our decision — before we make it.” Here are a few examples of how that rule applies:
At its essence, business strategic planning consists of defining an offering for a specified, target market. Like so many other business decisions, the objective of this effort is to generate ideas for which customers will pay a profitable price. That being the case, it’s hard to imagine how a management team could effectively make those kinds of decisions without the benefit of good market research.
The starting place for effective strategic planning is to hypothesize how customers perceive value in the realm of the proposed business unit. You should ask:
- How do customers perceive the problem the offering is intended to solve?
- How serious do they believe the problem is?
- What benefits of the proposed offering would be of most importance to them?
- How do they solve the problem today?
- What costs do they incur now to solve the problem?
These are all questions that can be answered by good market research, and all questions that are fundamental to making the important strategy decisions connected with “What business do we want to be in?”
The concept of brand management is not a management fad. Rather, it is at the heart of how competition is conducted today. Brand management is the proactive effort to create a unified and positive impression of an offering in the mind of the customer. Success or failure in creating a strong brand depends on making every impact on the customer a cohesive and value-laden one.
Since this all occurs “in the mind of the customer,” it is critical that good market research is a pillar of the brand management effort. There is simply no other way to measure and manage “the brand.” To be effective, you must ask:
- On what attributes is the brand image created in the mind of the customer?
- What benefits are important?
- How do the benefits of one offering stack up — as perceived by the customer — against the benefits of competitive alternatives and substitutes?
Customer perceptions are the metrics of brand management.
Many, if not most, companies determine price by identifying their own costs and “marking up” for a profit margin. This works, but only if the result happens to match up with what prospective customers believe the offering is worth to them. In reality, the monetary range for a rational pricing policy begins, on the low end, with the supplier’s total variable costs and ends, on the high end, with the value that customers place on the offering when they compare it to their alternatives.
Most prospective customers won’t (and can’t) directly tell a supplier what its best price should be. Instead, good market research strives to uncover the complete picture of how customers perceive value. With an understanding of which benefits customers consider the most valuable and how they obtain those benefits now (and how much they pay for them!), suppliers can make some informed decisions about where to set their own prices. Later in the product life cycle, pricing effectiveness can be tested by more direct methods, such as choice decision modeling and marketplace experiments.
The supply channel consists of raw materials suppliers, manufacturers, logistics suppliers, wholesalers, distributors, selling representatives, retailers, and so on. How those different entities work together and share the rewards of selling a product offering is the subject matter of channel management.
The most recent trends in channel management have been the consolidation of retailers into a powerful few and the disintermediation of many “middlemen.” These changes are the current result of the on-going struggle to control how end customers receive “value” — because that’s where the greatest profits reside.
Good market research is used in channel management by furthering the understanding of how end customers perceive value received. When that becomes more clear, each and any of the channel members can develop means to deliver that portion of the total value around which they can build a competitive advantage.
For example, if a distributor can package small units of product more effectively and efficiently than either the manufacturer or retailer can do it, that distributor has created a strong role for itself in that supply channel. And he can then confidently demand a profitable price for doing it. The proof of this formula, however, is in whether the customer perceives that the packaging, or the price required for the finished, packaged product, is favorable or not. Good market research can aid in making these determinations.
This category includes advertising, promotional campaigns, collateral marketing materials, sales presentations, and every way that a supplier attempts to convey the value of its offering to a prospective target market. Effective marketing communications efforts work both ways — they convey the value inherent in the offering to make sure the prospect is aware of it, and they also attempt to influence how the prospect defines value so that he comes to favor whatever advantages the supplier’s own offering has.
For both purposes, an effective marketing communications program must be based on a thorough understanding of how the marketplace defines value. Ask:
- What are the needs being addressed by this offering?
- What are the benefits of the offering that are the most important to the prospect today?
- How does the prospect perceive the benefits of the current offering — as compared to his alternatives?
Knowing the answers to these questions permits the development of marketing communications that have an impact on the prospect and, therefore, a benefit to the marketer.
Other categories of management decisions — such as production management, operations management, financial planning, human resource development, etc. — share the underlying premise offered here. That is, an understanding of how customers perceive value is a prerequisite to business planning, not an after thought. After all, if the objective of planning is to select actions to which customers will likely react most favorably, why not ask them what they think about such things first?