Do You Understand What Creates Value For Your Customers (and what that means for your price)?

In 1993 Michael Treacy and Fred Wiersema wrote a seminal paper in Harvard Business Review - Customer Intimacy and Other Value Disciplines.

They researched a number of successful businesses and identified three ‘value disciplines’, and they concluded that to be successful you had to match industry standards in two of them and excel in the third.

The three value disciplines were Customer Intimacy, Operational Excellence and Product Leadership. Broadly, (and simplistically), the three value disciplines can be described as:

Customer Intimacy means that the business is outstanding at segmenting customers, targeting those customers precisely, understanding each customer segment in detail, and delivering exactly what those customers want.

Operational Excellence is honing the business to provide customers with reliable products and services at competitive prices, delivered consistently, with no waste or unnecessary processes, and with minimum inconvenience.

Product Leadership means continuously delivering leading-edge products and solutions that beat the competition.

It’s easy to spot examples of this in action. Largely, Apple is pretty good at Product Leadership (and both of the other two!) - its products might not have the absolute latest tech every single time, but the technology is close to the leading edge, and it is brought together in a superbly usable, reliable and functional package. Ryanair is ferocious in its pursuit of operational excellence, which allows it to have a low cost base and charge low prices. Amazon knows everything about you and can segment down to an individual customer, suggesting things that customer might like, being utterly reliable in its delivery, and offering no-quibble returns.

What I find surprising is how this translates into pricing. It often seems that it doesn’t matter what discipline the company is focused on, all it cares about is the lowest price, which is not necessarily the right strategy unless they are focused on operational excellence.

For example, I spoke to a company that manufactured a precision dispenser of liquids. They were confident their product was the best in the market (so product leadership); despite that they had around 20% market share, another competitor had 10%, and a German competitor had 70%... and was also the most expensive. They were convinced they had to have the lowest price to compete, but that made little sense; clearly the market is not buying on price. After all, their customers pay top dollar for an inferior solution.

I have spoken to distribution companies that talk about all the things you would expect if they focused on customer intimacy - a huge range, next day delivery, superb telephone support, individual solutions for customers, quality products, and more. And yet all their communications are about the lowest price, everything is either ‘from’ or ‘only’.

Be clear about which value discipline you are following. Be clear about what drives value for your customer. Then charge a price appropriate to the value you are delivering.

Ref: https://hbr.org/1993/01/customer-intimacy-and-other-value-disciplines