Businesses Must Innovate to Create Customer Value Post-COVID-19

Sam Klaidman Apr 19, 2021

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Manufacturing business leader speaking with employees

Customer value creation is fast becoming an everyday discussion topic in most C-suites and boardrooms. The reason is very simple: if you don’t create more customer value, then your only recourse will be to cut prices, which will turn into a race to the bottom.

As experienced business leaders, we all already know:

What customer value means
What our customers value most when it comes to products and services like those we deliver

Unfortunately, we probably have misconceptions and outright errors in our thinking that will totally invalidate plans we are making for post-COVID-19 business reopenings.

Defining Customer Value

Simply put, customer value is the difference between what you get (the outcomes) and what you pay (the cost). Outcomes are what matters most to the buyer.

However, the above definition is too simplistic. At Middlesex Consulting, we define customer value as:

“The buyer’s perception of tangible (economic) and/or experiential (emotional) net improvements (benefits minus costs) to business outcomes (profit, CSAT, etc.) resulting from using or owning the supplier’s products and/or services, compared to all alternatives."

The two elements of this definition that you may not have discussed internally are:

"The buyer’s perception"
"Compared to all alternatives"

The Buyer’s Perception

No matter what anyone in your company says about your customer’s needs and wants, there is only one person whose opinion truly matters: your customer. They are the only people who can quantify the benefits they receive and the alternatives they can consider instead of doing business with you. And they are the people who will decide where they spend their money.

Your marketers, salespeople, support people, and executives have opinions about the value you deliver to customers. However, since they are not walking in the customer’s shoes, they only have opinions - not facts. And they have strong biases because of prior industry experience; maybe they worked for a customer or two, and maybe they believe everything they hear from customers. But they are also the people who are shocked when a good customer abandons your company for a competitor.

Customer needs and wants are not fixed, but instead change based on:

Competitors' offerings
Internal process changes
Demand
Cost structures
Globalization
Forecasts
Business climate

Compare All Alternatives

At the time someone is considering buying a product or service, they should be considering all alternatives. The customer could consider the following options:

Continue doing what they are doing (that is, do not buy anything)
Upgrade their existing equipment to gain new outcomes
Look at all suppliers, not just the incumbents, or those local to their plants
Either outsource or insource, depending on what they are currently doing (e.g., instead of adding more incoming inspection capabilities, they can discontinue incoming inspection and put all the risk of defects getting into production on the supplier)
Redesign parts, processes, or assemblies (3D printing is influencing this alternative)
Change traditional specifications (like adding the 10-year total cost of ownership, annual energy consumption, or environmental impact)
Make the new purchase the first of an across-the-board technology upgrade (think IoT)

Desired Outcomes Can Rapidly Change

Recently, Thomas conducted a poll to find out what really matters to industrial buyers. Buyers rated these factors on a scale of 1–5, with 5 being the most important. Here are the top six factors:

Delivery performance: 4.45
Cost: 4.2
Quick turnaround times: 4.03
Financial stability: 3.94
Quality certifications: 3.93
Industry experience: 3.91

But, if a hospital immediately needs to buy 250 ventilators because of COVID-19, do you think that cost would be second on the list or do you think their desired outcomes would be:

Delivery performance
Quality certifications

And do you think that compatibility with their existing vents would be important? I don’t.

The Opportunity to Rethink Your Value Proposition as a Result of COVID-19

It is obvious that many businesses are or will be cash poor for the next few quarters. And depending on their industry and specialty, they may be in that situation much longer. This creates a great opportunity for manufacturers to pivot to subscription-based offers and new pricing models that save buyers cash.

Here are a few examples:

Move from outright selling equipment to providing an operating lease where the initial cost move from CapEx to OpEx and rolls the maintenance and consumables costs into one monthly payment.
Move to an input-consumed model where the buyer pays based on the amount of material the product consumes in the production process. For example, for a 3D printer, the customer may pay $X per pound of plastic dispersed through the print nozzle.
Move to an output-based model where the customer pays the equivalent of a royalty based on units produced instead of making an outright purchase. Rolls-Royce has been doing this with jet engines since the 1960s with its “power by the hour” scheme.

In 2018, Bain & Company identified a number of elements that B2B companies value. These offers tick the following boxes and create different types of value (shown in parenthesis).

Acceptable price (table stakes)
Innovation and cost reduction (functional value)
Simplification, risk reduction, decreased hassles, reduced efforts, and commitment (ease of doing business value)

If your customers are strapped for cash and generally “not feeling the love,” then rethinking your business model will change their purchasing calculus and may give you such a competitive advantage. You will be able to increase your long-term revenue and profit picture, although with a short sales shortfall because the item is paid for over a number of years. However, at the end of the OpEx favored processes, you still own the equipment. Then the user can:

Renew the package for additional years
Purchase the product from you for a one-time charge
Return it to you to remanufacture and either resell or place it in another facility as on a new OpEx payment plan

As a final point, a recent article in Barron’s summarized Bank of America Analyst Andrew Obin in a GE research report:

“It might take years for demand for new planes to recover, but he thinks GE’s aftermarket parts-and-service business will rebound much faster. What’s more, profit for aftermarket service is higher than for new engines. New equipment is sold at essentially break-even levels. The money is made in services. As a result, Obin thinks GE aviation profit margins will approach prior levels by 2022.

There are lots of ways to win!

Sam Klaidman is the Founder and Principal Adviser at Middlesex Consulting. He helps his B2B product manufacturing clients grow their services revenue and profitability by applying the methodologies and techniques associated with the Customer Value Creation and Customer Experience professions to assist his clients as they design and commercialize new services and the associated business transformations. Contact Sam here.

Image Credit: By Drazen Zigic / Shutterstock.com

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