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26 October 2016

Marketing and Sales Processes. A Modern Approach to Customer Behavior. Part 1

Today there is a lot of useful content about marketing. However, when it comes to developing your own company and products, it can be rather hard to find sufficient information. I thought that it would be useful to have a sort of a cheat sheet to summarize the up-to-date marketing theory and give advice on:

  • How to orient your company on the market, what comes first, the consumer or the product?
  • How to build communication with the customer according to customer value;
  • Which decision-making pattern works best for a certain type of product;
  • Which way of gaining competitive advantage is more convenient?

In this article, you won’t find any IT program interfaces. Instead, we shall talk about marketing and sales approaches, customer behavior, and show you how these concepts can be applied to various types of business.

1. Two types of company orientation. Or are there three?

Product orientation

A product-oriented company has its focus on selling the product, and tries to make a product that everyone would want to buy.
In such a company, the main management goals are production ramp up, diversity of product lines and greater annual output. The company’s revenues depend on the volume of sales.

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Focus on the product is a good strategy for scalable businesses, i.e., companies, where the maximum use of production capacities and cheaper procurement of primary
goods lower the cost of the product.

Customer orientation

A customer-oriented company considers the needs of the target customer and does not focus primarily on selling.The main management goal here is to discover the target segment and focus on its needs:

  • What does the customer appreciate?
  • What do we have to offer in order to meet customer expectations?

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Revenues are driven by the value and relationship with the clients (loyalty programs, cross sales, premium prices).
Focus on the customer is a good strategy for businesses that are not scalable, where increase in production does not lower the product cost.
Let’s consider some examples:

Formula

Usually business consultants oppose these two orientation strategies: the product and the customer oriented one. However, there is the third type. It combines the best of the two and allows you to organize your business focusing on the product and forming the value for your customer at the same time.
In today’s conditions, this approach is the most efficient one as far as business development is concerned. A company that offers the product only cannot be successful, because businesses compete on the market of customer value, not the market of products and services.

When talking about customer value, experts usually say, “Know your customer!” Let’s see how it can be done.

2. Customer value.

In marketing and sales, value has two components:

Formula

Let’s take a look at how the product and service value for the customer is formed.

Any product or service becomes valuable if what the customer gets from it is higher than what he or she has to give in order to get it (material and non-material inputs). It is the same for both individuals and companies that act as your customer.

Formula

Customer value formula

Customer’s benefits
The product’s technical characteristics and ways of usage, and emotional interest are considered customer’s benefits. There might be more, but these two are the main types of benefit.

Benefits

Customer’s benefits

For example, when a person is buying a cell phone, they thoroughly consider its technical features: storage, screen resolution, processor speed. They also consider how they can use this device: make calls, read latest news, listen to music and so on. All these points are customer’s benefits.
Speaking of emotional benefits, successful usage experience is important. If the person is happy with the product, they will not want to replace it with a similar product of another brand. Such benefits as social status and recognition drive a person to buy the same product as their friends or colleagues are using.

Customer’s “sacrifices”
There are several main groups of sacrifices that the customer has to make to get a product or service:

Sacrifices

Customer’s “sacrifices”

The direct sacrifices are the price of the product and the resources required to choose and purchase it. Consider a company procuring raw materials. Several company employees work on finding and selecting the supplier, and the time they spend on it is a direct sacrifice.

The indirect sacrifices are materials, money and time needed in order to use the product:

  • Training. For example, when a company buys new equipment, the employees have to be trained to work on it. When a person buys a new cellphone or a computer with a different operating system, he or she has to get accustomed to it.
  • Absence of choice, a sacrifice that businesses scarcely take into account. The thing is, when the customer makes a choice in favor of one product, he or she automatically turns down the other products, and not products only. If a person chooses to go to the movies, it is obvious that he or she can´t go to the theater at the same time. When a company with limited budget invests in new equipment, it knowingly sacrifices vehicle renovation.
  • No chance to switch to an alternative product. For example, after implementing production facilities of one brand, using equipment of another brand would be rather difficult.
  • The cost of all possible risks. For example, when you change from one cell phone provider or bank to another, you always run certain risks. You do not know how the new provider works, how fast is their customer support and so on.

To sum up, let’s take a look at the formula of customer value components:

Formula

Customer value formula

Of course, the numerator and denominator will vary according to business areas. However, in general such mathematical representation works similarly for any type of business. As you can see, if the numerator does not show any benefits, and the sacrifices are significant, the product or service has no value for the customer. A company can raise its product’s value by increasing the benefits and keeping the customer’s sacrifices on the same level (even without lowering them).

By making a deep analysis of customer value, you can segment your customers. A company looking to buy 100 thousand dollars’ worth of supplies sees value differently from a company that buys their supplies with a much lesser budget. This is why you have to segment your customers according to how they see the value.

3. Analyzing Customer Value. Examples.

To illustrate the process of analyzing the customers’ benefits and sacrifices, let’s consider the following examples: electrical equipment manufacturer (B2B), food manufacturer (B2C) and bank (B2B, B2C).

Electrical

Benefits and sacrifices of electrical equipment manufacturer´s customers

Customers of the electrical equipment manufacturer value the functional capabilities of the product. Since the equipment will be used in the company’s core processes, the customer also values the ease of use and collaboration with manufacturer. Such emotional benefits as recognition and social identity do not matter as much.

The cost of the equipment and the resources required to select and purchase it are also very important to the customer. The time needed for employee training, the cost of having no chance to switch to an alternative product, and the cost of all possible risks also matter a lot. Since the equipment is very pricey, and is incorporated in the company´s infrastructure, the customer would not be able to reequip the production facilities easily in case the manufacturer raises the price or any other problem occurs. At the same time, the absence of choice is not that important to the customer, because they understand what they are investing in, and do it according to their budget.

Food

Benefits and sacrifices of food manufacturer’s customers

As for food products, the emphasis on certain customer benefits is rather an issue of positioning. The product’s characteristics, ingredients (for example, the grape variety of wine), are what the customer cares about. Ways of using the product also matter. For example, you can eat a product at once or divide it into several servings, depending on the product’s volume and expiry date. In addition, there are luxury foods and healthy foods, which offer social status and recognition.
With food products, resources also matter. If the customer does not know where the product is sold, or if it is only sold in faraway stores, obviously, the input to buy the product is just too high. The absence of choice counts, because when the customers buy one product, they therefore refuse to buy the alternative product.

Bank

Benefits and sacrifices of bank customers

A bank customer values ways in which they can receive services. As far as product characteristics are concerned, all the banks offer similar interest, credit cards with cash back and so on; therefore, such benefits are less important.

As you can see from the given examples, in each business area the final set of benefits and sacrifices is different. The value of each product or service as seen by the customer has a particular structure and needs to be analyzed. Such an analysis can help you set up the offer for your segment according to the customer’s understanding of the product’s value. You will be able to offer a better value, than your competitors, and make it obvious to the customer. I shall write more about value proposition (value that a company promises to deliver) in the second part of the article.

 
 

This article is inspired by the work of Gabriele Troilo, Bocconi University.

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Aleksey Trefilov
Aleksey
Trefilov
CEO