Value is Defined by the Customer

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Your product’s value is not

  • Your unique features,
  • Your specification advantage,
  • The price needed to hit profitability targets,
  • Your elegant design,
  • Your strong patent protection,
  • Your brand, or
  • Fair compensation for the risk and money you spent developing the product.

It’s none of these things. All of the above might be your perspective on value. However, your perspective doesn’t matter. It’s not about you. The customer defines value.

The Customer Defines Value

By way of illustration, let’s consider two cans of paint on display at your local home center. A quick scan of the small signs hanging below each of them reveals the following:

ItemBrand ABrand B
Price/gallon$25$100
Paint lifetime5 years10 years
Total coverage/can300 ft2300 ft2
Coats required for complete coverage21

Based on the data above, which brand of paint has the superior value proposition?

The correct answer is that you do not know.

That’s because you don’t know anything about the customer. The paint’s features don’t tell you anything about customer value without any customer knowledge.

Now suppose that the customer is a homeowner. And you know this about the homeowner’s situation:

  • The area that needs painting is 3,000 square feet.
  • He will pay a contractor $50 an hour to paint his house.
  • Each coat will require 10 hours of labor.
  • The homeowner expects to stay in this house more than 10 years.
  • He wants the most economical solution for keeping his house looking freshly painted while he lives there.

Which paint will produce the most value for this customer?

From the value analysis below, you can see that Brand B saves this homeowner $1,000 every ten years. Labor cost savings is the primary value driver.

ItemBrand ABrand B
Gallons of paint1010
Price/gallon$25$100
Total paint cost$250$1,000
   
Hours to paint one coat1010
Total coats21
Cost/hour$50$50
Total labor cost$1,000$500
   
Total cost to paint one time$1,250$1,500
Paint jobs required over ten years21
Total 10-year cost$2,500$1,500

Suppose another homeowner considers the same two cans of paint on the shelf. He, too, wants the best value for his money. His situation is as follows:

  • His house also has 3,000 square feet to be painted by a $50 an hour contractor.
  • He’s about to be relocated by his employer and needs to sell his house quickly.
  • His realtor told him that a fresh coat of paint will help attract buyers.
  • He wants the most economical solution for his paint problem.

By choosing brand A, this homeowner will save $250. Here paint durability does not matter. The primary value driver is the lower cost per gallon of paint. For this homeowner, the value analysis looks like this:

ItemBrand ABrand B
Gallons of paint1010
Price/gallon$25$100
Total paint cost$250$1,000
   
Hours to paint one coat1010
Total coats21
Cost/hour$50$50
Total labor cost$1,000$500
   
Total cost to prepare the house for sale$1,250$1,500

From this simple paint example, you can see that value couldn’t be defined until you defined the customer. You can also see that a vague description of the customer was insufficient. If you only knew the customer as a “homeowner,” you wouldn’t know enough about him to understand his primary value drivers.

Define Your Target Customer

The same is true for the capital equipment business. You cannot describe value until you define your target market. A precise, accurate definition of value can only come from a precise, accurate definition of the customer. It’s the foundation on which you will build your entire product and marketing strategy. Without a strong foundation, your strategy will collapse.

Defining your target market is the first step. It’s a proactive, deliberate, thoughtful decision. You need to select a group of customers

  • With similar buying needs,
  • That is large enough to fulfill your financial objectives,
  • Whom you will understand as well as you do your own company and products, and
  • For whom you intend to create unique value.

Once you’ve selected your target market, you need to describe it as precisely as possible. Include in your target description the answers to questions like these:

  • What types of organizations are in your target market?
  • What groups in these organizations will buy from you?
  • What job titles do buyers typically hold?
  • Who are your customers’ customers? (internal/external)
  • What are your customers’ customers demanding of them?
  • Where are your target customers located?
  • Where do they sit in the value chain?
  • What problems do they have that you intend to solve?
  • How does solving these problems make or save them money?
  • What triggers the need to buy?
  • How do they make their buying decisions?
  • What are their alternatives to buying?
  • What are their consequences of not buying?
  • What else do these customers have in common that distinguishes them from all other possible customers?

To test the precision of your target customer description, try this little exercise: Imagine that one thousand people are in the next room. Of the one thousand people, only five are in your target market. Next to you is a stranger. If you handed that stranger your target customer description, could he go in that room and accurately identify the five customers that belong in your target market?

Once you’re pretty confident that he can, you’ve succeeded in defining your target market.