The Elements of Creating Value

Learning Goal: Determine the elements of value customers desire for particular product segments.

Truly rich, entrepreneurship is about creating sustainable opportunities for people to thrive and flourish. When customers evaluate a product or service, they weigh its perceived value against the asking price. Meaning, we must create more value than the price customers are paying. Economists call this creating more utility than the cash could have otherwise purchased through another good.

A sophisticated consumer may take this principal further than simply weighing the price against the perceived value. The sophisticated consumer will take the Craftsman Approach to consumption. The Craftsman Approach requires the consumer to identify the core factors that determine success and happiness in your professional and personal life. Then the consumer will only purchase goods and services if there positive impacts on these factors substantially outweigh its negative impacts. We are in a time were substitutes goods, services, and opportunities are easily available.

For the most part, in business we hyper focus on price. Is the price low enough? This Wal-Mart style of thinking is pervasive and defeating to creating long-term value. This should be fairly logical as the only way to create new value in this model is to keep the price low while adding few, if any, new features to the product or service.

In marketing we discuss the value of helping people complete jobs (Product-Market Fit from Introduction to Business). We need to actively manage value to deliver more of it, whether functional (saving time, reducing cost), emotional (reducing anxiety, providing entertainment) or social (enhancing relationships). This is the core focus of this lesson.

The amount of value in a particular product or service always lies in the eye of the beholder. Finding the appropriate level of value is the job of marketers. To make this task easier, Eric Almquist, John Senior and Nicolas Bloch have identified 30 "elements of value" - fundamental attributes in their most essential and discrete forms.

Note there is four categories:

    1. functional (saving time, reducing cost)
    2. emotional (reducing anxiety, providing entertainment)
    3. life-changing (enhancing relationships)
    4. social impact (knowing/loving who you are)

Maslow's Hierarchy of Needs

The model should look familiar to psychologists who have studied Maslow's Hierarchy of Needs. Created value follows the basics tenants of Maslow's theory. Basic needs (functional) are security, warmth, rest, etc. Psychological needs (emotional and life changing) are related to mental health and relationships. Finally, self-fulfillment overlaps with social impact as the culmination of a life well lived.

Maslow (1943) initially stated that individuals must satisfy lower level deficit needs before progressing on to meet higher level growth needs. However, he later clarified that satisfaction of a needs is not an “all-or-none” phenomenon, admitting that his earlier statements may have given “the false impression that a need must be satisfied 100 percent before the next need emerges” (1987, p. 69).

When a deficit need has been 'more or less' satisfied it will go away, and our activities become habitually directed towards meeting the next set of needs that we have yet to satisfy. These then become our salient needs. However, growth needs continue to be felt and may even become stronger once they have been engaged.

Growth needs do not stem from a lack of something, but rather from a desire to grow as a person. Once these growth needs have been reasonably satisfied, one may be able to reach the highest level called self-actualization.

Every person is capable and has the desire to move up the hierarchy toward a level of self-actualization. Unfortunately, progress is often disrupted by a failure to meet lower level needs. Life experiences, including divorce and loss of a job, may cause an individual to fluctuate between levels of the hierarchy.

Therefore, not everyone will move through the hierarchy in a uni-directional manner but may move back and forth between the different types of needs.

On an interesting note, Maslow expanded the hierarchy of needs later in research to expand on the specifics of self-actualization. Personally, I believe the complexity of the 8-stage model represents the complexity of self-actualization much better. We are not going to study this in detail but I will leave it here for you to read if you are interested.

Some Elements Matter More than Others

Perceived quality affects customers advocacy more than any other element across all categories. Take a look at the elements for the following categories. Tell me what sticks out to you as the most interesting and why.

Banks and Creating Value

It’s no secret that banks are under attack from many quarters. Insurgents have been attacking the weak points—picking off individual aspects of the banking experience and delivering better value propositions.

Consider Venmo, a digital wallet that lets you make and share payments with friends. You can easily split the bill, cab fare, or much more with the simple click of a button on your app. Being that Venmo was started by Paypal, the app is not integrating more and more with online shopping experiences and increasing functionality daily. All these payment processes were once performed by banks.

To be sure, earning customer loyalty is harder than ever in banking, as powerful trends benefit the insurgents such as Paypal and Amazon.

Take a look at the infographic below. The 5 primary elements of value for banks (quality, saves time, reduces anxiety, heirloom, and simplifies) are incredibly easy for technology companies to address. What can banks practically do to maintain their position in the market?

What is the takeaway from this graphic?

Consumers on average give their primary bank a lower rating on these elements than at least one of the major tech firms, Amazon, Apple, Google and PayPal (see Figure 4). Banks will have to close the larger gaps on quality, saves time and simplifies, especially with Paypal and Amazon add services.

Banks Can Win the Long-Game

To win the long-game, banks are going to have to devote considerable resources to digital experiences. This is the equivalent of Target (Bank of America) competing against Amazon (Venmo).

  • Accelerate the digital migration. Abundant evidence shows that customers who shift to digital banking have greater loyalty to their primary bank, cost less to serve and are more profitable.
      • The key unit for managing experiences is now the customer “episode,” which consists of all the activities involved in fulfilling a customer’s need. For example, the “I need to replace a lost credit card” episode ends successfully when the customer receives and activates the new card, allowing her to make purchases again. Episodes range from a single interaction (paying a bill online) to an intricate series of interactions (buying a new home). A bank can identify its most important episodes and the sources of friction in each one, then mobilize dedicated teams to overhaul those episodes, usually by making them more simple and digital.
  • Join, acquire or die. To compete with fintechs, large technology firms and other disruptors, banks may need to collaborate on common solutions.
      • Sweden’s Swish app, which a consortium of seven large banks started in 2012, now dominates peer-to-peer payment and merchant purchases.
  • Cultivate emotional Elements of Value. Banks have to perform better on a few functional elements such as saves time and simplifies.
      • Simple and digital are critical characteristics in other episodes as well. For instance, 92% of direct banks were highly rated by respondents on saves time, compared with 28% of traditional banks. It also explains the rise of online fintechs like Quicken Loans, which has grown from less than 1% of retail mortgage originations in the US in 2008 to almost 6% at the end of 2017. Quicken Loans recently overtook Wells Fargo to become the leading direct-to-consumer mortgage lender in the country. When the company launched Rocket Mortgage, Quicken Loans said a team of 500 software developers took three years to streamline the mortgage process. That’s a level of investment that most banks hesitate to commit to.

Lesson Information

Questions

  1. How do the 30 Elements of Value mirror Maslow's Hierarchy of Need?
  2. How are tech companies transforming the way consumers perceive value?
  3. What elements of value do we deliver on at Cuplifting? Explain how.
  4. What do we need to change? Explain one additional product we could offer to enhance our created value to customers.

Sources