Customers Are No Longer Willing To Pay Enough. Why?

Tough economic times increase complaints by business owners that: Customers will only buy based on low price, Quality no longer matters, and Competitors are giving their product away,

It is economic reality that weak demand generally results in softer prices.  Though the key reason that customers no longer pay what they once did may actually be that your customer’s perception of value has changed.

A Value Proposition is the sum of the benefits of the actual product/service your firm provides plus the experience your customer has with your firm, viewed from the customer’s point of view.

The Value Proposition your company offers is the reason your customer chooses your company over competitors when your firm solves a problem or meets a need for a particular segment of customers in a compelling way.

During tough economic times, customers re-evaluate their “wants” Vs. “needs” and, to save money, focus solely on satisfying “needs”.

What is often stated as “quality” by owners of companies that make and sell things is just a different specification or feature set.  When customers select a less robust feature set they are minimally satisfying their “need”.  Products/ Services that include features that add cost and exceed the minimum features required to solve the customer’s problem or meet the need will become uncompetitive.

Some competitors may be in a financial position to enhance their Value Proposition by lowering prices to protect market share during periods of weak demand.  Sometimes this action is taken unwisely.  However, adaptable competitors will detect a change in a customer segment’s perceived Value Proposition and adjust their offering and business model to sell at a lower price, in a sustainable manner.

Deep knowledge of customers and customer segments is necessary to ensure that your firm’s Value Propositions stay in sync with changing customer wants and needs.

Winning Value Propositions are a result of effective listening to customers in a given customer segment so the right blend of elements can be created and adopted to solve a customer problem or meet a customer need better than competitor’s offering.

Value Proposition Elements (Typical)

1) Price / Terms

2) Product / Service Benefits & Solutions

3) Ease of Acquisition of Product / Service

4) Performance of Product / Service, as represented

5) Customer Experience with resolving issues

6) Customer Perceived Risk

When customers that once paid enough for your product /service are no longer willing to do so means something has changed in the customer’s perception of your Value Proposition.

Your company must be culturally built to engage with and listen to each customer, with every interaction, to detect any pattern of change in a customer segment’s needs or problems.  How to accomplish this is the subject of another post, but key is that a process must be culturally embedded in your company to avoid denial which delays acknowledgement of changes occurring in a customer segment and prevents your firm from effectively adapting to the new environment.

A Few Examples of Changing Value Propositions in Tough Economic Times

1)  Legal Support Services, the Economic Buyer Moves Upstream to the Client

The most common practice for handling legal support services was for the client to let their attorney hire legal services as they wished.  In these tough economic times, clients are asking for competitive quotes and large corporate clients are circumventing attorneys by contracting directly with legal support service providers applying buying power to get lower prices.  This is a change that will not likely reverse as the economy improves.  This change is disruptive for legal support service firms.   Suddenly the repeatable sales models, which have been built over decades, no longer are effective as the economic decision maker for legal support service has changed to someone with whom the service provider likely has no relationship.  Further, the power exerted by the economic buyer has permanently lowered prices, while simultaneously commoditizing the legal support service industry.

2)  Specification / Feature Set changes to “Good Enough”

Customers will often change their specification on a product to “good enough” in tough times to save money.  For example, there are varying grades of in-shell peanuts that are offered by grocery retailers at different price levels to consumers.  There is a meaningful difference in price and some brands choose to differentiate by offering a premium grade that is a little larger and has a more pleasing visual appearance.  In tough economic times, in order to save money, many consumers will shift to a lower grade generic peanut that is “good enough”.

The recently announced iPad Mini tablet computer will likely be a “good enough” trade-off for many consumers wishing to save money vs buying the full size iPad.

Product offerings with “extra features” that add cost and exceed the customer needs will get replaced by “good enough” products.

 

3)  Switch to “The Whole Product” to Reduce Risk

Risk reduction can take on increased importance in tough economic times.  Customers may assign a higher value to “reduced risk” and will favor the product/service perceived as the safest.  This relates most often to products that require additional activities such as design, customization, and installation.  Instead of dealing directly with the various individual entities for each aspect of a job, a customer will prefer to deal with a single, qualified, proven company.   For example, a new hospital under-construction must make a selection for its counter and wall surfaces.  Key elements of this product choice are the performance of the surface while in use over its economic life, how close the real styling is relative to the “as designed” style, fabrication of proper shapes with accuracy and durability, and on-time installation.  At risk is the economic value of the hospital space as it is revenue producing.  If hospital space is unavailable because of construction delay or need to take patient rooms out of service for surface repair, there is a high economic cost to the downtime.

In this scenario, customer’s will most likely select a product that offers the most proven reliability available from a single company combined with its proven “authorized” partners capable of completing “the whole job”, thereby creating price reduction pressure on “non-Whole Product” Value Propositions.