assignment 11

The30ElementsofConsumerValue-AHierarchy.pdf

Home >Computer Science homework help >assignment 11

SALES & MARKETING

The Elements of Value by Eric Almquist, John Senior, and Nicolas Bloch

FROM THE SEPTEMBER 2016 ISSUE

When customers evaluate a product or service, they weigh its perceived value againstthe asking price. Marketers have generally focused much of their time and energy onmanaging the price side of that equation, since raising prices can immediately boost profits. But that’s the easy part: Pricing usually consists of managing a relatively small set of

numbers, and pricing analytics and tactics are highly evolved.

What consumers truly value, however, can be difficult to pin down and psychologically

complicated. How can leadership teams actively manage value or devise ways to deliver more of it,

whether functional (saving time, reducing cost) or emotional (reducing anxiety, providing

entertainment)? Discrete choice analysis—which simulates demand for different combinations of

product features, pricing, and other components—and similar research techniques are powerful and

useful tools, but they are designed to test consumer reactions to preconceived concepts of value—

the concepts that managers are accustomed to judging. Coming up with new concepts requires

anticipating what else people might consider valuable.

The amount and nature of value in a particular product or service always lie in the eye of the

beholder, of course. Yet universal building blocks of value do exist, creating opportunities for

companies to improve their performance in current markets or break into new ones. A rigorous

model of consumer value allows a company to come up with new combinations of value that its

products and services could deliver. The right combinations, our analysis shows, pay off in stronger

customer loyalty, greater consumer willingness to try a particular brand, and sustained revenue

growth.

We have identified 30 “elements of value”—fundamental attributes in their most essential and

discrete forms. These elements fall into four categories: functional, emotional, life changing, and

social impact. Some elements are more inwardly focused, primarily addressing consumers’ personal

needs. For example, the life-changing element motivation is at the core of Fitbit’s exercise-tracking

products. Others are outwardly focused, helping customers interact in or navigate the external

world. The functional element organizes is central to The Container Store and Intuit’s TurboTax,

because both help consumers deal with complexities in their world.

ICONS BY NIK SCHULZ

Find this and other HBR graphics in our VISUAL LIBRARY

In our research we don’t accept on its face a consumer’s statement that a certain product attribute is

important; instead we explore what underlies that statement. For example, when someone says her

bank is “convenient,” its value derives from some combination of the functional elements saves

time, avoids hassle, simplifies, and reduces effort. And when the owner of a $10,000 Leica talks about

the quality of the product and the pictures it takes, an underlying life-changing element is self-

actualization, arising from the pride of owning a camera that famous photographers have used for a

century.

Three decades of experience doing consumer research and observation for corporate clients led us

to identify these 30 fundamental attributes, which we derived from scores of quantitative and

qualitative customer studies. Many of the studies involved the well-known interviewing technique

“laddering,” which probes consumers’ initial stated preferences to identify what’s driving them.

Our model traces its conceptual roots to the psychologist Abraham Maslow’s “hierarchy of needs,”

which was first published in 1943. Then a faculty member at Brooklyn College, Maslow argued that

human actions arise from an innate desire to fulfill needs ranging from the very basic (security,

warmth, food, rest) to the complex (self-esteem, altruism). Almost all marketers today are familiar

with Maslow’s hierarchy. The elements of value approach extends his insights by focusing on people

as consumers—describing their behavior as it relates to products and services.

It may be useful to briefly compare Maslow’s thinking with our model. Marketers have seen his

hierarchy organized in a pyramid (although it was later interpreters, not Maslow himself, who

expressed his theory that way). At the bottom of the pyramid are physiological and safety needs,

and at the top are self-actualization and self-transcendence. The popular assumption has been that

people cannot attain the needs at the top until they have met the ones below. Maslow himself took a

�

The elements of value approach extends Maslow’s “hierarchy of needs.”

more nuanced view, realizing that numerous patterns of fulfillment can exist. For example, rock

climbers achieve self-actualization in unroped ascents of thousands of feet, ignoring basic safety

considerations.

Similarly, the elements of value pyramid is a heuristic model—practical rather than theoretically

perfect—in which the most powerful forms of value live at the top. To be able to deliver on those

higher-order elements, a company must provide at least some of the functional elements required

by a particular product category. But many combinations of elements exist in successful products

and services today.

Most of these elements have been around for centuries and probably longer, although their

manifestations have changed over time. Connects was first provided by couriers bearing messages

on foot. Then came the Pony Express, the telegraph, the pneumatic post, the telephone, the

internet, e-mail, Instagram, Twitter, and other social media sites.

The relevance of elements varies according to industry, culture, and demographics. For example,

nostalgia or integrates may mean little to subsistence farmers in developing countries, whereas

reduces risk and makes money are vital to them. Likewise, throughout history, self-actualization has

been out of reach for most consumers, who were focused on survival (even if they found fulfillment

through spiritual or worldly pursuits). But anything that saved time, reduced effort, or reduced cost

was prized.

Growing Revenue

To test whether the elements of value can be tied to company performance—specifically, a

company’s customer relationships and revenue growth—we collaborated with Research Now (an

online sampling and data collection company) to survey more than 10,000 U.S. consumers about

their perceptions of nearly 50 U.S.-based companies. Each respondent scored one company—from

which he or she had bought a product or service during the previous six months—on each element,

using a 0–10 scale. When companies had major branded divisions such as insurance or banking, we

conducted separate interviews focused on those divisions. We then looked at the relationships

among these rankings, each company’s Net Promoter Score (NPS)—a widely used metric for

customer loyalty and advocacy—and the company’s recent revenue growth.

Our first hypothesis was that the companies that performed well on multiple elements of value

would have more loyal customers than the rest. The survey confirmed that. Companies with high

scores (defined as an 8 or above) on four or more elements from at least 50% of respondents—such

as Apple, Samsung, USAA, TOMS, and Amazon—had, on average, three times the NPS of companies

with just one high score, and 20 times the NPS of companies with none. More is clearly better—

although it’s obviously unrealistic to try to inject all 30 elements into a product or a service. Even a

consumer powerhouse like Apple, one of the best performers we studied, scored high on only 11 of

the 30 elements. Companies must choose their elements strategically, as we will illustrate.

Our second hypothesis was that companies doing well on multiple elements would grow revenue at

a faster rate than others. Strong performance on multiple elements does indeed correlate closely

with higher and sustained revenue growth. Companies that scored high on four or more elements

had recent revenue growth four times greater than that of companies with only one high score. The

winning companies understand how they stack up against competitors and have methodically

chosen new elements to deliver over time (though most of them did not use our specific

framework).

Next we explored whether the elements of value could shed light on the astonishing market share

growth of pure-play digital retailers. This, too, was confirmed empirically. Amazon, for instance,

achieved high scores on eight mostly functional elements, illustrating the power of adding value to a

core offering. It has chosen product features that closely correspond to those in our model. For

example, in creating Amazon Prime, in 2005, the company initially focused on delivering reduces

cost and saves time by providing unlimited two-day shipping for a flat $79 annual fee. Then it

expanded Prime to include streaming media (provides access and fun/entertainment), unlimited

photo storage on Amazon servers (reduces risk), and other features. Each new element attracted a

large group of consumers and helped raise Amazon’s services far above commodity status. Prime

has penetrated nearly 40% of the U.S. retail market, and Amazon has become a juggernaut of

consumer value. That allowed the company to raise Prime’s annual fee to $99 in 2015—a large price

increase by any standard.

Patterns of Value

Which Elements Are Most

Important?

What customers value in products varies by industry. Here are the top five elements influencing loyalty for 10 types of businesses.

APPAREL RETAIL

QUALITY VARIETY

AVOIDS HASSLES DESIGN/AESTHETICS

SAVES TIME

TV SERVICE

PROVIDERS

QUALITY VARIETY

REDUCES COST DESIGN/AESTHETICS FUN/ENTERTAINMENT

To help companies think about managing the value side of the equation more directly, we wanted to

understand how the elements translate to successful business performance. Are some of them more

important than others? Do companies have to compete at or near the top of the pyramid to be

successful? Or can they succeed by excelling on functional elements alone? What value do

consumers see in digital versus omnichannel companies? We used our data to identify three

patterns of value creation.

Some elements do matter more than others.

Across all the industries we studied, perceived quality affects customer advocacy more than any

other element. Products and services must attain a certain minimum level, and no other elements

can make up for a significant shortfall on this one.

After quality, the critical elements depend on the industry. In food and beverages, sensory appeal,

not surprisingly, runs a close second. In consumer banking, provides access and heirloom (a good

investment for future generations) are the elements that matter; in fact, heirloom is crucial in

financial services generally, because of the connection between money and inheritance. The broad

appeal of smartphones stems from how they deliver multiple elements, including reduces effort,

saves time, connects, integrates, variety, fun/entertainment, provides access, and organizes.

Manufacturers of these products—Apple, Samsung, and LG—got some of the highest value ratings

across all companies studied.

Consumers perceive digital firms as

offering more value.

Well-designed online businesses make many

consumer interactions easier and more

convenient. Mainly digital companies thus

excel on saves time and avoids hassles.

Zappos, for example, scored twice as high as

traditional apparel competitors did on those

two elements and several others. Overall, it

achieved high scores on eight elements—way

ahead of traditional retailers. Netflix

outperformed traditional TV service

providers with scores three times as high on

DISCOUNT RETAIL QUALITY VARIETY

REDUCES COST SAVES TIME

REWARDS ME

CONSUMER BANKING QUALITY

PROVIDES ACCESS HEIRLOOM

AVOIDS HASSLES REDUCES ANXIETY

GROCERY QUALITY VARIETY

SENSORY APPEAL REDUCES COST REWARDS ME

BROKERAGE QUALITY

MAKES MONEY HEIRLOOM VARIETY

PROVIDES ACCESS

FOOD AND BEVERAGES

QUALITY SENSORY APPEAL

VARIETY DESIGN/AESTHETICS

THERAPEUTIC VALUE

AUTO INSURANCE QUALITY

REDUCES ANXIETY REDUCES COST

PROVIDES ACCESS VARIETY

SMARTPHONES QUALITY

REDUCES EFFORT VARIETY

ORGANIZES CONNECTS

CREDIT CARDS QUALITY

REWARDS ME HEIRLOOM

AVOIDS HASSLES PROVIDES ACCESS

FROM “THE ELEMENTS OF

VALUE,” SEPTEMBER 2016

reduces cost, therapeutic value, and nostalgia.

Netflix also scored higher than other media

providers on variety, illustrating how

effectively it has persuaded customers,

without any objective evidence, that it offers

more titles.

Brick-and-mortar businesses can still win on certain elements. Omnichannel retailers win on some

emotional and life-changing elements. For

example, they are twice as likely as online-

only retailers to score high on badge value,

attractiveness, and affiliation and belonging.

Consumers who get help from employees in

stores give much higher ratings to those

retailers; indeed, emotional elements have

probably helped some store-based retailers

stay in business.

Moreover, companies that score high on

emotional elements tend to have a higher

NPS, on average, than companies that spike

only on functional elements. This finding is consistent with previous Bain analysis showing that

digital technologies have been transforming physical businesses rather than annihilating them. The

fusion of digital and physical channels is proving more powerful than either one alone. That

accounts in part for why E*TRADE has invested in physical branches and why retailers such as

Warby Parker and Bonobos have launched physical stores. (See “Digital-Physical Mashups,” by

Darrell K. Rigby, HBR, September 2014.) These patterns demonstrate that there are many ways to

succeed by delivering various kinds of value. Amazon expanded functional excellence in a mass

market. Apple excels on 11 elements in the pyramid, several of them high up, which allows the

company to charge premium prices. TOMS excels on four elements, and one of them is self-

transcendence, because the company gives away one pair of shoes to needy people for every pair

bought by a customer. This appeals to a select group of people who care about charitable giving.

Putting the Elements to Work

These patterns are intriguing in their own right, and they illuminate how some companies have

chosen to navigate upheaval in their industries. Ultimately, however, the elements must prove their

usefulness in solving business challenges, particularly growing revenue. Companies can improve on

the elements that form their core value, which will help set them apart from the competition and

meet their customers’ needs better. They can also judiciously add elements to expand their value

proposition without overhauling their products or services.

Companies have begun to use our method in several practical ways, instilling a “hunt for value”

mentality in their employees. Although many successful entrepreneurs have instinctively found

ways to deliver value as part of their innovation process, that becomes harder as companies grow.

The leaders of most large organizations spend less time with customers, and innovation often slows.

The elements can help them identify new value once again.

Some companies have refined their product designs to deliver more elements. Vanguard, for

instance, added a low-fee, partly automated advice platform to its core investment services in order

to keep its clients better informed and, in many cases, to reduce risk. A chainsaw manufacturer that

felt undifferentiated used the elements of value to identify specific ways of making future products

distinctive. It focused on quality (defined as the results of using its products), saves time, and

reduces cost. These three elements had the greatest effect on customer satisfaction and loyalty, and

the company was able to build competitive advantage with them.

Other companies have used the elements to identify where customers perceive strengths and

weaknesses. They start by understanding which elements are the most important for their industry

and how they stack up on those relative to competitors. If a company trails in the crucial elements,

it should improve on them before attempting to add new ones. A large consumer bank found that

although it fared relatively well on avoids hassles and saves time, it did not score well on quality. The

bank did extensive research into why its quality ratings were low and launched initiatives to

strengthen anti-fraud operations and enhance the mobile app experience.

The broadest commercial potential of the elements of value model currently lies in developing new

types of value to provide. Additions make the most sense when the organization can deliver them

while using its current capabilities and making a reasonable investment, and when the elements

align with the company’s brand.

Sometimes selecting an additional element is fairly straightforward: Acronis and other software

providers added cloud backup and storage services to reinforce their brand promise of reduces risk

for computer users. Another key element in cloud backup is provides access, because users can reach

their files from any computer, tablet, or smartphone connected to the internet.

It’s not always so obvious which elements to add, however. One financial services company

recognized that if it could attract more consumers to its retail banking business, it might be able to

cross-sell insurance, investment advice, and other products. But how could it do that? The company

arrived at the best answer through three largely qualitative research stages followed by a fourth,

highly quantitative stage.

Structured listening. Working with Bain, the company interviewed current and prospective customers across the United

States, individually and in groups. The goal was to understand consumers’ priorities for a checking

account, their frustrations, their compromises, and their reasons for using multiple institutions for

banking services.

“Ideation” sessions. We then used the elements to explore where improvements in value might resonate with

consumers. Bain’s survey data had identified the elements that tend to reinforce customer advocacy

in consumer banking, among them provides access, heirloom, and reduces anxiety. Those insights,

combined with the consumer research, informed ideation sessions with a project team consisting of

people from all customer-touching departments across the bank, not just marketers.

The sessions explored which elements might be used to form the nucleus of a new offering. For

example, provides access and connects held appeal, because the bank might be able to provide access

to mutual funds or connect consumers with financial planners. In the end, however, the team

decided that neither element was feasible in this business, primarily for reasons of cost. Instead it

developed 12 checking-account concepts that were built around reduces cost, makes money, and

reduces anxiety. Reduces cost highlighted low fees, while reduces anxiety emphasized automatic

savings. Reduces anxiety was particularly important, because most of the targeted consumers were

living paycheck to paycheck and struggling to save money.

Customer-centric design of prototype concepts. Each concept approved by the project team contained a different mix of product features, fees, and

levels of customer service. Many of these new concepts could be delivered through an improved

smartphone app that would increase customer engagement with the bank. Almost all the targeted

consumers used smartphones for financial services (consistent with our earlier observations on the

many elements of value delivered by these devices).

The financial services company then conducted further one-on-one interviews with consumers and

got fast feedback that allowed it to winnow the 12 prototypes down to four concepts for enhanced

value. Then, on the basis of the feedback, it refined them in the fourth, quantitative stage:

Rigorous choice modeling. Having designed the four prototypes, the project team tested them with thousands of customers

using discrete choice analysis, which requires people to make a sequence of explicit choices when

presented with a series of product options. The researchers began by amassing a detailed list of the

attributes for each prototype—ATM fees, overdraft fees, credit monitoring, customer service hours,

and so on. They presented respondents with several sets of checking accounts that varied on these

attributes, asking them to select which prototype from each set they preferred. This process was

repeated several times, as attributes changed according to an experimental design, until the team

derived the winning combination of attributes.

Two clear finalists emerged, which the bank recently launched in the marketplace. It will use

customer demographics and the increase in demand to gauge the eventual winner.

Getting Started

No other elements can make up for a significant shortfall on quality.

The elements of value work best when a company’s leaders recognize them as a growth opportunity

and make value a priority. It should be at least as important as cost management, pricing, and

customer loyalty. Companies can establish a discipline around improving value in some key areas:

New-product development. Our model can stimulate ideas for new products and for elements to add to existing products.

Managers might ask, for example: Can we connect in a new way with consumers? Can our

customers benefit from integration with other software applications? Can we add therapeutic value

to our service?

Pricing. Managers commonly view pricing as one of the most important levers in demand management,

because when demand is constant, higher prices accrue directly to profits. But higher prices also

change the consumer value equation, so any discussion about raising prices should consider the

addition of value elements. Recall how Amazon’s judicious increases in value helped justify higher

prices over time.

Customer segmentation. Most companies have a formal method of segmenting their customers into demographic or

behavioral groups, which presents an opportunity to analyze what each of these groups values and

then develop products and services that deliver those elements.

Whenever an occasion to improve value presents itself, managers should start with a survey of

current customers and likely prospects to learn where the company stands on the elements it is (or

is not) delivering. The survey should cover both product and brand, because examinations of the

two may yield different insights. For example, the product itself may deliver lots of value, whereas

customers have difficulty getting service or technical support.

The elements of value have an organizational dimension as well: Someone in the company should

be tapped to explicitly think about, manage, and monitor value. One pay-TV executive, lamenting

the success of Netflix, told us, “I have a lot of people working on product features and service

improvements, but I don’t have anyone really thinking about consumer value elements in a holistic

manner.”

The concept of value remains rooted in psychology, but the elements of value can make it much less

amorphous and mysterious. Abraham Maslow emphasized the bold, confident, positive potential of

psychology. The elements can help managers creatively add value to their brands, products, and

services and thereby gain an edge with consumers—the true arbiters of value.

A version of this article appeared in the September 2016 issue (pp.46–53) of Harvard Business Review.

Eric Almquist is a partner with Bain & Company’s Customer Strategy & Marketing practice and the global head of consumer insights for Bain.

John Senior is a partner with Bain & Company’s Customer Strategy & Marketing practice.