Blog

Why Focusing on Your Target Customer and Defining Your Value Proposition Isn’t Enough for Business Success

Have you identified your company’s target customer yet?

Based on all I’ve been reading lately, your organization is behind the eight ball in this economy if you haven’t. In all honesty, there is nothing special about the current business environment that makes identifying your target customer more critical today than at any other time. It actually turns out that the power in the marketplace has been shifting for some time to the customer and, incidentally, their service expectations have been rising. Essentially, knowing who your target customer is has been a requirement for some time but it feels like it has turned into a business imperative in a tough, and suddenly tight, economy and marketplace.

Identifying your target customer gives your company someone (or a group of someones) to focus on. It gives you someone to get to know really well, allowing you to develop an intimate understanding of their evolving wants, needs, and expectations. With this information, you can identify and create products and services that will suit your target customer AND you can design a customer experience that will appeal to them on an emotional level. In other words, knowing who your target customer is allows you to gain a comprehensive understanding of what they value.

At a basic level, customer value can be looked at as a simple plus-minus equation. On the plus side are all the benefits your product or service and customer experience provide to your customer. On the minus side are the costs to the customer that are associated with using your products or services and interfacing with your company. Costs include money, time spent/wasted, and other intangible, non-monetary costs. Benefits include the product and service features that your customer is looking for as well as other benefits you deliver that exceed your customers’ basic service expectations. When the benefits offered by your product, service, and customer experience outweigh the costs in the eyes of your customer, you meet or exceed customer expectations and add value. When, however, costs outweigh the benefits, you fall short of customer expectations and your company destroys value for your customer. Customers are usually attracted to companies and products/services that provide value and are generally repelled by companies and products/services that destroy value – no real surprise here.

However, here’s something that’s important to remember: Value is defined by your customer. That is, perceived benefits and costs are in the eyes of the customer – not yours.

Not surprisingly, different target customers buy based on different perspectives of the cost-benefit tradeoff. For example, some are looking for great products that offer high levels of quality for a low price while others want to receive a consistent product and/or service experience at a predictable (often low) price. Some customers are willing to pay a premium price just to look cool or have a first run or limited edition product or experience while others want to buy from a company that really understands them and can fulfill a variety of needs by offering a one stop shop model. Identifying your target customer and really understanding them positions you and your company to hone in on their perspective on value. And, with this understanding, you can craft your customer value proposition – the combination of benefits you are going to provide to your customer.

As you likely know, there are three classic customer value propositions. While there have recently been suggestions that there are additional value propositions (including market or niche creators/new market leadership such as seen with Cirque du Soleil), let’s stick with the big three: Operational Excellent; Product Leadership; and Customer Intimacy.

Operational Excellence: Companies adopting this value proposition focus on delivering exceptional levels of quality, price, and ease of purchase and they put together an offering that represents an attractive combination of these three elements. They have a reputation for executing reliably and with consistency, usually providing their customers with low prices and expedient, dependable service.

Product Leadership:  Companies pursuing this value proposition excel at creating new products that are on the leading edge and are highly desirable. Often, successful companies in this category seem to create and market products that the customer wants before they know they want it (often said about Apple’s products). The focus is on product innovations (not incremental improvements) that explode existing paradigms and boundaries and these companies consistently provide their customers with the newest and most innovative products and/or services, often at a premium price.

Customer Intimacy: Companies with this value proposition build close bonds with individual customers within the customer group. Customer-intimate companies leverage their knowledge of what their individual customers’ needs and pain points are to create customized solutions, often at very reasonable prices. The hallmark of these companies is giving the customer more than they expect and going above and beyond to provide customers with a total solution. As a result of their focus on the individual customer and their relationship with them, these companies enjoy high levels of customer loyalty.

It is important to note that while successful companies will choose one of the big three as their primary customer value proposition, they do not exclude the other two in their operations. They will, however, perform at threshold levels only on these subordinate value propositions because they realize that some of the elements in the individual value propositions are in direct conflict with each other. Determining their leading customer value proposition allows for easier prioritization of work efforts and more focused decision-making – translating into a real ability to deliver on the primary drivers of customer value.

The key to success with customer value propositions is to leverage your understanding of your target customer AND the value propositions of your competitors to differentiate your company in the eyes of your target customer. To do this you can either choose to adopt a different customer value proposition from your competitors OR excel on different attributes within a shared value proposition – these are the two primary ways to differentiate your company in a competitive marketplace.

While knowing your target customer and adopting a compelling customer value proposition are critical for business success, these two things alone are not enough. In fact, it turns out that, besides identifying a target customer to satisfy, excelling on a specific dimension of value and delivering a compelling value proposition, and performing at threshold levels on other customer-defined standards of value, to achieve sustained business success, you must deliver and improve the value you provide year after year on an ongoing basis. The only way to do this, and successfully deliver on your promised value to your customer, is to build and implement an operating model that is fully aligned with your customer value proposition.

Interestingly, the elements of a company’s operating model have a lot in common with many of the balanced scorecard’s perspectives. These elements include the organization structure and peoples’ skills and capabilities, the company’s culture, the nature of strategic information technologies, the types of management systems employed, and the range of business processes implemented. The elements of the operating model have synergies with the learning and growth/organizational capabilities and internal processes perspectives on the balanced scorecard (hold this thought).

The key to success when implementing a specific customer value proposition is to ensure that it is supported by the appropriate operating model. So, what is the right operating model for a given value proposition?

Operational Excellence: This value proposition features highly centralized functions with the most skilled resources residing at the core of the organization and a command and control approach to management. The organization is very disciplined and process focused with conformity with defined cost and quality specifications being highly valued. Information technology features integrated, transactional systems that support business processes that are focused on delivering products on a predictable service cycle using standardized assets. The operating model in operationally excellent organizations is built on conformity to standards and specifications rather than flexibility and is designed to deliver predictable levels of performance and profitability.

Product Leadership: This value proposition features a more fluid organizational structure where ad hoc teams are formed and then re-formed and high skill levels reside throughout the organization. Management is comfortable with risk and it rewards the innovation capacity of individuals within teams. Experimentation and out of the box thinking are musts and the culture is built around going for broke and playing to win. Information technologies are focused on enabling communication, co-creation, and knowledge sharing, and key business processes include invention, research and development, commercialization, and marketing. The operating model of product leaders is dynamic and agile so that new ideas are created, tested, and commercialized and profit is realized as quickly as possible.

Customer Intimacy: This value proposition features client-focused teams with high skill levels residing as close to the customer as possible. Management is focused on deepening the relationship with the customer and expanding wallet-share. Customization to customer specifications is the force driving company-client interactions and employees are experts at learning about the needs of their clients. Information technologies are focused on the customer and feature the ability to integrate relevant internal and external information in one knowledge hub. Key business processes are flexible and responsive and are focused in the areas of customer acquisition and relationship development, and custom solution generation. The operating model of customer-intimate organizations is client-specific and customer-focused, is geared to supporting maximum solution customization, and is focused on the lifetime value and profitability of each client relationship.

With the obvious synergies between the elements of a company’s operating model and the classic balanced scorecard perspectives, it is easy to see how the strategy map (which leverages the balanced scorecard perspectives) becomes the best tool for formulating, displaying, and communicating the operating model associated with a company’s primary customer value proposition. When you think of it in this way, strategy map use becomes as critical to success as defining your target customer and your primary customer value proposition.

Popular thinking about the foundations for business success is currently focused on the need to define a company’s ideal customer and the customer value proposition. However, actually delivering on that customer value proposition isn’t as easy as making a public statement of your current value proposition. Success requires an aligned operating model that is specifically designed to deliver the differentiating elements of your primary customer value proposition.

A best practice approach for success includes (1) clearly identifying your target customer; (2) identifying your primary customer value proposition and determining which specific attributes to excel on to achieve differentiation in the market place; and (3) creating a strategy map that clearly defines and lays out the operating model required to deliver that specific customer value proposition.

With all three components in place, and a approach dedicated to keeping them relevant to customer and market needs in an evolving environment, your company will be well positioned for business success over the long term.

Why does your customer buy from you? Why do your employees think your customer buys from you? Are the answers the same? Is your current operating model helping you exceed customer expectations?

To avoid business failure, you must be confident that your company can deliver. Interested in testing your company’s current capabilities quickly and accurately?

Find out how you can by simply clicking here.

 

4 Comments

  1. Greg Schott
    Oct 26, 2011

    I have been an advocate of both “The Balanced Scorecard” and “The Discipline of Market Leaders” for a long time. I agree that the integration of these concepts makes a lot of sense to help an organization understand itself and develop its strategy. However, when looking at potential target customers, I believe that this approach is too complicated to be used in evaluating a fit with the target’s needs.
    Rather, I favour the approach that Ron Karr promotes in “Lead, Sell, or Get Out of the Way”. Ron identifies four potential value propositions you can offer a client: increased revenue, reduced operating cost, improved productivity, and better competitiveness. When a seller identifies a target’s needs and frames his offering using these four value propositions, conversations can quickly develop into an exploration of mutually-beneficial solutions.
    Once a business relationship has been started, I fully endorse a more detailed exploration leading to a deeper relationship using the concepts you have described.

  2. Sandy Richardson
    Oct 26, 2011

    Hi Greg:thank you for your comments and information on Ron Karr’s approach to value propositions. In your opinion,is this approach limited to the B2B context or does it have applications beyond? Sandy

  3. example
    Feb 14, 2012

    example

    Why Focusing on Your Target Customer and Defining Your Value Proposition Isn?t Enough for Business Success – SFO Blog – Helping You Build Your Company into a Strategy Focused Organization

  4. Chelsey
    Sep 16, 2013

    Greetings from Idaho! I’m bored to tears at work so I decided to check out your blog on my iphone during lunch break. I really like the info you present here and can’t wait to take a look when I get home. I’m shocked at how quick your blog loaded on my cell phone .. I’m not even using WIFI, just 3G .. Anyhow, great blog!