You Don't Measure What You Offer Your Customers
Though it is the most important metric
What's the difference between a $4 wine glass and a $40 one? Does the same wine taste better in the latter?
Is a luxury car ten times better than one that is ten times cheaper?
We all know that businesses should create value for customers to earn profit. And you are, for sure, also familiar with the "value for money" concept. If you want to ask for more money, offer more value.
But what is "value," and how to measure it?
Wine glasses and value
Imagine a person choosing wine glasses. How does she do it?
First, she realizes that she needs them. Maybe she's just bought a new flat, or her husband has broken the last glass in the house. She goes to a store and sees a lot of different glasses on the shelves. Which one will she buy?
The answer is obvious – the one that, she believes, will bring the most value to her. She may be proud of her frugality if she buys the $4 one. On the other hand, if she opts for the $40 one, she may expect her guests to appreciate her taste and wealth highly.
So, if we look at the situation from the manufacturers' point of view, they both create value for their customers. The first company, which produces the $4 glasses, may say it offers consumers reasonable prices for acceptable quality. The second one can point out in its corporate presentation that it allows demanding customers to feel special.
So, both firms solve their business tasks. But how can they measure the outcome?
Net profit and value
What isn't measurable isn't manageable. So, if the main goal for any business is to create value, how can we measure it? How can we track our progress? What makes us think we create more value for our customers this year than twelve months ago?
The most straightforward answer to the question above is net profit. If customers love a company's products, they pay the requested price. So the company gets profit, the customers get satisfaction, and everyone is happy.
But any financial metrics, such as profit, revenue, ROI, ROE, EVA, EBITDA, etc., don't reflect how much value the business creates for customers. They rather demonstrate what customers do for the company.
Of course, there is a logical connection between revenue, gross margin, and customer satisfaction. If people are willing to pay the requested price, regularly buy, and stay loyal, they are at least satisfied.
But this connection is too indirect.
Customers may continue to buy the product only out of habit. According to the Diffusion of innovation theory, around half of the people are the so-called Late Majority or Laggards, so they buy new things only when they become commonplace. It took Amazon seven years to cross the one billion revenue line. So, your customers' loyalty may be nothing more than an illusion if they are laggards who haven't switched to another solution so far.
Numbers speak about the past and not about the present (let alone the future). 2007 became the best year for Nokia in terms of net income, and iPhone was still below the radar then. Apple sold around million phones that year, whereas Nokia was proud to have one billion customers worldwide. You know the end of the story.
But the most crucial point is that your company may not create much value for its customers. Maybe it just offers more value than others. If the quality of your products or services is average, yet your competitors' proposals are even worse, your business may be booming. But it is not for long.
Many companies measure customer satisfaction regularly, but this is a tricky metric, and it may or may not reflect the amount of value a business creates for its clients.
Customer satisfaction
Many years ago, I regularly consumed milk. I bought a specific brand, but not because this milk was much better than others – I would grab it off the shelf only by the force of habit.
If I were asked about the product, I would have answered that I was satisfied.
But then oat milk entered the market. I switched to it, so the milk brand lost me as a customer.
The customer satisfaction indicator (or many other similar indicators) just tells us that at this particular moment, customers, for some reason, prefer this product over others.
It's better to measure it than not to do it. But many leaders are blinded by this metric, not realizing that it is no more valuable than the number of Facebook likes.
By the way, I had a Nokia in 2007, and I was completely satisfied.
Customer value as a subjective indicator
One of my clients told me a parable some years ago.
Once, a middle-aged man from a wild Amazonian tribe was brought to Hong Kong for a study. Scientists would like to know how a person who'd never known of electricity would react to a modern city full of cars, screens, skyscrapers, technologies, etc.
The man spent three days in the city, and he was shown all the technological miracles of the time. He was watching but didn't comment.
On the last day, one of the scientists asked him:
– What did you remember from what you saw?
– A cart for transporting bananas, – the man replied.
– A cart? What a cart?? Where did you see it???
The scientist discovered that a day or two before when they were going from one skyscraper to another, the Amazonian man spotted a cart full of bananas on the street.
He didn't pay much attention to self-driving cars or laptops because he couldn't imagine having or using them where he lived. So he didn't need them. But he had to carry heavy bunches of bananas on his back at home, so he noticed the cart and liked it very much.
We need to keep in mind two things:
Customer value is a subjective indicator. Your product may be better, faster, nicer, or cheaper than its analogs, but if customers don't see it, it doesn't matter.
The value of a product for a customer can only be measured in comparison to its counterparts.
So, we can't measure customer value the way we measure revenue. But we can do the following:
We may identify customer needs, the deeper, the better (read more about 16 basic human needs here).
We may find out the extent to which our solutions satisfy their needs. Can our products truly fulfill them, or are they only a compromise in the absence of a better solution?
We must ask customers also evaluate the extent to which other products and substitutes meet their desires.
Conclusion
We must measure how much value our business creates for customers.
We have to find a correlation between created value and financial metrics
We should always look for a way to propose more value to our customers.