SELF TEST #13: Identifying Reasons for Negative Volatility
What is Value?
A product's Performance plus its Price equals its Value.
What is Performance?
The total package of benefits a company offers to a customer is its Performance. Performance and Price are two components that define Value for a customer and competitors. Performance includes Function, Reliability and Convenience benefits.
How do customers buy?
Customers buy using the Customer Buying Hierarchy of Function, Reliability, Convenience and Price. The customer uses an elimination orientation to review all the competitors on Function first, then Reliability, then Convenience and then Price. The customer keeps cycling through the Customer Buying Hierarchy until the customer finds one company offering a benefit of importance to the customer that the others do not offer, and then makes the purchasing decision.
How do you determine what Value you offer your customers?
Since Value is the combination of Performance plus Price, your Performance must reduce the customer's costs by more than the Price you charge the customer. The customer's costs in a manufacturing and some service businesses include Acquire, Use, Maintain and Dispose. Customer costs in all distribution businesses and in most service business include Obtain, Sell, Guarantee and Return.
How does Negative Volatility hurt our company?
It hurts our company in three primary ways. First, we lose some of our most profitable customer volume. This causes us to lose both margin and potential Economies of Scale. Second, our competitors gain a profitable customer and pick up both margin and potential Economies of Scale. Third, our cost of regaining that customer is very high because of the negative impression the customer has of us.
How is it possible for a company to gain share without outperforming the industry on penetration of new customer volume.
A company may gain share in a market, and often does so in a Hostile market, through better retention than the industry average. If the company retains more of its total sales volume than does the average competitor in the industry, the company will gain market share because of this superior retention, even if it is not beating the industry average on customer penetration.
Where are competitors in an industry most likely to fail in their customer relationships?
In all Hostile and most industries that are not growing very fast, competitors are most likely to fail first on aspects of Reliability and, secondly, on aspects of Convenience. There may be some failure on Function as well, but these tend to be much smaller than the failures in Reliability and Convenience.
Return to Self Test #13