Ability of Competition to Copy

Customer Buying Hierarchy

Capsule: Customers buy in a hierarchy of needs: Function, Reliability, Convenience and Price. They use this hierarchy to evaluate each competitor and to eliminate all but one potential supplier. This hierarchy informs our evaluation of an innovation's ease of copy.

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Symptoms and Implications:

Any change the Company makes that competitors copy is like kissing your sister. It has a very limited effect. Once the competitor copies the Company's innovation, the customer cannot make a decision in favor of one competitor over another on the basis of that innovation. Nor can the innovation reduce the customer's cost unless it is unique to the Company.

The Customer Buying Hierarchy helps the Company estimate the speed with which competitors might copy an innovation. The Customer Buying Hierarchy separates the performance of the Company into three categories: Function, Reliability and Convenience. It adds to these three components of performance, the aspect of Price to create a four-part Customer Buying Hierarchy: Function, Reliability, Convenience, and Price.

Customers use this Hierarchy to evaluate competitive products. In making a purchase, a customer moves through the Customer Buying Hierarchy in a definite order. The customer purchases after evaluating alternative products and suppliers on each of these four components of the Hierarchy, in turn.

Customers begin their evaluation with Function, which is any benefit of the product that changes how the customer uses the product.

Function Innovation Examples »

Next, they review Reliability, which refers to the consistency with which the Company and the product fulfill the promises made or implied to the customer.

Reliability Innovation Examples »

Next comes Convenience, which refers to those benefits enabling the customer to find and purchase the product quickly and to put it into use expeditiously.

Convenience Innovation Examples »

Price is the final component of the Hierarchy. Any change in the effective cash price paid by the customer to the supplier changes Price.

The customer continues through the Hierarchy until he finds a unique supplier, who offers something no other supplier can or will offer him. If the customer is unable to make a choice among his alternative suppliers on the basis of Function, he moves to Reliability. He then evaluates all aspects of Reliability, at least those aspects of importance to him, and either chooses a supplier or moves to an evaluation of Convenience benefits. He evaluates all remaining suppliers on the basis of Convenience and either purchases from one of those suppliers or moves to the level of Price.

Here, again, the customer attempts to choose one supplier from those remaining on the basis of a uniquely low Price. If the customer is not able to make a decision after the first trip through the Hierarchy, he begins again. On the second pass through the Hierarchy, the customer uses finer criteria to evaluate each component of the Customer Buying Hierarchy and his alternative potential suppliers.

This is a single elimination game. The customer uses the Hierarchy to eliminate potential suppliers at each level of the Hierarchy. The customer eliminates any prospective supplier who cannot offer a benefit that the customer values and that at least one other prospective supplier does offer. The customer continues this process until he has eliminated all except one supplier. This is the supplier who sells him the product.

The customer may buy at any level in the Hierarchy. However, the customer will not move down in the Hierarchy, for example, from Function to Reliability, until he has determined that all competitors still in the running to supply his needs are equivalent on the basis of Function. At this point, the customer views all remaining prospective suppliers as equivalent in Function. While there may, in fact, be differences among the prospective suppliers on Function, those differences are not important to that particular customer. Since no supplier appears unique on Function, the customer moves to the Reliability component of the Hierarchy.

This explanation of the workings of the Customer Buying Hierarchy implies that a prospective supplier must be unique for the customer, when compared to all other suppliers, on a component of the Hierarchy that the customer views as important. The lack of a particular benefit of value to the customer will eliminate a prospective supplier if others offer the benefit. At the same time, a benefit innovation must be attractive to the customer and remain unique for a period of time in order to help the Company gain new customer sales volume.

Customer Buying Hierarchy Questions

Analysis 44
Customer Buying Hierarchy Definitions

  • What current industry benefits would define Function, Reliability, Convenience and Price on the Customer Buying Hierarchy? (Analysis 44)

  • What aspects of Function, Reliability, Convenience or Price would separate one or several competitors from more than half of the rest of the competitors in the market place? That is, what benefits or price advantages do less than half the competitors have?

  • What percentage of the total current industry sales volume falls into each component of the Customer Buying Hierarchy?

Test Your Knowledge: Customer Buying Hierarchy »

Basic Strategy Guide Users Return To: Step 18

Summary Points Next: History of Duplication