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NET valueHOW TO PROFIT

AS THE DIgITAl CulTuRE

CHANgES YOuR

VAluE PROPOSITION

STEPHEN TuRNER &

STAN DEVAugHN

FOREWORD bY DAVID CARlICk

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Turner DeVaughn Network500 Third Street, Suite 245

San Francisco, CA 94107

Copyright © 2008 Stephen Turner and Stan DeVaughn

All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever.

Second edition May 2009

For information about special discounts for bulk purchases, please contact Turner DeVaughn Network at 415 344 0990

Book design by Turner DeVaughnProofreading by Edit911

Manufactured in the United States of America

Turner, Stephen and DeVaughn, StanNET value: How to profit as the digital culture

changes your value proposition.Includes biographical references and index1. Business Communication. 2. Marketing.

ISBN-13: 978-0-615226972

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Contents

Foreword i

Introduction vii

Part I What Makes a Value Proposition Relevant? 1 benefits / What Customers Value Most 16 Pricing / How to Know When Your Price is Right 24

Adoption Costs / Flattening the Learning Curve 38

Part II Why You Win with a Value Proposition 89

Your growth / The Result of Growing Customer Value 98

Your Competitive Edge / Giving Customers Better Reasons to Buy 119

Case Studies / Nanonex, ING Direct, RCM1, VCS Timeless, GE Healthcare, Sugar CRM 127

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Part III bringing Your Organization and Your Value Proposition into the Digital Culture 175

Chief Executive Officer / Value Creation Starts at the Top 177

Chief Operating Officer / Banishing Complexity 187 Chief Financial Officer / Is the Price Right? 193

Chief Marketing Officer / Knowing the Benefits Customers Value Most 200

Chief Information Officer / Turning Information into Customer Value 210

Vendors Focused on Customer Value / The Difference Between Information and Technology 216

Your key Performance Indicators / Assigning Meaningful Metrics to your Value Proposition 239

Appendix Connecting Customer Value to Shareholder Value 267

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David S. Carlick is a 30-year veteran of high technology marketing first as an advertising agency founder and owner in Silicon Valley and now as a venture capitalist backing online media and marketing companies. He did some of the earliest online work for Netscape, Chrysler, Cadillac, eTrade, Merrill Lynch, T. Rowe Price, Valvoline, and the Clinton White House. He was instrumental in starting one of the first online rep firms, which evolved into the company Double- Click. As a venture capitalist and investor, he has been involved with companies such as Ask Jeeves, the search engine, and served as chairman of the parent company of MySpace, the social network. He is now on the Board of Reach- Local, which helps thousands (soon tens of thousands) of small businesses market themselves online.

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ForewordDavid Carlick

TuRNER AND DEVAugHN kNOW THE TRuTH

Your online conversation with your customers and your prospects – your web-site, in other words – is the window into your marketing soul.

The computer changed business and the Internet changed computing for all of us elders. For the generation born after 1980, the computer and the Internet are taken for granted.

All of us who choose to use computers to do our bidding (pun intended) are being trained to have high digital expectations of the companies that want our business.

We are being trained by websites from Amazon to Zappos to be able to get information, compare prices, understand the value proposition, see what others (like us) value, and hear from others what is good, what is great, and what sucks. We have decided that the problem with instant gratification is that it takes too long.

The growing majority of the customers of any business have high digital expec-tations, whether they are consumers looking for a camera or engineers looking for a solution to a complex design problem or managers looking for a key hire or singles looking to get married.

The key word here (another pun intended) is “looking.” Internet searches have transformed the marketing world in a way that is magical for the customer and brutal for the marketer. You are now marketing in a digital marketplace that has the speed and transparency of a stock market, even if your business is as seemingly analog as selling palm trees to homeowners.

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Your digital persona lays bare your value proposition to the prospect if you do it right or buries it under a bushel if you do it wrong.

Turner and DeVaughn have taken up the three issues that this forces on us in a way that makes sense: your value proposition, how you organize around it, and how your online presence delivers it. Most importantly, they show how interactive” has taken marketing from a broadcast model, where you transmit your message to everyone, to a conversational model, where you are in constant dialog with individual customers and prospects.

No different, perhaps, than the grocer 50 years ago who knew customers by name, and yet completely different than that.

WHAT IS MARkETINg?

Marketing, in the purest sense, is becoming one with the customer and making things and delivering services that so delight customers they actually become your salespeople.

Most companies fall short of this. It is considered a nice ideal but an impractical way to think about business.

But those companies that achieve it enjoy extraordinary growth and profit, as surveys consistently document.

Most companies achieve a lesser level of marketing – it is one of the functions in the company, one of the boxes on the organization chart, and it fights for resources and attention with the others, like engineering, manufacturing, finance, HR.

I believe the customer’s digital expectations will force a reexamination of whether “pure” is a luxury or a necessity.

The customer is in charge and can size up the competition for her business with a few clicks.

I recently decided to buy window shades to block the morning sun that wants to cook the inside of our home. A search yielded a plethora of vendors, many with very sophisticated web sites. We narrowed the choice to two, and started

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playing with the measuring and ordering system. One had better prices; one had a richer site with better visualizations.

But the gloss of the latter, compelling as it was, was trumped by the functionality of the former. In particular, the former let me ‘edit’ a shade configuration and ‘save’ the configuration for a different window. We were getting six shades with slight variations in size needed. Maybe the glossier site had that function, but I couldn’t find it. So the functional site won over the glossier site. The lower prices didn’t hurt, either.

Traditional marketing says, “our job is done.” Turner and DeVaughn point out that the marketing in this case has just begun. The shades will arrive. We will unpack them. The real test of our relationship with this vendor will begin.

Of course, if we are delighted, every friend in the world will know it. If we are disappointed, it won’t necessarily be bad, although the vendor will still hear about it.

Back in the 50s, the car companies’ research indicated that a happy cus-tomer tells a few friends but an unhappy customer tells many. Today, the vast majority of people who walk into an auto showroom have done extensive research online.

In the online world, the voice is more balanced. People want to pass along good news. People like to be brand advocates, to be the discoverers of some-thing cool and associated with that. Online researchers who managed feedback functions for websites found that it was evenly mixed between complaints and praise, and that suggestions were about equally distributed between the two.

Online researchers have found that the most loyal customers are frequently those who have had a problem that the vendor fixed, compared to those who just had a smooth experience. Your online dialog will give you opportunities to learn from the happy and unhappy customers, and best, to turn many of the unhappy ones into your best advocates.

To me, the definition of purest marketing is when the customer joins the

sales team.

foreword by david carlick

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MARkET RESEARCH

For a while, MySpace was the fastest growing website ever. The company was founded by some very talented online direct-marketing people who believed that Friendster could be vastly improved.

Friendster, which has grown quite nicely, mostly outside the U.S., was at the time a classic marketing structure: top-down, strategic decision-making about what the customer should want. They decided that the site should be clean and well designed.

MySpace founders gauged that there was a larger, more freewheeling audience much more interested in self-expression and association around cool things like music. They piled on the features that delighted users, and users responded by inviting more of their friends. The site blew past Friendster and is, as of this writing, the largest social network. The pages are chaotic to my graphic eye but to the MySpace user they are personal achievements and social connectors.

I believe MySpace growth was driven greatly by the online digital marketing experience of the founders. They had ideas, but they tested many of them. They listened to their users and gave them what they wanted. Users felt an affinity

with MySpace. It was,“their” space.

Will the window shade company where I left a half-filled shopping cart learn from my visit? Perhaps.

NET value describes well the opportunities you have to use new digital tools to have a conversation with your increasingly digital prospects and customers.

You can be smarter than your competitors at knowing what makes your customer tick if you tap into the online dialog that is available 24/7.

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bOTTOM lINE

This book takes on a very large subject. How do you organize around your customer in a digital world?

The automatic teller took years to catch on. In the first ten, maybe 60% of bank customers had used them. By the end of 20 years, about 90%. There are some customers who will never use one, and a larger group of younger customers who never go into a bank. We are now roughly ten years into the full bloom of the Internet and mobile Internet being introduced to the consuming and business public. In my opinion, we are just getting started.

All the companies and users in the world are raising the bar every single day for how useful the interactive relationship can be, which in turn raises the bar for your marketing efforts. I don’t think you can clear that bar with marketing merely as a “feature” of your business.

NET value makes the clear case that marketing – the voice, needs, and desires of the customer – has to be in your company’s DNA. Best, they show the thinking that can help you achieve this.

Enjoy.

foreword by david carlick

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The key to success is to promise the consumer a benefit – like better flavor, whiter wash, more miles per gallon, a better complexion.

— David Ogilvy

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Introduction

It’s been nearly a half-century since David Ogilvy wrote those words of wisdom in Confessions of an Advertising Man (1963). It was a best-seller and helped transform him from successful agency owner (Ogilvy & Mather) into a larger-than- life character in marketing. His no-nonsense observations about successful selling – how and why products of all kinds are bought and sold – are every bit as instructional today as they were then, if not more. Small wonder why his book is considered a classic in its genre and has sold millions of copies.

It’s an understatement to say that it was a simpler world when David Ogilvy was selling better flavors, whiter washes, and better complexions. Sales people were ready to take the customer’s order at the Rolls Royce dealership or at the Hathaway shirt retailer – both companies were clients of Ogilvy & Mather. Those same sales people were also ready to gain a greater understanding of their customer and offer value that addressed his or her needs. One consequence of a simpler, rounder world was that there was less competition and more time to spend with buyers. In other words, it was more about establishing relationships to help people feel comfortable making their purchases.

Fast forward to the global marketplace of Thomas Friedman’s “flat” world and one of its many consequences – the proliferation of small and medium-sized marketers, practically all of whom do business online. Today, since a live sales person doesn’t factor in to most web-based transactions, nobody is making people feel more comfortable about their purchase. The entire model has shifted from the ground up. And many products aren’t so simple either. With so many products designed to solve more and more complex problems, it’s not always obvious what they do – or what they can do for you as a consumer. Even when sales people do get involved, they themselves may struggle to get past the complexity and adequately explain the benefits of the product.

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But despite the overwhelming proliferation of products and media today – something inconceivable in the 1960s – there is one thing that’s stayed the same: the importance of promising a benefit when selling any kind of product. The most successful marketers, historically – Procter & Gamble and General Electric come readily to mind – have always understood and profited by this principle. It’s built into their DNA. It’s fundamental not just to their marketing function, but to the full spectrum of their business operations. The “customer brand experience” is only a fraction of what is most important to customers and superior marketers understand this. Creating value requires the unrelenting attention of the entire management team. It also requires product innovation to provide something of real value.

Value is created by a company but requires the investment of a buyer’s time and money – a simple equation where the price they are willing to pay is determined by what they get. Advertisers fighting it out for a smaller percentage of markets today are too often misinformed about – or oblivious to – the all-important notion of promising a benefit. But in today’s digital culture, a hypercompetitive world of fragmented markets where the mass-marketing model no longer applies, a marketer’s need for a highly relevant customer value proposition has become the only thing, especially where marketing online is concerned. Everything else isn’t just peripheral, it’s irrelevant.

Every business on the planet is potentially subject to the scrutiny of happy customers, angry bloggers, disgruntled ex-employees and competitors in disguise. Buyers are paying attention not just to what everyone else says, but how you react – if at all. With so much online attention, every manager must be able to distinguish the signal from the noise. In other words, despite all the feedback, only a fraction of it tells you if your value proposition is relevant, compelling and what matters most to customers. Part One of this book gives you a primer on the building blocks of value, starting with the way customers place value upon benefits.

Never forget, though, that external factors such as technological shifts, energy costs, interest rates, availability of capital, geopolitical risks and election cycles can almost overnight change what matters to buyers overnight. The proliferation

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of social networks in today’s digital culture enables almost instant spotting and analyzing of trends. But gaining and applying the insight required to create new value requires rigorous discipline.

With social media seemingly everywhere now, nearly anyone can spot trends and get analysis from every possible angle. Insights are on-demand, but the fore-thought to create the right kind of value requires discipline. No question that being nimble and fleet-footed, as youngish enterprises and entrepreneurs typically are, puts you in a position to out-innovate the bigger guys.

No question that being nimble and fleet-footed, as youngish enterprises and entrepreneurs typically are, can enable them to out-innovate their larger and more staid competitors. At Turner DeVaughn, we’re often approached by entrepreneurs with big dreams. They may have heard about our work for Apple, Adobe/Macromedia, Cost Plus World Market, Robert Mondavi, Network Appliance, Yahoo and others. They want our success with great clients to rub-off on them. These entrepreneurs often think that their big idea by itself is enough to catapult them to success. Thomas Edison spoke about his genius being 99 percent perspiration and one percent inspiration. The “big idea” is that one percent.

In these pages we’ve tried to describe the other 99 percent, showing how innovation and marketing are actually two sides of the same coin. Innovation and marketing create value by which entrepreneurs can grow their start-up businesses into larger enterprises. A big idea doesn’t mean much if it doesn’t address a real need.

The most successful companies are the ones with the deepest and most thorough understanding of what their customers place the most value upon. They are the companies with the best customer instincts and market insights. They will more often be able to pinpoint, promise and deliver the right benefit. Smaller outfits should take heed here. This is what gives the big guys a leg up on formulating new business models and delivering the right innovations more consistently – innovations that customers will find not only irresistible but pay the most to enjoy. Those “innovations” broughtto market by the other guys, if they’re not based on genuine benefits and a relevant value proposition, will wither and die no matter how gaudy the promotional fanfare – or how low the price. It’s

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a question of substance over style; how something looks is important but how it works is even more so. The best products do both.

In our years of experience as marketing communicators, designers, market developers and management consultants we’ve come to recognize some important truths. Foremost among them: whether you’re a fledgling startup or a more mature outfit enjoying some success, insufficient attention to customer value – the benefits those customers want most – spells trouble. If, for whatever reason, you fail to stay on top of those ever-changing benefits, you will fail in the market- place. It’s that simple. Indeed, the more competitive the marketplace, the more fundamental it is to know what your customers want most and when they want it. Another observation – all of this is subject to change without prior notice.

Another marketing truth: value propositions that are most relevant and most clearly communicated are predictors of success. They answer one of the most frequently asked questions in business: what’s the return on investment (ROI)? In other words: can I expect to get out of this product or service more than I pay for it (because I have to!)? The most successful marketers have quantified answers to this question and build business operations around them. The best of the best create their corporate cultures based upon these ideas, always communicating the real value behind their products or services.

In the chapters that follow, we demystify the concepts of the value proposition and customer value, wrest it out of business school parlance and show you how to apply it to your own business. We want you to have both the context and the tools to take the value proposition buyers demand, and mold your organization around it. It is not about the perfect pitch, but the perfect response.

We use simple case studies and real world examples, many with which we have had years of personal experience. We’ll use examples of companies that got it right, some that got it wrong, and a few that never got it at all. Each has something to teach us. We’ll show you ways to avoid stumbling, and how to right yourself when you do. We’ve been there and taken our share of stumbles.

With the value proposition most relevant and compelling to your market, you’ll enjoy a significant competitive advantage. Without it, you’re just an-other competitor fighting for crumbs of market-share.

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We live, work, buy and sell in a digital culture as well as a global economy. The Internet is both an agent of change and a means to discover, connect and trans-act in this culture. The relationship between this ever-changing environment and the creation of value for your customers is what this book is about: how you can use the web to communicate and create new and greater value to your customers based on what they want and how much they will pay to get.

Jeff Zucker, CEO of NBC Universal, sees a difference between those “born digital” and older generations who acclimate to technology with less ease. Digital content consumed, generated and shared is different among “millennials” who came of age with the Internet because the line between their real lives and virtual lives is blurred. Still, all of us are part of a new and emerging digital culture with a very old fundamental truth at its core: we want to know the benefits of a product and justification for the price. Social media is only the first step.

One of the great things about the Web is that, given the right tools, it enables us as buyers to make decisions at our own pace about exactly what we want. This goes beyond the qualitative comments on Twitter, Angie’s List or Yelp. It can – and should – be quantitative because value is quantitative.

Value is an exchange of some quantity of money in return for a product or service. This is where scalable “ROI calculators” are useful – but only if they include the elements of the value proposition. The problem is that most of them are based on generic assumptions. They do not factor-in the experience of real customers who use the actual product or service. This matters when a product is complex and varies from one environment to another. If, for example, if someone using a personal computer (PC) takes five hours to install software and learn how to use it while a person using a Mac takes two hours, then the difference in adop-tion costs are significant. Charging the same price to both people may seem fair to the seller, but not the buyers.

Scalable ROI calculators are useful if they include the elements of the value proposition. However, most are based on generic assumptions and do not factor-in the experience of real customers who use the actual product or service. This matters when a product is complex and can vary from one environment to another. For example, if a person using a personal computer (PC) takes five

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hours to install software and learn how to use it, and a person using a Mac only takes two hours, then the adoption costs vary significantly. Charging the same price to both people may seem fair to the seller, but not buyers. Customer insights can enable a developer to reduce the installation time and learning curve for the PC version. Otherwise, the pricing may need to be different, based on the value proposition customers demand.

Generic calculators that offer real usefulness address the realities customers face. Those realities change almost daily. Web- based analytical tools must, too, as new customer input changes the equation.

With so many skeptical shoppers out there today, jaded by empty promises and shoddy products more so than during David Ogilvy’s era, most digital media actually complicate decisions and overwhelm consumers with extraneous or non-relevant messages. Customers must search, search again and look hard for the information that matters most to them. The typical marketing “message” was created for marketing management, not to be relevant to marketing’s target.

There is good news, however, and it is central the message of this book. The same technology now so often misused to overload us online can be transformed to make those skeptical customers a bit less skeptical of you. In fact, we’ll go so far as to say that you can enlist a great number of those very same skeptics to make significant contributions to your own value proposition.

Those customers and prospects are out there right now waiting for someone to make their life easier. They buy things and influence the decisions of their friends and associates. Buyers like to shop, compare, talk and look smart. It’s time for you to let them sign in – and start telling you what they want and how they want it. “They” are your marketplace. It’s time for them to tell you more than you ever knew about your own value proposition. We’ll show you how.

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Before you read on, we invite you to do a quick online assessment of the financial impact of your own value proposition. Go to http://www.netvaluegap.com/ to see if you are as profitable as you should be.

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Part i

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Price is what you pay and value is what you get.

— Warren Buffet

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Tony Russo watched helplessly as his company’s value proposition melted away. Russo, the VP of marketing at Network Equipment Technologies (N.E.T.), one of the most successful networking startups of the 1980s, would tell anyone who would listen that N.E.T. was trapped in an outmoded view of its marketplace.

One afternoon while Russo fretted about N.E.T.’s future to his marketing and communications director, Stan DeVaughn, a N.E.T. sales executive was engaged in a conversation with two other passengers on her flight from Los Angeles to N.E.T. headquarters near San Francisco. She learned that they worked for a startup company involved in a new computer-networking technology that was the subject of growing buzz among her own customers. One of the passengers, the startup’s founder, said he was looking for more investors and wanted to ex-plore the possibilities of working with N.E.T. The sales exec was sure that Russo, back at headquarters, would be interested in hearing about her in-flight chat.

For months, Russo had been lobbying for N.E.T. to place more emphasis on new kinds of products for interconnecting their customers’ more remote sites and equipment. He knew these were the benefits on which customers were placing higher value and relevance. He quickly entered into informal discussions with the intriguing start-up. To his dismay, the reaction by his peers at N.E.T. was far less than enthusiastic. Russo’s colleagues, committed to their existing technology, insisted that N.E.T. products would always offer a superior value proposition without reliance on acquired technology. They saw no urgency in going to market with the kind of products the startup was developing.

Ironically, the startup was developing the very kind of products that a growing number of N.E.T.’s customers were clamoring for. As N.E.T. dragged its feet, the startup was attracting the attention – and the venture capital – of Don Valen-tine, one of Silicon Valley’s pre-eminent investors.

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What Makes a Value Proposition Relevant?

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At that moment, the landscape of the network industry was forever altered and N.E.T.’s days of prominence were numbered. The new network product, the one in which Russo and Valentine saw a superior value proposition, customer benefits and a stellar future, was called a “router.” The name of the startup Russo was trying to get N.E.T. to bet on? Cisco Systems.

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To see your own products through any lens other than the eyes of the people who use them kills innovation and erodes value. The insights crucial to innovation become blurred or obstructed altogether when your point of view is anything other than what a customers sees.

Cisco, NetApp and Google, a few years later, emerged in the blind spots of market-leader managers, such as the ones at N.E.T., who were concerned with threats” having more to do with the way they perceived their competition than how they were perceived by their customers. Most companies – even leaders – tend to worry about competitors who offer more product features or a lower price. Or both. These managers overrate their offerings by assuming that customers share their own inflated regard for them. It’s what they’re not worried about, however, that can do them the most harm.

Among these competitors, price is a common battleground especially when prospective customers are playing one brand off of another as they do when they perceive brands as commodities. Buyers compare apples to apples very efficiently today.

Small wonder, then, that the venerable “value proposition,” the concept we explain and explore in this book, has become a new frontier. More buyers ask for one. Few marketing and sales managers have a compelling response. As a matter of routine in our daily interactions, we ask sales people and solicitors of all kinds to describe their product’s or their company’s value proposition. Typical answers fall into two categories.

1 / Awkward silence: What’s a value proposition?

2 / Awkward reflex: We offer more-for-less.

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Among those claiming to offer more, when pressed to elaborate, it frequently comes down to more product features for less money. They struggle to translate those features into benefits for buyers, however. Unable to break out of the vicious cycle of more-for-less, sales people are frequently asked to compare their apples to a competitor’s. If a seller accepts the comparison, he who offers more apples at a lower price, wins. Not exactly a formula for financial growth.

Most products and services aren’t as simple as apples. Sellers are loath to reveal that their product has any hidden costs and buyers rarely know if or how unseen complexity will impact them. Simple rule-of-thumb: having to spend more than a few minutes to become proficient using a product, or needing another component for the original product to become operative, means that there are hidden costs. These are what we call “adoption costs.”

Procurement managers are judged in large part by how much money they save their employers. Few of them notice that these cheaper purchases are often more expensive to implement or made their company more complicated. Stephen Turner learned the economic impact of e-procurement when one of his clients, Ariba, went public. Ariba’s mission was to increase the importance of the purchasing department by demonstrating cost savings achieved using Ariba software. In many ways, the mission has been accomplished on a vast scale – but we have observed collateral damage.

Procurement (purchasing) departments often fail to consider how purchases would add or detract from the things customers value. Should chief operating officers not demand that their procurement processes be measured by the impact of the complexity and adoption costs of the products and services they procure? We suggest that they can and should.

Purchasing is not alone in this failing. Each function in a company naturally fixates on its own importance and fails to connect its contribution to the overall value proposition of the company as a whole. Indeed, all of us often fail to see how our entire company’s value proposition contributes to our customers’ value propositions. This value chain is not a new idea, of course, but until now these concepts have been too abstract for many people in R&D, engineering, operations, finance, marketing and sales to put into action.

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We offer a more practical way. We suggest to our clients that they use the three most basic elements of the value proposition, as they buy or sell:

1 / Quantify the benefits that are the result of the features offered.

2 / Ascertain the adoption costs that will be incurred based on the realities of the user.

3 / Push for specifics on pricing over the course of the relationship.

Since there is often a disconnect between buyers and sellers, sales people are rarely equipped with this highly relevant data. This is why it’s so important to measure what matters. It takes interdisciplinary teamwork to know these things and see that they are delivered throughout the organization:

• The marketing team must have intimate, up-to-the-minute knowledge of, and about, the benefits that matter to customers – the benefits on which they place the highest value.

• Everyone involved in operations should demand low (or no) adoption costs.

• The finance organization needs to back the sales force with a pricing strategy and structure that works for customers.

The entire company needs to align itself – its total operations – with value for customers. The best performing companies offer real solutions to their custom-ers based on customer needs. This doesn’t always mean more-for-less. The right model might offer less-for-more. Customers reward brands that have one clear benefit and a simple product experience. Ease-of-use commands a premium.

If you define marketing as the things you do understand what buyers value most from your brand and then turning those people into your biggest cheerleaders – which is as good a definition as we know – you understand that people buy

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benefits, not features. They also buy simplicity and reject complexity. Thus, your organization should be structured to make things easier and simpler for customers, not more difficult and complicated.

Seeing your brand the way your customers see it enables development of the simplest and most elegant product features. Knowing what it is that customers value the most also means that cost structures can be based on what customers will pay. A relevant value proposition is the way you show your market that your internal operations are aligned with the wants and needs of each customer.

This book intends to show how you can sustain and maintain this outside-in point of view aided by technologies of the digital age, in an increasingly open culture of transparent communications. If current trends continue, and there’s nothing to suggest that they won’t, procurement departments will use the web more and more to get only what they need.

Consumers are also comparison-shopping with sites like Shopping.com and Yahoo Shopping. The marketplace is especially demanding during economic downturns. Customers will turn away from anything that doesn’t offer a real, tangible benefit that justifies the price. This usually this means helping a customer achieve a goal or reduce a risk.

In today’s digital culture, buyers desire reassurances that they are getting better value and that they are more likely to get a good deal. It empowers them to communicate with each other and exert leverage in transactions. The open information age also drives out redundancies and waste and gives buyers a more complete picture of the impact of their decision. Today’s transparency, then, is no friend to sellers with anything to hide.

Sellers often react, with negative consequences, rather than rethink. The more-for- less approach, for example, is exactly the wrong one in many cases unless the objective is to go out of business. The less-for-more strategy may be counter- intuitive, but it’s the shortest route to higher profits: a process we call net value.

A market-driven value proposition is becoming a brand’s most important asset in large part because it streamlines operations. It connects what the company is doing on the inside (innovation) with the best interests of customers.

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THE COST OF NOT HAVINg A VAluE PROPOSITION

Stephen M. Prichard has the perspective of a venture capitalist (Internet Capital Group), with experience in financial services (Janney Montgomery Scott, LLC) and consumer electronics (Bose). He also looks back on his tenure as VP of human resources and administration at DNA Plant Technology and realizes that the CEO and board did not focus on value creation, despite their belief that the customer was at the center of its innovations.

Our business strategy was based upon the use of genetic engineering tech- nology to make consumer-driven improvements in plant products, such as taste, vine-ripening, shelf-life and healthy attributes,” he said. “It was not focused on grower-driven attributes, such as yield, disease resistance, draught tolerances, and so on. We failed to appreciate the difficulty in growing and distributing this unique variety of tomato at a price point that made the entire business viable.”

While the firm’s board was composed of premier CEOs and retired CEOs of Fortune 100 companies and two Nobel Prize winners, the lack of directors who could advise them on a value proposition became a burden. “We spent valuable capital doing things ourselves that should have been partnered or outsourced.

Additionally, the stature of the board members made it too easy to continue to raise money for many years as we continued to fail to meet stated goals, time-lines and commitments. Month after month of losses mounted as we rational-ized that we could fix the production issues over time – which never happened.” It was critical that the CEO align the operations of DNA Plant Technology with the market, which a value proposition could have enabled. Marketing, finance and operations should have been mandated to collaborate on customer value. For example, research by marketing indicated that the company could price their tomatoes at 150% to 200% of the price of conventional ones. However, that was not enough to cover actual costs. Said Prichard: “The field yields of this tomato line with great taste and shelf life was so low that we would have needed to sell it at 400% to 500% of conventional tomatoes to make a profit. The learning is that we focused so much on the development of the proprietary product that we took our eyes off the entire business model, which included

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production (farming characteristics). To have a viable business, we needed to focus simultaneously on the consumer characteristics and the farming char-acteristics. We had a great product that could not be produced at a profitable price point.” This is what happens when you don’t really know what benefits people are willing to pay for – and how much they’ll pay.

It’s what happens when CEOs fail to mandate a market-based approach. In the case of DNA Plant Technology, the CEO could have spotted the pricing/cost disconnect much sooner. The business was in operation for 20 years and ceased operations in 2004. No value proposition, no ROI.

The shame is that it did not have to end that way. A value proposition could have enabled one of two possible outcomes:

1 / By understanding what the market would pay and aligning operations with that amount, the company would have been able to identify areas to cut costs and balance consumer characteristics and farming characteristics.

2/ If it was impossible to get the costs down to the level that the market would pay, the CEO could have presented the board with the harsh realities and recommended that the company shut down well before they raised mil- lions of dollars of capital and risked the reputations of everyone involved.

This is the real essence of value innovation; innovating around the business model and containing costs is what creates value.

When companies embark on “innovation” without proper attention to their markets, they incur needless operational expenses and generate product features that customers will likely reject.

This is as true for tomatoes as with every other product with which we have been associated. DNA Plant Technology was in the process of breaking new ground and had no peers to reference for a pricing structure and business model. This isn’t unusual for early-stage enterprises. Many start-ups go where no one has gone before. They lack a coherent process to organize internal operations around their market. A relevant value proposition applies market intelligence to improve the chances of getting it right the first time.

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Through decades of working with companies of all sizes and types, our experience has shown us some patterns. Most companies are not at either end of the spectrum of value creation. They are often struggling somewhere in the middle. We have observed that companies are in one of six basic situations. See if anyone could say these things about your company: 1 / They say they don’t need a value proposition, because their product is so essential that people will pay any price for it. This argument is based on the premise that a value proposition is a sales pitch, as opposed to an entire way of running a company to maximize value creation.

2 / They had a killer value proposition once, but times have changed and they haven’t been able adapt to the evolving demands of the market. 3 / They can’t justify their price in terms that matter to customers. Without a value proposition, they are likely to fail because they don’t understand what customers value.

4 / They have a value proposition, but don’t want to reveal it, for fear that competitors will copy it. Senior management keep it away from customers and employees, because they might share it with competitors as well.

5 / They believe they have a value proposition, but its focus is solely on the bene- fits they think buyers’ value. They don’t factor in pricing or adoption costs.

6 / They have a value proposition and it serves them well because it organizes their internal operations, pricing and external outreach. If this statement applies, congratulations! You win in the marketplace.

THE ISSuES FACED bY CEOS

Confronting the concept of customer value can be daunting. There are thorny issues that the absence of a relevant value proposition can, over time, raise. Especially for company founders and early investors.

Venture capitalists who ask us to talk with the start-ups they’re backing will say that the CEO/entrepreneur has a great idea, but needs to be educated on value creation. Once “educated” it can become clear to the CEO that the organization may need some retrofitting to get closer to its market (or find another).

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Practical objections do arise:

Disruption. If the enterprise is nothing more than a house of cards, an incon-venient restructuring is required. If everyone accepts the mission and agrees to a timeline, we find that change can occur without trauma or terminations.

Retention of Staff. When people are hired to do one thing and they feel that they are being asked to change, there is fear that staff may leave. We find that the best contributors embrace the disciplines of value creation.

Technology Infrastructure. It can be expensive to scrap systems that have become familiar. By managing real estate, personnel, training programs devoted to legacy system, people own the status quo, not the evolving needs of customers.

Financial Impact. Skeptics may fear that the focus on “customer value” advocated in this book may be more expensive than it’s worth. Do the free gap analysis on-line at http://www.netvaluegap.com/. See whether there are reasons to evolve.

Everyday Distractions. The daily grind can be so overwhelming that it leaves little time for dealing with the bigger issues. The most effective managers get over this and mandate change that gets results.

Competitive risk. “What if the competition learns what we are doing? Won’t they copy it?” If it makes lots of money for your company of course they will try but you will have a substantial head-start.

Case in point: For years we have been supplied by a number of paper compa-nies, including South African Pulp & Paper Industries (SAPPI). Stephen Turner asked about one supplier’s value proposition and was told that they “don’t make it public because competitors might use the information.” Huh?

CEO-mandated value creation means that staff can stop wasting time on needless features and excessive operational complexity. It also gives people permission to think less about competitors and more about customers.

The bottom line: You create greater value by transitioning your business model in such ways that enable you to deliver simpler and more irresistible products for which your customers will be willing to pay more. Or, as we advise clients, by reserving your right to be smarter tomorrow than you were today.

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Customers provide all kinds of feedback to companies at the moment that they feel compelled. These visceral comments can enable a company to understand what makes their customers tick and what matters most to them. To start, you have to get past the emotion and identify what they really need and want.

Creating your brand is about establishing your promise to help buyers achieve their goals or avoid a risk. It’s not about the logo. No knock on logos. What it means is that the logo is a reminder of the promise that has value in the minds of buyers. The best way to remind them is to have their peers tell them how great your product is and make it easy to find – online or on the nearest street corner. Advertising and promotional activities are effective for reminding people about the brand and making it more pervasive, but they’re nowhere near as powerful as word-of-mouth.

This is true with consumers and business customers. In the digital culture, where online communities proliferate and prevail, this is crucial.

It’s really about what your product is going to do for those people who you want to raise their hands and shout, “OK, I gotta have it!” So, what’s in it for them? What is it about these customers, and your product, that will combine to inspire the raised hands? How much difference does your new thing represent compared to what the customer’s old thing is already doing for him?

Think of your brand as what your new thing is promising to the people at whom it’s aimed. Then think of it as the collection of promises you’ll need to make and keep – consistently. In turn, larger competitors will get into the market once they see the traction you’re getting based on those promises. Count on it, they’ll come after you. So “branding” doesn’t just suggest that you see through the eyes of your target, it demands that you see through the target’s eyes, stand

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in his loafers, and know precisely how he describes and feels the problem you profess to solve for him. Now that you’re in the customer’s world, the “buying” environment, what are the messages the customer needs to receive in order to inspire a trial? What motivates this guy? What is it about your new thing that is “motivational” for him?

The go-to-market portion of your marketing plan is but one chapter of the commercial” portion of your overall business plan. It should distill – and serve as the blueprint for – what you need to do to get customers to buy your new thing now and from now on. Remember that your competitive environment won’t be lonely very long if you’re successful.

ONCE AgAIN: CuSTOMERS WANT AND PAY FOR bENEFITS

The simplest way we know how to “teach” marketing and the importance of benefits is to remind our marketer clients how they themselves behave as shoppers, consumers, customers, and even voters.

What inspires you to respond to a call to action by a manufacturer?

What turns you off?

What goes through your mind when you’re walking through a shopping mall glancing at the window displays and deciding whether to enter the store?

When you’re shopping online, when and how do you become confused and click onto another site? What is it about a site that keeps you coming back?

What makes you feel loyal to a brand?

When and how do you ask yourself “what’s in this for me, and why should I switch brands?”

When you ask “what’s in this for me?” to a marketing pitch, what do the most compelling answers have in common?

How do you interact with salespeople? What do you react favorably to as opposed to unfavorably?

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lEARNINg bY ExAMPlE

Much has been written and said about the accomplishments of fitness club Curves, which enables women to work on physical fitness sans men in the gym. Curves found a need and filled it. More than four million women have made this brand a fitness-market icon. With 10,000 locations in more than 40 countries, it’s not only the world’s largest fitness franchise, it’s the tenth-largest franchise in the world of any kind. The bedrock of its success, according to the company: positive word-of-mouth. Members are eager to spread the word about the woman-minded workout equipment, the fast process, and the sense of community for women on busy schedules.

While it’s a service, you can think of Curves as a product that’s tailor-made for its target customer: the equipment is hydraulic so there are no weight-stacks to lug around or change – something most women are not inclined to do. Another benefit: the pushing /pulling action of the equipment, rather than lifting and lowering, reduces the potential for soreness or injury. As for customers on a tight schedule, the Curves workout routine – a full regimen of warm-ups, aerobics, strength training, cooling down and stretching – amounts to a manageable half-hour. The word of mouth has been positive and abundant. According to a recent review on ePinions:

Everything is contained in the one room, including the office. The room is bright and cheery with murals on the walls and posters to read. Music plays constantly with “Gloria” (the voice on the tape) prompting those who were working out to move to the next station” every 30 seconds. Women workout around a circle, which allows everyone to see and support each other.

A staff member stands in the center of the circle to ensure everyone is working out properly. The staff is very concerned about making sure to keep your work-out aerobic, rather than anaerobic.“Gloria” prompts you to check your heart rate regularly to make sure it is in the target zone. The staff explained that this enables your body to burn fat rather than muscle.

Note the female “community” aspect of the product benefit: “The women work out around a circle, which allows everyone to see other and support each other.”

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Any market consists of people who reference one another. The market for Curves happens to be women – who listen closely to other women. The brand focuses on what this market wants. It conceives, develops and markets everything around the benefits those women want: a good, productive, convenient workout away from the gaze of males. They want the camaraderie, companionship and support of other women (and staff) and a reduced risk of injury. The benefits are simple and easy to understand. That makes it easy for women to recommend Curves to one another. The brand is about them.

Compare the benefits-obsessed approach of Curves to the feature-mindedness of security-equipment maker Zylaya. Parents of college-aged children have always been anxious about their youngsters’ security away from home and Zylaya has engineered a system that integrates a number of elements with the hope of mak-ing students, faculty and campus employees safer, and property more secure.

The company sells a multitude of features, such as personal display devices, asset trackers, visitor tracking badges, wireless sensors, and the “ZENS Man-agement Suite for use on college campuses and in dormatories. But Zylaya’s focus on their systems’ features ignores the real anxieties and concerns that led to the advent of such systems in the first place. Will nervous parents sleep better at night knowing that their kids are tucked away in Zylaya’s ZENS

management suite?

Parents and students are already talking about these issues because they matter. In part, anxiety is high because the news covers abductions, shootings, assaults and murder of you people nearly every day. People are talking about things that Zylaya may have not even considered: How do on-campus parties impair judgement? What’s the best way to deter crime in the first place? What about background checks or psychological profiles of other students? Technology may be part of the solution, but may not address the core concerns.

Zylaya, rightly proud of its systems’ features, still ignores the central benefit of safety: peace of mind. Parents and college campus security officials will buy peace of mind, not asset trackers and sensors – even if they are wireless.

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We noted Zylaya’s pride in engineering and design, which is typical of entrepreneurs who deliver complicated, multi-component systems. This is the reason why, on many web sites of tech products, features trump benefits in prominence and screen space. Our own benchmark research reveals that only 44% of such sites even list benefits, let alone give them priority over features.

Tech products of all kinds are difficult to design and build by definition. The accomplishment of integration and functionality, however – as wondrous and even miraculous as it sometimes is – cannot be allowed to overshadow the issues topmost in the minds of customers and buyers. The product will not succeed if buyers don’t identify it with a valuable benefit – a market-based value proposition. They want to know what the whole system will do for them. Parents of college students want to know what the security system is doing, not how it does it.

By knowing what your market values, your company has the basis for a solution, not just a collection of complex features. By knowing what they value, you also have some kind of an idea what financial value that both or you can place upon the benefit that has the most impact on their lives or businesses.

WHAT WIll THE MARkET PAY? ASk IT

What you charge for your product or service should not be based on your cost to develop features, especially those features you’re not absolutely certain your customers want. Our experience: companies making guesses, no matter how educated, about which benefits are the most desirable are the most inclined to develop features that are the least desirable. The added cost to the product cannot be passed along in the price charged to the buyers. There will never be enough of them.

Sooner or later, the market will show its hand and reveal what it’s willing to pay. For a proactive brand, this revelation will occur sooner. “Proactive” means you’re continually reaching out to your market to learn the relationship

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between benefits and costs. Outreach of this kind enables your business mod-el to calculate the minimal costs required to deliver what customers indicate they value most – and least. For reactive brands, however, the news will arrive later. Maybe when it’s too late. “Reactive” describes what happens when you wait until after you have made your development investment, then cross your fingers, hold your breath and get the product out there, all the while hoping that the dogs will eat the dog food. No matter how pure and high-quality the ingredients, now matter how cutting-edge the manufacturing and brilliant the packaging and promotion, or how strong the distribution, the dog food is suc-cessful only to the extent that dogs like it.

If you’re not aware of your market, if you’re not a proactive brand, learning about what buyers want after the fact can be an expensive education full of hard lessons, as many entrepreneurs can attest. We’ve seen it time and again.

So how much are your customers willing to pay for all those valuable benefits?

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Preconceptions about pricing are dangerous for managers. A common assumption is that there is no room to add value because the competition is too intense. Another is that their revenue and business model cannot change. A third bias is their pricing must be based on the costs of production, rather than the perceived value delivered to a market. Finally, managers fear that an advanced degree in economics is needed to grasp the complexities of pricing and do anything positive about it.

One of the first things taught in economics class, to the students who stay awake and alert, is that price elasticity is a function of supply and demand. Theory is fine, but we have found that managers need practical examples to make sense of it. One of the most important things that a company can do to impact demand is to create a whole system that creates an end-to-end solution for customers.

Think of the oil business. Maybe not a particularly pleasant thought but relevant here. “Big Oil” and oil-rich oligarchies participated in creating a demand that’s pretty hard to reverse. It’s one critical link in a chain that binds almost everyone together in industrialized nations. Many office buildings have parking facilities for their customers and employees. Most homes have garages. Vast highway systems enable people to move back and forth easily. Cars come in all forms, to suit anyone’s needs. The entire culture and economy has embraced the mobile lifestyle. It’s part of a way of life.

Obviously, gasoline is not sold because of its smell (a feature). People know the benefit of gasoline, even if they bemoan the detriments. Most of us need a certain amount of gas in the tank and when we do, we’ll pay just about what-ever it costs. Especially when we’re running on empty.

Pricing How to Know When your Price is Right

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This complete system has made automobiles the transportation mode of choice for consumers and petroleum a necessity. This can be done on a much smaller scale with all kinds of products and services – challenging the assumption that supply and demand is beyond the reach of a company and its managers. It always comes back to knowing the benefits that matter most to customers.

As you can start to see, real marketing is far more than clever promotions or simply knowing the customer, one of the most hollow mantras in Silicon Valley. Real market development, rather, is about knowing what is most important – read: most valuable – to the customer and then being able to structure your operations and costs to enable profitable delivery of whatever that value happens to be. It may also entail partnerships or coopetition (cooperation with the competition) to form a whole system if that is what buyers need.

Marketing and finance teams must work together to deliver what buyers need at the price they are willing to pay. The more demand that is generated and value assigned to a product or service by buyers the higher the price. Yet, the finance team must do more than simply cut internal costs or keep up with the competition when demand falls short of expectations.

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Value creation requires fresh thinking – and breaking down preconceptions. These ideas are often formed through experience. At least some of the employees in most companies have worked for competitors and admire how they do business. Within a competitive set, incremental improvements are the name of the game and an increase in price typically happens when another competitor successfully makes the move. It doesn’t have to be this way.

It’s also rare for companies to reinvent their revenue and business model, in large part because it requires a deep understanding of one’s market and the problems faced by customers. It’s easier to look inward at one’s cost structure – one that probably looks a lot like one’s peers. Cost-plus pricing is a very common mistake that a new business model can undo. Such innovation happens when companies understand the positive financial impact of market-driven pricing.

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Just as some companies “get it” when it comes to creating customer value with a whole product, others have an instinctive feel for what to charge for their product in putting forth the most powerful value proposition.

Commission Junction, for example, understands that most businesses will pay for results. It addresses one of the weak – if not the weakest – link in Internet marketing: the obsession with clicks, at the expense of actual sales. It’s never been about clicks on your ad banners. Revenue is the metric that really matters. The company’s web site makes it clear:

Affiliate marketing is an online advertising channel in which advertisers (online merchants that sell products or services) pay publishers (independent parties that promote the products or services of an advertiser on their Web site) only for results, such as a visitor making a purchase or filling out a form, rather than paying simply to reach a particular audience. This pay-for-performance model is in essence the modern version of the finders’-fee model, where individuals who introduce new clients to a business are compensated. The difference in the case of affiliate marketing is that advertisers only pay their publishers when the new client introduction results in a sale or a lead, making it a low-risk, high-reward environment for both parties.

Commission Junction adroitly addresses the most primary management issue of all when it comes to marketing, or almost any other corporate function: what is the return on this investment? This assumes that there is a return, of course. Not all investments have one.

Google is learning now that the pay-per-click model may not be enough to sustain robust revenue and earnings. One recent survey by comScore revealed that just six percent of web surfers account for more than half of all those clicks on display ads that scream from the top of so many web pages. And most of the clickers, with incomes of less than $40K per year, aren’t prime targets for many of the products being advertised. Worse, these folks account for less than 15% of online shopping.

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Advertisers have been willing to pay for clicks as they associated “traffic” with value. But, as is the case with money-losing restaurants whose dining rooms may still be full, a successful business is all about selling and pricing effectively, not the volume of your web site visitors. Particularly during economic down-turns, returns-on-investment is coin of the realm. It’s the most readily accepted measure of economic value.

Commission Junction’s business model has its critics. Even though there is no real risk, some executives ask if it makes sense to pay what they consider to be very high commissions. Some don’t feel the costs-for-revenue to be worth the price. Revenue is expensive, but part of what Commission Junction also does is to find a market of buyers who may be difficult to reach. Such a market can grow if customers see value in a product or service and make referrals to friends and associates.

The price of revenue and market development didn’t bother Sony, Quicken or eBay. But it does trouble some smaller operations that don’t consider the costs of marketing and factor them into their budget or purchase price. Sometimes they can’t because they have no grasp of the value they are creating for customers.

Business software maker eXpresso struggles to justify charging anything when they are not focused on the appropriate market. eXpresso’s offering is a spreadsheet for business users who require quick, effective collaboration. The business user” market segment is key here because some home-user bloggers have objected to the $10-per-user fee. But the home user is not eXpresso’s sweet-spot; the corporate user is. Problem: confusion in the marketplace. During beta-testing, the buzz on eXpresso reflected the lack of marketplace under-standing that the company had always been targeting business users, not the home market. Being able to price a product properly also requires that a prod-uct be aimed at people who are willing to pay for the benefits offered. Home markets are not that interested in collaboration. At least, not enough to pay the $10 premium.

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eXpresso found itself fending off comparisons to GoogleDocs, and Zoho, the products of which are not at all comparable to eXpresso’s. Users who rely on GoogleDocs, for example, want above all to save money on software. Collabo-ration is secondary if it’s even a factor at all. Of course, no one wants to spend money needlessly but there are many instances where only special applications, seemingly premium-priced in the eyes of some buyers, will do. This is another reason why knowing who you are targeting and what value they place on the benefit you’re selling is so indispensable.

eXpresso’s target market is comprised of businesses desiring to expand and extend their office environment with the addition of “power tools” to systems such as Exchange and SharePoint. So, it’s important to know how customers perceive technical differences – product features – or the procurement process as a way of differentiating products. What eXpresso offers, technically speaking, is a web-based editor of Excel files via Microsoft technology, vintage 2000. Since then, Microsoft has come up with SharePoint, a web-accessible tool for document management and collaboration that also edits Excel, Word, Outlook and PowerPoint. Here, eXpresso is stymied again: it takes an IT department to set up and maintain SharePoint – something eXpresso’s target customers already have, along with a heavy investment in Microsoft. Suddenly, eXpresso’s benefit – a turnkey hosted-solution requiring only a credit card – loses appeal and urgency. Could eXpresso still find an appealing benefit for the home market? Maybe. But there is an abundance of freeware out there and collaboration just might not be worth the price, especially if the user adoption costs are greater than GoogleDocs or SharePoint.

Knowing what your target market actually values is the cornerstone of effective marketing. As eXpresso has learned, business users see little value in having to maintain yet another application when Microsoft’s SharePoint represents a superior value proposition.

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Pricing has a profound impact on a company’s bottom line: It influences perceived value in the marketplace, and influences how well a product will sell.Most importantly, it determines profit. For example, when a product is under- priced by 10% or a salesperson cuts price by 10%, that money comes directly from profits! A company’s costs remain the same:

Costs $100 Costs $100

Old Price $ 120 New Price $ 108 10% price cut

Profit $ 20 Profit $ 8 60% profit cut

Because pricing is so important, it pays for a company to determine its pricing carefully. A poor but commonly used method of determining price is cost-plus pricing. With cost-plus pricing, a company adds up all the costs associated with a product and then adds a “reasonable” profit margin to determine the price. Cost-plus pricing is easy. However, cost-plus pricing also leads to overpricing, which can limit sales, and underpricing, which leaves money on the table. After all, customers don’t care about a company’s costs; they care about value to them.

A company will be more profitable if they use the Differentiated - Value Pricing method. Using this method, companies learn how much consumers value their product or service and then price accordingly. This ensures products aren’t overpriced, and sales are maximized. This also keeps products from being underpriced, and therefore, profit is maximized. Differentiated - Value Pricing takes more work, but pays big dividends.

DIFFERENTIATED-VAluE PRICINg REquIRES RESEARCH

To explain Differentiated - Value Pricing, I will use the example of Alpha Copier Co., an imaginary maker of copy machines. Alpha has a newly designed copy

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machine for the small business market and the company needs to determine a price before it can be introduced. The company’s Sales and Finance departments have agreed on a price of $1,750 based upon manufacturing costs and Alpha’s standard 40% profit margin: $1,250 + 40% = $1,750). This price is only $100 more than Alpha’s older, more basic model, but Sales explains that the market is tough. Nevertheless, the CEO thinks the new copier is worth more and has hired a management consultant to help determine a more accurate price.

The first step is to look at the competition and find the low-price alternative to Alpha’s offering. Beta Copier Co. has a copier that costs just $1,200. This is well below Alpha’s cost-plus price, and even below Alpha’s costs; however, Beta’s offering lacks many features:

Attributes / benefit Alpha beta

Pages per minuteBenefit: Greater productivity) 30 15

ResolutionBenefit: Professional appearance) 600 x 600 300 x 300

Paper capacityBenefit: Convenience) 500 sheets 1,000 sheets

Duplex capableBenefit: Saves paper / environment) Yes No

USBBenefit: Copy direct w/o computer) Yes No

Internet capabilityBenefit: PDF to email / fax) Yes No

Brand imageBenefit: Proven reliability) Reliable Low cost

Price ?? $1,200

The next step is to research how much Alpha’s target market actually values each feature. To do this, the consultant would survey Alpha’s customers. Ideally

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Alpha would commission a special type of survey called a conjoint analysis. Alpha could guess how much each feature is worth, but the company would run the risk of assigning too much or too little value to various features. In contrast, a conjoint survey gives robust statistical data on customer preferences and the monetary value they assign to those preferences.

From the research, the consultant finds that customers in the target market value the features according to this table:

Attributes / benefit Avg. difference (Alpha vs. beta) in value Alpha betaPages per minuteBenefit: Greater productivity) $75 30 15

ResolutionBenefit: Professional appearance) $200 600 x 600 300 x 300

Paper capacityBenefit: Convenience) -$50 500 sheets 1,000 sheets

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Internet capabilityBenefit: PDF to email / fax) $100 Yes No

Brand imageBenefit: Proven reliability) $300 Reliable Low cost

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When added up, the consultant finds that the average customer values a copier with Alpha’s attributes $725 more than a copier with Beta’s attributes. To calculate a price based on the copier’s differentiated value, the consultant would add the additional value created ($725) to the price of the base product (Beta’s $1,200 low-end copier). The consultant would then recommend that

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Alpha should begin with a price of $1,925 – $175 more than their cost-plus price! This foundation price will then be adjusted up or down depending on other strategies.

DIFFERENTIATED-VAluE PRICINg IS THE FOuNDATION FOR STRATEgIC PRICINg

The example of Alpha Copier Co. assumes that Alpha has already determined a target market. This is important because different market segments will value features differently. For example, a very small office may not value the addi-tional speed of Alpha’s machine, and a very large office may not value the entire machine at all. Therefore, to develop a robust model, it’s important that the research be focused.

There are also broader strategic reasons to adjust price up or down from the Differentiated - Value Price. For instance, Alpha’s strategy may be to engage in penetration pricing to maximize market share or take advantage of the learning curve and economies of scale when launching a new product. Or the company’s strategy may be to raise the price to enact a skim strategy, focusing on early adopters, signaling quality, and/or maintaining their brand image. Regardless, Differentiated-Value Pricing is the foundation from which to make these strategic adjustments.

DIFFERENTIATED-VAluE PRICINg gETS RESulTS

Although Differentiated-Value Price is straightforward, many companies – maybe most – still use cost-plus pricing. There are three reasons. First, Differ-entiated - Value Pricing is a function of the Marketing department whose goal is maximizing profit; yet pricing decisions are usually made by the Sales department whose focus is maximizing sales and the Finance department whose focus is metrics like gross-profit margin. Second, Differentiated - Value Pricing requires a greater investment of resources including time, money, and effort and is, therefore, more difficult. Third, pricing on differentiated value is a complex topic that isn’t covered in many training courses on management so, more often than not, managers don’t know about or understand it.

Robert A. McKinney, founder of The McKinney Group, LLC, is a business strategist and classical entrepreneur. He combines a diligent analysis of the data with microeconomics and proven strategy tactics to help growth-oriented startups through $50M businesses maxi-mize value creation. This unique combination has been proven with companies like Em-erson Electric, Greater Lafayette Small Business Development Center, Jacobs Engineering Group, and Intel. Robert earned his MBA from the Krannert School of Management at Purdue University and is a member of the Strategic Management Society and the Ameri-can Marketing Association. More information about pricing and other strategic manage-

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Nevertheless, companies that do make the switch get big results. For example, the industrial-parts maker Parker Hannifin used cost-plus pricing since the company’s inception; however, when better pricing was implemented, it added $200 million to its operating income (profit).

Similarly, a Differentiated - Value Pricing model helped a startup client (of McKinney) go from two years of near-zero sales and cash burning to significant sales and positive cash flow in just a few months. Before, the company was guessing at price – pricing extremely low – and then approaching potential customers with value propositions that were perceived as mere sales puffery. The client couldn’t justify the value because the price wasn’t quantifiable. But developing a Differentiated - Value Pricing model allowed the startup to quantify their value proposition and develop marketing communications and sales pre-sentations accordingly. When the value was quantified, it was easy to justify – and sell. Sales went up significantly – and at a higher price.

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Price is a function of customers’ perceived value – not a company’s invested costs. Therefore, it makes sense to set price based on customers’ perceptions instead of a company’s costs. Differentiated - Value Pricing allows companies to stop guessing at price and start quantifying their product’s value, and, therefore, their product’s price. In turn, a quantified value proposition allows companies to overcome consumer skepticism and begin making sales.

AbOuT THE ExPERT

Robert A. McKinney, founder of The McKinney Group, LLC, is a business strategist and classical entrepreneur. He combines a diligent analysis of the data with microeconomics and proven strategy tactics to help startups through $50MM businesses maximize value creation. This unique combination has been proven with companies like Emerson Electric, Greater Lafayette Small Business Development Center, Jacobs Engineering Group and Intel. Robert earned his MBA from the Krannert School of Management at Purdue University and is a Certified Managerial Accountant (CMA), member of the Strategic Management Society and the American Marketing Association. More information about pricing and other strategic management concepts can be found online at www.McKinneyStrategicManagement.com.

eXPert inSigHt by robert a. mckinney

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IS VAluE DIFFERENT FOR ONE CuSTOMER THAN ANOTHER?

According to author Michael McGrath, pricing based on value is intended to maximize profit margins.3 It is good for sellers, as well as buyers. Another model known as value-based pricing is a major step beyond cost-plus pricing because it focuses on the benefits an individual customer will experience – what a product will do for them.

Understanding the benefits of most value to a given market segment allows a company to offer pricing that is appropriate for the customers in that segment. This often requires business model innovation and upgrades to information systems, which can even support price points customized for each buyer.

Keith Ogden saw discriminatory pricing as a good thing when he was chief operating officer at East Avenue Capital. Even though the much larger investor may pay a lower percentage of their total capital for the services they consume, it will be more total dollars than a smaller investor. He suggested that smaller investors can be just as time consuming to service, so it is important to have a financial mechanism in place to accommodate different customers.

We are all familiar with utilitiy bills. They charge different rates, depending upon the time of day or usage. They charge per gallon of water consumed or kilowatt of electricity used. Why not find ways to measure value in other situations? If customers understand what they pay is based on criteria relevant to them, they can choose to control usage. Some conserve in order to control costs. Others consume more if it makes a tangible difference in their lives or businesses.

Discriminatory pricing should be based on what customers value. In B2B transactions, it might be very profitable for buyer and seller if the value your brand offers actually enhances the buyer’s value proposition. This requires an understanding of where you fit in the value chain. If your customer can’t describe their value proposition, you may need to provide case studies that show how other companies have built their own value offering upon yours. For example, many e-commerce sites emphasize next day delivery – and show the FedEx trademark. For others, security of their personal identity is important, so logos showing that the vendor has certification is really valuable to buyers.

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If you can’t show how you enhance their value proposition, you have to offer a clear justification for the price point. Buyers don’t react well to discriminatory pricing when they don’t see a benefit for them in the pricing structure. Several years ago, Risk Management Solutions operations chief Randy Schlemmer advocated discriminatory pricing with insurance companies. One of them learned they were paying more than a smaller client and was not happy about it. The client challenged Schlemmer: “If you are selling lawn mowers and you tell me that I have to pay more than my neighbor because I have a larger lawn, how can you say that is fair?” Schlemmer’s response was that the smaller insurance company derived less value than the larger company.

In this simple example of the lawn mower, the innovative business model would focus not on the features or benefits of the lawn mower itself, but on the size or complexity of the lawns – something that actually matters to the buyer. If the value is really based on the different sizes of lawns, perhaps the right business model is not to sell a product (the mower). There could be a service model or leasing model instead:

The service would charge for cutting grass, based on the size of property. The cost per linear foot cut might be the same among different clients, yet one with a large estate will pay much more than a client with a small lawn. The primary benefit to the customer is to have the lawn cut without having to worry about maintenance or the upkeep of a mower. As a result, the product cost can be amortized as part of the ongoing revenue of the service.

The lease could be based the monthly fee on linear feet covered – perhaps in-cluding equipment maintenance.

A value proposition must include pricing as one of its three pillars and be trans-parent about it. If you know your market, you can find the appropriate model to satisfy their needs, while also enhancing your own profitability. The main thing to remember is that value is what buyers’ perceive – based upon the ben-efits that are important to them. Customer-driven pricing and business model innovation will make it difficult for competitors to challenge your position with predatory pricing. Price alone is not the basis for the value proposition.

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Needless complexity is very expensive for companies and their customers. Everyone involved in an enterprise must consider whether they are adding to its complexity. It’s a matter of seeing what customers value and systematically eliminating everything else. Unfortunately, employees can get into comfortable habits and protect their own jobs at the expense of the health of the business.

Robert Herbold describes this as “The Fiefdom Syndrome” and wrote a book of the same name about it. It’s based on his experience as former COO at Microsoft and senior vice president of advertising and information services at Procter & Gamble. He observed employees who were more concerned with how they were perceived than with getting to know what customers re-ally wanted. In one instance, a salesperson named David attempted to guide his customer on how to fill out a customer satisfaction survey. Herbold remembers that the customer “told him that she wished he and his peers would put a whole lot more focus on providing bright ideas than on worrying about how well they were doing in their boss’s eyes. She escorted David to the door and promptly called his vice president of sales.” The feedback made the VP realize that the data from the surveys were biased. It doesn’t just manifest itself in dealings with customers. It happens in every department.

Herbold asserts that these fiefdoms “cost their companies plenty. Creators of fiefdoms tend to hoard resources. Determined to do things their own way, they often duplicate or complicate what should be done companywide. It’s important to implement companywide processes and information systems that eliminate complexity.” 4

Customers will pay the purchase price of your product if and when they determine that the benefit exceeds (or matches) what they must spend to attain it. What they must spend is the sum of the price plus the costs of adoption, or

Adoption CostsFlattening the Learning Curve

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whatever additional costs may be lurking before they can begin enjoying the benefits. Adoption costs include the price of supplementary items associated with a number of consumer electronics products and systems – as we all know. You must be aware of them at every marketing step, from product conception through consumption, and even after-sale support. Products must be designed, promoted and distributed with adoption costs in mind.

THE REAl COST TO YOuR CuSTOMERS IS HIgHER THAN THE PRICE TAg

What can we all learn from the humble can of soup? As it turns out, plenty. Those of us of a certain age remember a time when a can of almost anything required a can opener. According to Campbell’s web site “We first introduced the Pop Top cans on Campbell’s® Chunky™ and Campbell’s® Select™ Ready to Serve soups. Consumer reaction was overwhelmingly positive. Further consumer research told us that most consumers prefer the convenience of the Easy Open lid.” 5

It’s possible that it realized that its sales were limited to those who had can openers and rather than going into the electro-mechanical business of can openers, it might make more sense to create a container capable of being opened without the use of another product. Beverage folks have been doing this since 1962. Only recently have we been able to open cans of soup, tuna, etc., this way.

Voila – the pull-tab. They call it the “Easy Open Pop Top.” Moral: when you add value that simplifies your product, you sell more of it. Buyers are cautious in most of their purchase decisions, especially if they perceive that a product is not as simple as it may appear. All “features” you add to create value must deliver a valuable benefit. You must know what your customers value – even if you feel that they are making decisions based on emotion rather than logic.

We can’t remember how many times technology executives have, in exaspera-tion, reminded us that they were not in the “emotional, ‘consumer’ business.” To our way of thinking, it all depends on how you look at it. People who buy technology in a B2 B context are consuming it. They are, in every way, consumers of technological products. Study after study suggests that they are probably more emotionally involved in these purchases than any other ones they make. When your job and reputation are at stake, emotions kick-in.

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Emotion is exactly what a few extraordinary companies such as Apple strive, with extraordinary success, to tap into. The history of Apple’s ups and downs, something Stan DeVaughn observed first hand at the company when the pattern was being established, has been richly documented. Suffice to say that when Apple marketing has been good, it’s been great. When it hasn’t, it’s been conspicuous which, to the satisfaction of shareholders, has been very infrequent.

One of the most glaring symptoms of Apple’s loss of product and marketing focus, prior to the General Douglas MacArthur-esque return of Steve Jobs in 1996, was the rise in the adoption costs of buying Apple products. See? It can even happen at Apple, as DeVaughn painfully witnessed twice during his tenure. At the time, these were the Apple products that, in Jobs’ on-point vernacular, “sucked.” His initial successes, upon returning, recaptured the essential ingredient to success in the earlier years: simplicity of product design. Jobs, and the enterprise he co-founded, had always believed in products as a bonafide fashion statement, an emblem of taste. By the late 1990s, technology was clearly a fashion accessory. As such, it had to be simple enough for a fashion model to use.

While the advent of the blockbuster, rules-changing iPod music player would not occur for several years after Jobs’ Cupertino comeback, the iPod was the poster-product for a complete system, also known as the whole product. A whole product” is, in the eyes of its user, a simple product to use: it’s fast and easy to begin enjoying the product’s benefit immediately upon purchase.

It was no secret that Jobs had been spellbound for years by the offerings of Sony Corporation and the way the Japanese consumer-electronics giant seemed to churn out one irresistible product after another. DeVaughn remembers him being particularly enthralled by the Sony WALKMAN®, the iPod of its day and as “whole” a product as technology (and the recording industry) would permit at the time. Looking back, DeVaughn can only wonder what Jobs was thinking and planning as he was furiously launching the Macintosh,

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surrounded by Apple employees with their WALKMANs clipped to their belts and wired to headphones as they grooved to Men at Work or Talking Heads.

The iPod player combined with the Apple iTunes music download system enable a classic “whole” product that does away with (or completely minimizes) adoption costs. The iPod doesn’t come with free music, but the friction of an adoption cost is a non-issue.

Whole products eliminate or minimize the cost of adopting the product you buy. With minimum effort and cost you can start enjoying the benefits at the moment of purchase. Music downloads via peer-to-peer (P2P) sites such as Napster addressed a long-standing customer desire to avoid buying entire albums. One or two songs per album were good enough for millions of people. Then Apple came along and enhanced the value of buying individual tunes – with the understanding that this is the benefit customers want and place some value upon – especially if they could do it legally. In this case, the nominal fee of $.99 was acceptable for a single iTune.

Apple’s marketing “genius” is its user-centered innovation. It knew how to make the product to which people would assign the most value. So it innovated a complete product. Every aspect of the iPod was considered, giving customers the opportunity to focus on consumption of iTunes. Everything else was designed out.

Compare Apple to Rokonet when it comes to the trap of adoption costs and the aggravation of an incomplete product. Rokonet offers a wireless burglar-alarm system called WisDom, “a wireless, domestic security system.” After searching online for a security system, a colleague of ours determined that WisDom was priced right. It was cheap. Just as it was for the people who used P2P music download sites during the Web 1.0 downloading era, price was priority in this case. The purchase price of the security system, $30, seemed almost too good to be true. Turns out that it was. Our colleague did not consider the complexity of installation and integration and Rokonet mentioned nothing about these when selling it. After spending weeks on the phone with customer support,

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the phone company, electricians and others, the eye-popping adoption costs topped $1,200 for labor alone. This quickly soured the sweet taste of a bargain. The WisDom “system” is the classic example of the incomplete product. It wasn’t a system at all. First, a piece of hardware arrived in parts which included wire and cable, a fuse and a user manual that omitted such relevant details such as how to wire it into a telephone line and how to link it to the local police department or alarm service. It was up to the user (read: the buyer) to figure it out and make it work – which meant finding a telecom service provider familiar with the system, its installation and its complete wiring and integration.

Rokonet offered no list of installers or local specialists in its products and neither were any listed in the telephone directory. There was no ecosystem that supported the product and the company. Had Rokonet even considered the concept? Imagine an iPod with no way to download music, no MPEG format and no agreements with record labels.

If WisDom were designed as a whole system, it would have woven relation-ships with related suppliers. Telephone installation professionals would have known how to integrate it. Alarm companies could service it. And police departments would be familiar with the brand. If the company had thought of the product as a whole product, the puzzle would have been put together by design and everything else would have been designed out.

A security system is no fashion accessory. Still, as a product marketed to home-owners it should be simple enough for a fashion model to use. Models may be more attractive than most of us, but it doesn’t mean they want to waste their time learning how to use a music player or setting up a security system. They just want to listen to tunes in safety.

Our colleague is intelligent and made a purchase decision to be safe. He thought $30 was the full extent of the investment required. The real cost became more obvious after six weeks. Frustrated and up to here in wire and

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cable, he chose simplicity over WisDom: a turn-key solution priced at about $200. Installation included.

Adoption costs often fly below the radar of manufacturers and represent a blind spot that reduces the value of your offering. They dilute and even destroy the value proposition. As millions of devout Apple faithful will attest, the compa-ny’s organizing principle is product simplification and adoption cost reduction, a principle unfortunately lost on the Rokonets of the world. Unfortunately, the Rokonets far outnumber the Apples. Let’s hope this book helps turns that around. There are far too many needlessly complex and incomplete products.

Every company needs to rethink how it understands its customers’ pain points. Some companies have been selling a product for years and need to stay cur-rent. If you are introducing a new product, it’s worth noting that the people who beta-test your product represent a rich source of information on at least two levels. They provide you with a way to price your products, but they also offer a deeper understanding of the adoption costs involved whenever a new product is introduced into an existing system. The more ways you can cut the cost of adopting your product, the stronger the value proposition you make – and the higher the premium you can command. You can formulate a practical, relevant value proposition to the extent that you understand the real costs to your customers (purchase price plus cost of adoption) and the real benefits your product represents. You can demonstrate forcefully that you see your product through the eyes of the people to whom you’re selling.

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Some companies are obsessed with the value they create and measure everything. Autonomy has more than 17,000 customers and is growing fast. It focuses on something they call meaning based computing, which is specific to infrastructure software for the enterprise. A critical reason for their success is a value proposition that is quantified and acknowledges adoption costs. In look-ing at one of their clients, Autonomy’s website says: “The financial firm spent about $2.3 million in system purchases and deployment costs to date. However, the company’s prospects are brightening. The financial firm expects to recoup 30% of its total investment by the close of this calendar year, and in six months after that – to recover the remainder of its investment – for a total ROI of about two and a half years.” They are sober in adoption costs, yet amazingly successful in their niche. With a market cap of $4 billion, it’s a pretty sizable niche.

Their value proposition is focused on two things that their customers value: reduced operational costs and improved productivity. To quantify the value proposition, the project sponsor at the financial firm explained: “You take 30

minutes in every person’s day and now save that due to the new system which eliminates or reduces your wasted time searching for, tracking, and receiving necessary information. This 30-minutes-a-day translates to a savings of over

$13 million each year!” He added that another way to look at this savings is a rate of 1300% or the equivalent of 43 full-time staff people a day just by adding up all those 30-minutes for all the employees at the banking institution.

A value proposition is not simply a sales tool, but an organizing principle that informs where to focus on creating value and where there is no real business value at all. If there is value, it can and should be measured. That’s why it’s es-sential to quantify and validate each element above to confirm that a viable value proposition actually exists.7

Value PropositionThe Organizing Principle that Everyone Needs

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THE TuRNER DEVAugHN MODEl IS MARkET-bASED

Recall our earlier definition of marketing: the things you do to give people reasons to buy. Those reasons must be theirs, not yours. A true value propos- ition puts the customer first – knowing which benefit they value the most is pre-requisite. It allows a company to justify its price point. Most sellers think of a value proposition as a statement. Developing a value statement is a good starting point; it forces you to stand for something and gives customers something to think about.

Many ad agencies make good money crafting turns-of-the-phrase that get attention – things like taglines, ad headlines and web copy. They get results when they are based on substance.

Turner DeVaughn advocates going beyond a pitch and actually building a product, business model, lines of responsibility, truly interactive web site, ROI

calculators, IT infrastructure – an entire organization – around customer value. This model relies upon three essential elements of the value proposition:

BENEFITS Articulating your understanding of the benefits customers value – which can be personalized through a web-based user interface.

ADOPTION COSTS Acknowledging the learning curve required to achieve those benefits – often caused by overly complex product features.

PRICING Delivering a price point that can be justified – and even customized based on buyer needs.

These are the most important factors for buyers as they make purchase decisions. Metrics can be identified based on these three elements, allowing a brand manager to quantify how its product offering performs for customers. This aids in giving buyers a justification of the price point. Analyze your own value proposition at http://www.netvaluegap.com/

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Turner DeVaughn’s model pushes organizations to find ways to simplify what they do and to measure what matters. Innovation around customers – and their real problems – allows companies to leapfrog the competition. The model also embraces smarter ways to use the web and social media. Individual buyers have realized that they have a right to as much information as they can get before making a decision. Today, many buyers look to each other because companies are in their own world. Buyers want to know what they will get out of a product, whether it is simple enough to use and if the company behind it is reliable. Pricing is also a big factor with complex products or services. Brands that can’t justify their price by quantifying the value they are delivering are not even part of the same conversation customers are already having.

POSITIONINg AND OTHER VAluE PROPOSITION MODElS

Many sellers believe that a positioning statement or elevator pitch is enough to generate sales. Each can be useful to stand out from the competition, but may not address fundamental issues that matter to customers.

When company’s management, investors and board are vague or uncertain about what it is, exactly, that their customers value most, these statements are almost meaningless. In contrast, seeing your offering through the market’s eyes acknowledges the true source of revenue.

Positioning, as is the case with other marketing concepts, is often misunder-stood and misinterpreted throughout the organization. Think of “positioning” as simply how you want your product or your brand or even your entire company to be thought of by your customers – relative to your competitors. It’s where you want to “live” in the minds of the people you’re targeting.

Once you know exactly what your customers value most, you can consider ex-panding the value proposition to include elements of positioning. Firms such as SRI International and Gistics have postulated more complex value proposi-tion models that incorporate the competition and serve as a hybrid of value proposition and positioning statement.

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THE SRI INTERNATIONAl MODEl

Now in its seventh decade, SRI International (formerly Stanford Research In-stitute) has been the scene of such innovations as the computer mouse, in-ternet suffixes such as .com and .org, and HDTV which is disrupting the TV electronics market. In his book Innovation: The Five Disciplines for Creating What Customers Want, SRI’s CEO Curtis R. Carlson describes SRI’s model:

NEED Does the product solve a problem or address a need that real people actually have?

APPROACH How does your product provide an optimal solution to the need?

BENEFITS PER COST What will a product do for the customer and what will they spend to get it?

COMPETITION Why is the product better than competitors’?

This “NABC” model is a more comprehensive approach to value because it also incorporates positioning. It forces a company to think about their product, how it works, the competitive dynamic as well as customer value. SRI attempts to balance an internal vantage point (inside-out) with the visceral reality that a customer experiences (outside-in). There are many components, including benefits per cost, which is similar to the Turner DeVaughn model. SRI devel-oped a shorthand formula:

Customer Value equals benefits minus Costs

Establish your customer benefits per cost, then justify your purchase price. Turner DeVaughn places more emphasis on the costs of adoption and keeping a product as simple as possible. Research on buyers tells us that they don’t want to hear a complex story. Still, there is a reason for companies to build more

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Another SRI formula enables creation of a framework for comparing a number of benefits to cost attributes. While the formula is simple, it requires a deeper understanding of your market and a number of benefits assigned a value of zero-to-five to enable measurement.

Value Factor equals benefits divided by Costs

If you have enough data to crunch the numbers, it’s a useful exercise. SRI’s value proposition model, while powerful, is complicated to use because it requires market research and positioning. SRI sets a standard that requires the firm’s assistance in crafting this NABC value proposition as part of their innovation methodology.

The process of articulating one’s approach and competition is a way of incor-porating positioning into the value proposition. Your approach addresses why the product is better for certain situations. Your competition provides a way to describe why your product is superior.

This model is a good way to inspire customer-centric innovation, but does not treat the value proposition as a means to organize company-wide processes and functions. It does not align business operations with the market a business wants to serve.

complex narratives around their value propositions. SRI’s more elaborate view also incorporates the idea of investor benefits per cost, which is useful with angel investors and venture capitalists.

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THE gISTICS MODEl

Founded and run by one of our favorite brainiacs, Gistics is a think tank that works behind the scenes to build business cases for so-called “disruptive” technologies. Michael Moon takes the value proposition to the next level of complexity not so much for the benefit of buyers but to educate influential consultants. Here is an example of a differentiated value proposition for “DAM-enabled marketing processes using Interwoven MediaBin”:

FOR Growth-oriented firms with increasingly diverse and demanding marketing operations

WHO NEED More effective ways of engaging potential buyers across multiple markets, communication channels, and collateral-presentation formats

WHO SUFFER Missed sales and low sales-conversion rates caused by late or incorrect marketing communications

WHO BELIEVE That automation would enable marketers to “customerize” their marketing communications to particular segments and achieve higher levels of engagement and sales conversion

WHO WANT Easy, flexible ways to reuse their visual marketing assets – images, designs, presentations, spread sheets, documents, PDFs, videos, and animations – web marketing content, and finished marketing materials

GISTICS Finds that Interwoven provides the fastest return on investment of the most open, enterprise-class repository of visual marketing assets available

USING Documented best practices and a methodology- driven professional services group to ensure rapid user adoption and financial payback

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SPEED The time-to-multichannel-markets of marketing content for new and existing offerings

REDUCE Defect rates and off-brand messages of printed collateral and web pages and, therefore, overall costs of content, and

ENABLE The reallocation of internal cost saving to other revenue generating investments (more media, higher production value media, greater levels of personalization)

UNLIKE Homegrown on-premise DAMs such as Share Point, Filemaker, or other open source tech- nologies that lack:

• Fast time-to-value with out-of-the-box enteprise- class functionality, including shopping carts, high-quality image transformation, and managed delivery of encrypted packages

• Scalable Web Services and enterprise-class APIs

• Global professional service team capable of serving enterprise marketing operations

OR UNLIKE Stand-alone on-premise DAMs from Artesia, ClearStory, or North Plains that lack:

• Fast time-to-value with out-of-the-box enterprise-class functionality • Best practice methodology-driven professional services group • Superior user experience resulting in lower costs of training, support, reconfiguration, and meta data management

• Robust APIs and rapid integration with other enterprise system

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OR UNLIKE SaaS DAM services from Getty Images, Corbis, and ClearStory that do not provide:

• Best practice methodology-driven professional services group

• Flexible configurations and addition of new media services

• Robust APIs and rapid integration with other enterprise

OR UNLIKE DAM service providers from Schawk, RR Donnelley, Quebecor, or Wieden that:

• Lock in customers into the media services and technologies of one provider

• Limit fuller integration with corporate security and identity management models

OR UNLIKE ECM Suites from EMC-Documentum, Oracle- Stellent, and OpenText-Artesia that lack: • Open, flexible WCM integration model and API support of other enterprise services

• More robust, open, and distributed DAM

capabilities

gISTICS concludes that Interwoven DAM-enabled marketing processes increase sales by maximizing the operational productivity of marketing, sales, Web production, and creative teams within increasingly diverse and demanding marketing operations of medium and large enterprises.

GISTICS offers a very powerful model to differentiate one’s product from that of the competition. It arms consultants with almost everything they need, but does not factor-in pricing.

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Differentiation Isn’t Enough Customer Value Starts with the Customer

Being different does not equate to being better, at least in the minds of customers. Common marketing techniques can confuse the market and do nothing to ensure that customers are getting what they want. A number of companies we’ve worked with have previously gone through the motions of establishing a positioning statement, elevator pitch or some kind of mission statement. They bring in consultants, rally the troops and invariably end up with documents in thick plastic binders, a modified tagline, and sometimes something that looks suspiciously like the language their competitors are using – none of which has anything to do whatsoever with the product benefits most sought after by their target customers. That kind of inside-out process does not constitute a relevant value proposition.

Turner DeVaughn has not coined the phrase “value proposition” nor done the most extensive academic research on the subject. We have been busy in the trenches between companies and their customers and have finally decided to broker a truce. They may both feel that they are on opposite sides, but they are not. Customer value is good for both, but it requires a common language.

The challenge is to know the difference between the words that describe your good intentions, and the real, tangible product benefits your customers place the most value upon. We seek to eliminate the self-absorbed aspects of such exercises and focus on customer value. This should not be something that your company does once a decade, but every day. It requires a mindset that fixates on the customer and their world.

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DON’ T ASSuME THAT YOu kNOW WHAT CuSTOMERS ACTuAllY VAluE

As documented in countless studies and backed up by ample evidence, product innovation derives from immersing yourself in the problems your customers experience and the way they articulate them. You must live in their world, deal with their issues and see your offerings through their eyes. And it’s not so much about specific problems as it is about the way customers feel about the positives and negatives of current solutions available in the market, how they describe their needs, how they go about solving their problems today and what they might consider and prefer as alternative, superior solutions.

Customers can’t always describe these things clearly or in ways that would define a better solution. This is why a feel for the broader market, or ways that other kinds of customers in other categories describe their problems, is so useful. This ability “to see around corners,” as Jack Welch, former CEO of General Electric GE), describes it is a trait of innovators, as is the ability to anticipate trends – rather than just spot them after they’ve become trendy. A better solution requires a deep understanding of the world in which the customer lives – including their financial and time pressures. Your value proposition gives customers an opportunity to correct your perception of benefits you think they value. It is far more than your pitch. It is the common ground for the buyer and seller to agree upon the terms of the transaction. The value propossition – and the organization behind it – must evolve based on what you learn from your customer.

Employees and executives are often so caught up in company internal issues that they can’t hear what the customer is repeatedly shouting at them. Some-times it takes years to hear a simple request and convert it to action. By then, it’s often too late.

One company took 50 years to really hear the voice of their customers. Fortu-nately, for WD-40®, it was not too late. WD-40 is one of America’s most ubiqui-tous brands. It can be found in over 80% of households. WD-40 even has a fan club. It has heard about more than 2000 uses for its product. The authors are among these loyal fans. WD-40 Company is also our client.

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One of the most common complaints that customers have shared with the company since the beginning was annoyance about losing the straw taped to the can. WD-40 would often mail a straw at no cost to the consumer. Some less patient users would go to the store and swipe straws from cans on the shelf.

Stephanie Barry, director of global innovation, spoke about the problem at a Turner DeVaughn conference (Top Line Conference, May 2007): “(Auto) Mechanics would find that the straw would shoot into the engine and it was impossible to get it out. Consumers told us that it’s hard to put back into the nozzle.” The company tried a number of home-grown solutions including a strap they called “the bra.” They also had tried a rubber band. None of the solutions were simple enough to address the real problem on a mass-market scale – in part because they did not understand the real problem.

Market research revealed that 81% of customers lose the straw at some point over the years that it sits in the garage, under the sink or in the basement. They ran focus groups, which reiterated the problem, but could not get the company closer to a solution.

WD-40 Company stepped back and realized that it had to go about understanding the problem on a deeper level. It began conducting observational research, something anthropologists call “ethnography.” This reveals much more than a focus group could because it is based on what people actually do as opposed to what they say they do. The company sent its teams to stores, homes and the workplace. They watched a maintenance guy, an equipment rental shop, a lithographer (printer) and saw behaviors that people never described in focus groups. For example, almost everyone uses WD-40 with and without the straw, depending upon the need. So they remove the straw and set it aside because they need to hold the can in one hand and a tool in the other. A key insight was that a solution to the straw problem required that a user also be able to operate it with one hand while keeping the straw attached. By addressing the reality of the customer, seeing the product through the customer’s lens, WD-40 Company realized that they could offer better usage. They could make people more productive. In other words, they could add customer value.

Thus, WD-40 Company developed the Smart Straw™.

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In testing the new Smart Straw, the company was astounded to learn that 93% of customers would buy it, which was 20 points higher than the target benchmark. Even more astounding was the fact that buyers would be willing to pay 40%

more for the product. They could increase the price from $2.49 to $3.49 and customers would see enough value to justify the premium. Barry noted what the improved industrial design contributed; “[s]leeker, newer designs were garner- ing higher prices. It’s not just about aesthetics, but solving the problem in a re-ally functional way.” Design was also about making the product easier to use.8

Financial results have been impressive, with millions of dollars of additional revenue. A trip to Home Depot is good evidence. The old cans sit on the shelves, while the new Smart Straw cans are often sold out. This demonstrates that consumers are willing to pay more for more value – when they know what it will do for them.

The lesson: value creation is about solving people’s problems. The easier you make their lives, the more they will pay. Unfortunately, smaller companies bound for somewhere other than glory often miss the point completely. Customer value, your proposition of value to your customers should equal increased shareholder value, the reason you’re in business to begin with.

So what does this mean to you and your success in the marketplace? Everything.Let’s first define our terms, particularly the difference between features and benefits.

FEATuRES DO NOT EquAl VAluE – SOMETIMES THEY ARE OPPOSED TO IT

One of the most common mistakes we’ve seen made by companies of all sizes and types, and one of the main obstacles to establishing and promoting a rel-evant value proposition, is the confusion of two discrete and distinct concepts: features and benefits.

The fact is that the line between product features and product benefits can, in practice and application, become so blurred that features and benefits are indistinguishable from each other. When this happens, you inevitably start

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to position and sell your product’s features as if customers perceived them as having benefits unto themselves. Make no mistake. They do not. Here’s a way to think about it: a feature is something that you design into the product to generate a benefit for the user. Features go in. Benefits come out. Features are expensive to develop and product-ize. Customers pay you only for the benefits they derive from those features.

Benefits are the only thing customers want and are willing to pay for. Buyers consistently demonstrate that they are interested in any given feature only to the extent that it delivers a benefit for them – either avoiding a fear or help-ing them meet a goal. Better gas mileage, easier video downloads or uploads, whiter wash, are all about goals. This does not diminish the importance of features. Obviously, you can’t enjoy benefits without the features that created them. For too many product-centric marketers, however, features can tend to become an all important end unto themselves. This is understandable because companies rightly take great pride in what they design and build. The problem is that this confusion can create an obstacle – severe friction – to marketing and selling the product. Features are the means to the salable ends. Those ends are the benefits.

Confusion of features and benefits and how they are translated into marketing initiatives leads to misguided marketing. This ultimately leads to misdirected budgets and lackluster sales. To paraphrase David Ogilvy’s secret to success page vii), you must promise a benefit and not a list of features, no matter how cool or killer you might think they are. To the prospective buyers of your prod-ucts, it makes no difference what you, your engineering team or anyone else in your company might think. We’ll say it again: customers want a benefit. It’s the only thing they will spend money on. And the more valuable the perceived benefit, the more they’ll be willing to spend.

But along with delivering benefits comes a caveat; a product’s benefit must equal or exceed the purchase price and costs of adoption.

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INNOVATION IS AbOuT THE CuSTOMER

A few years ago there was a flurry of books on the topic of innovation leading to a lot of good reading. Stephen Turner is a reviewer of marketing books for Library Journal, so he reads lots of these tomes. What struck us was how it corroborated another pattern we’ve recognized over the years; many entrepre-neurs and enterprises confuse product features with product innovations.

In reality, they are not synonymous.

Innovating your products around the benefits your customers place the most value upon creates an irresistible economic force in the marketplace. Historically speaking, it may be the most important economic force of all.

Consider the Model T, introduced by Henry Ford exactly a century ago (1908). A huge factor in the advent of the Model T Ford was innovations in the pro-cessing of rubber (vulcanization) over a span of six decades. In 1844, Charles Goodyear patented a curing process for rubber involving high heat and the addition of sulfur and other equivalent curatives. The main feature of the breakthrough was a chemical process in which polymer molecules are linked to other polymer molecules by atomic bridges composed of sulfur atoms or carbon-to-carbon bonds.

The benefit was that springy rubber molecules kept their properties, but the bulk material was harder, much more durable and also more resistant to chemical attack so it could be used for a number of applications – such as tires. In 1898, with just 13 workers, Goodyear Tire & Rubber began production with a line of bicycle and carriage tires, horseshoe pads and poker chips, but the process was slow and output was limited.

In 1905, however, George Oenslager discovered a related process. The main feature was that a derivative of aniline called thiocarbanilide was able to accelerate the action of sulfur on the rubber. The benefits were much shorter cure times and reduced energy consumption. With shorter cure times, the rate of manu-facturing could be greatly accelerated, which saved lots of money.

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Innovations in the manufacturing processes enabled the automobile to go into mass production with the Ford Motor Company in 1913. The combined inno-vations were ultimately aimed at accelerating the time it took to assemble a vehicle, which pushed the prices down to affordable levels for mass-market consumption. The rest is history. It’s part of the cultural vernacular that the Model T changed the world by making personal transportation affordable. The Tin Lizzie gave Ford the idea that a low price was the key factor in growing big. And that was true for two decades.

Innovation must address larger market forces. General Motors (GM) realized that a low price is not always the most important issue for consumers. Ford lost it groove in the 1930s, when GM built what consumers saw as a value car, meaning an automobile that consumers would buy even though it cost more than its rivals, says auto historian Michael L. Bromley. The innovation was not so much in containing costs as it was offering consumers something extra that mattered more: status.9

GM reigned as the world’s largest auto maker for 76 years by offering a spectrum of products staggered all along the economic ladder. Its innovations had more to do with matching the styling and engine power of the car to the stage in the buyer’s life and career. The ultimate status symbol (and top rung of the ladder) of the American dream, of course, was the Cadillac.

In the past generation, in the face of the evolving needs and demands of drivers, GM’s mindset and operations did not adapt to the new realities. In 2007, the Washington Post reported that Toyota had captured the title of the world’s number one carmaker. Buyers wanted better fuel-efficiency and higher quality. By understanding the need and acting upon it, Toyota has been richly rewarded. 10

The consensus on innovation? To sustain growth (read: shareholder value) there is no single thing a company can do that is more important than pay attention to what buyers value. We often see the innovators within a company so focused on the leaves, that they cannot see the tree, let alone the forest. GM missed the forest.

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All due respect to our many friends and clients who are technologists, or of a technological bent, but we feel compelled to declare that innovation is not unlike the old description of war being too important to be left in the hands of the generals. Innovation is too important to be left exclusively in the hands of technologists or R&D. Innovation springs from anywhere and everywhere in an organization – but it should revolve around customers.

Technologists may be so disconnected from the actual problem the customer faces that it is impossible to actually solve it. People in different roles see the same problem in a different way – including customers. Whether it is a prod-uct or service offering, the end game should also be about simplicity and value. From a service perspective, how difficult is it for a customer to get through to the right person? How many layers does a company have? Does the company even want customers to get through? If technologists are not asking these ques-tions, you may get the experience offered by United Airlines and most of their competitors. Stephen Turner was due to catch a flight on United and called in to switch his ticket to a later flight. The group responsible for customer service could not do that. It had to be done by the Internet group, because the ticket was originally booked online. And they required that the caller have access to the web at the time that they call in. If the airline looked more closely at the reality of business travelers, they might see that people are often in transit and cannot get in front of a computer when en route to the airport.

From a product perspective, is it really the intent of the engineers to have so many features that most people can’t figure out how to use a product? The effect is a fixation by technologists upon product features (never to be con-fused with benefits, remember) at the expense of customer value. In our ex-perience, there is a faulty logic that underlies this obsession with features that goes like this: “It is essential for our products to contain more features that are ever-richer because they (the features) amount to a higher-level of innovation which, when you come right down to it, is the source of all influence, power, and capital. Oh, and customers.”

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Let’s examine the logic here by looking hard at the practical reality of products and their feature sets. Most users, according to usability and satisfaction surveys galore, say repeatedly that more features are, in fact, too many features. Those users want products that are simpler to use and understand. They equate more” with “more complicated.”

Worse, feature-driven logic misses the real point, the real source of power, influ- ence, awards, and customers. The simple truth is that simplicity sells; customer value, ironically, is almost always associated with ease-of-use and utility. Non-technologists, after all, represent the customer mainstream, even the category of innovators who will try new products without much concern for price. In survey after survey, extraneous features don’t attract users. They confuse them.

A PRODuCT DESIgNER’S SuRVEY OF CONSuMER SATISFACTION

Smart Design LLC is one of America’s oldest and most honored product design consultants. Its long-time clients include Corning, Kellogg’s, Microsoft, Hewlett- Packard, GoodGrips™ tools, Shell Oil and Becton Dickinson, among many other familiar names and brands.

Stan DeVaughn conceived and guided a research project for Smart in 2003, primarily designed to generate commercial exposure for the firm, to determine how well a buyer’s experience with a product lives up to expectations. While the ulterior motive was building brand image and awareness for Smart and its work, the findings would also aid the firm’s day-to-day design efforts.

Conducted online, researchers asked buyers about recent purchases of major appliances with built-in intelligence such as dishwashers and ovens, home en-tertainment devices, digital cameras and other digital technology as well as their experiences with them. It drew responses from more than 700 people, or 7.4% of a sample of 9,500 individuals.

The survey revealed substantial data that supports the value proposition thesis. Smart learned that above all consumers want products that meet their expec-tations. And it may not depend on how user friendly the product is. When a

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product is not easy to use, according to the findings, proper setting of expecta-tions can increase satisfaction by almost 60%. Consumers who researched and found information about various brands and products were more likely to be satisfied with their purchases. The message for manufacturers is clear – make your information readily accessible and available.

This was shown to be especially true for more complex devices such as digital cameras. Most important to satisfaction: meeting the expectation that purchasers had, upfront, in the first place. With digital cameras, for example, a product with a fairly steep learning curve, owners care more about getting quality photos than a camera that’s easy to use. While some admitted difficulty in using such cameras, the buyers surveyed expressed high levels of satisfaction.

While difficulty using a product decreases satisfaction, people who expected their new digital camera to be hard to use were more satisfied regardless of the actual experience. Sixty-five percent of the people who expected difficulty said the product was easy to use. Nearly 90% expressed satisfaction. But only 41% of the people who expected an easy-to-use camera got what they expected. Just 36% of these people were satisfied with the product.

The study also found that women make more informed and less-emotional purchasing decisions than men. For example, women view their appliances primarily as tools to get work done while their male counterparts judge such products with emotional considerations foremost in mind – such as if and how the product features can impress their friends. A loud and clear message to marketers: of overriding importance is the ability to see your product through the eyes – and minds – of your target buyers.

The message to product designers is equally clear. When users demand more and more complex features, ease-of-use might become harder to achieve. But design incorporates many dimensions that can impact the experience people have with a product. Packaging, clear and friendly instructions and product literature, and comprehensive technical support contribute mightily to a satis-fying product experience that fulfills expectations.

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Beyond the design of the product itself, the user experience incorporates everything from the information made publicly available in website content, to knowledgeable sales personnel, to packaging, to retail environments and salespeople, to tech support, and so on. All of these seemingly disparate elements make up the “whole” that must exceed the sum of the parts to ensure the product’s maximum success and profitability.

People want features and benefits that meet expectations, even more than they want a product that’s easy to use,” said Gary Shapiro, then-president and CEO

of the Consumer Electronics Association (CEA), the leading trade association in the consumer technology industry. CEA produces the International Con-sumer Electronics Show, the world’s largest annual event for consumer tech-nology. The Smart Survey underscores this desire on the part of consumers.

These findings have significant implications for many products, from kitchen appliances to consumer electronics,” said Vicki Matranga of International Housewares Association, a leading trade group. “This is especially important as higher technology gets designed into more household products.”

ENgINEERINg CAREERS

Most technologists and engineers are as interested in their career development as anyone else and want to stay current with technology as a way to rise through the ranks. Many engineers and technologists seek the approbation of their peers who may also be future employers. Thus features – not the benefits they enable – become a common currency along the career path. This brings about the feature creep so bemoaned, and yet encouraged, by many executives. Silicon Valley is notorious and legendary for competitors racing to bring new product features to market. Not so much to attract new customers as to lure the best talent away from the competition.

Take NVIDIA for example. Now a mainstay in Silicon Valley, NVIDIA provides visual computing technologies.3 The career section of their web site is designed to appeal to engineers: “We love what we do because we do what we love. Join

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us. NVIDIA’s culture promotes and inspires our team of world-class engineers and developers to be at the top of their game. We’ve created an environment where talents are recognized and collaboration is valued. Our employees are shaping the world of tomorrow...today.” 11

The two main messages here? Do what you love and create the future. No mention of customers. While the race is underway, many perplexed customers just watch from the sidelines wondering what’s in it for them.

TECHNOlOgY IS A MEANS – NOT AN END

We said earlier that we’ve seen companies of all sizes get more caught-up in their product features than what matters to customers. Smaller companies are at a distinct disadvantage because they are often so much more technology-and- product driven. They tend to see customers through the lens of the product, rather than the other way around.

Consider a company called Zyvex. Their elevator pitch for the product, the nProber™, describes it as an “eight-position nanomanipulator system designed and optimized to electrically probe sub-100nm features on semiconductor de-vices. The system consists of a state-of-the-art Zyvex Nanomanipulator, an FEI

Quanta™ 200 FEG SEM, a parametric analyzer, an advanced anti-contamina-tion system, and custom software to control and integrate each component.” 12

A nanotech system seems almost like crack cocaine for engineers who love to create solutions with unlimited complexity and feel free to do so knowing that other engineers are also buying the systems. They feel like they don’t have to dumb down” the product in order to market it. They argue that it will sell itself if one focuses on the specs. Engineers justifying this practice tell us that other engineers make purchase decisions by reviewing the specs – not considering the value proposition. Based on our observations, we beg to differ.

We heard a similar argument before we went to SC07, the high-performance computing conference in Nevada in 2007. Engineers told us that we would find that all of the booths focused on the features and specs since everyone there was so smart. When we arrived we found that the small companies (struggling

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companies dominated by feature-obsessed engineers) were following the credo to focus on the most complex features. They were happy to let any people who might walk up to the booth figure it out on their own.

But, we also found that the most successful companies – such as IBM, HP, Sun, Cisco and Cray – were focused on the benefits that would be realized by buyers – especially engineers. You can see photos at http://flickr.com/photos/turner devaughn/. These brands presented more than just information booths. They were architectural statements that assert overall value in the marketplace. So much for letting people figure it out for themselves. Successful companies know the value they offer and aren’t afraid to make sure the customer knows it.

Going back to the nProber for a moment, it turns out that Zyvex was able to describe the benefits after all – but not in their elevator pitch: “The nProber dramatically increases throughput without sacrificing ease-of-use. The system guides the user through each application while remaining flexible enough for advanced probing experiments.”

This proves that it is possible to see past the features. Still, they have not gone far enough. They have not quantified the increased throughput. Is it twice as fast, or 100 times? That would be the source of their value proposition. How much would an engineer purchasing the nProber pay if it increases throughput 100 times? That’s real customer value.

To the extent that they can reverse a feature-centric point of view, they can significantly sharpen their focus on a quantified value proposition. To the extent that they can gather market data and refine it into real market knowledge, they can make sure that their product and business model give customers reasons to buy – the reasons that are based on what customers tell them.

Customer insights inform what effective compamies do and how they do it. That means that innovation is required in engineering, R&D, product design, supply chain management, technology, web development, graphic design, marketing, procurement and finance. Innovation renews what companies do and how they do it – always in-tune with changing market conditions.

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INNOVATION IS NOT lIMITED TO R&D

Understanding the problems that customers face is essential to creating value. Products that address a specific problem often emerge from “outside-in” innovation which requires an understanding of one’s market.

Innovative solutions come in the form of product features, but innovation can come in many other forms, including business models that are more compelling to customers or more profitable for businesses. New trends, demographic shifts, pricing pressure or market dynamics can also inspire innovation.

Case in point: to reduce inventory exposure and its own shipping costs a few years ago, Wal-Mart required vendors to ship to many more locations to ac-commodate its just-in-time (JIT) inventory strategy. Wal-Mart now dictates which stores need shipments directly from suppliers. In turn, suppliers needed to innovate to keep their inventory high enough to satisfy JIT demand. They also have to innovate within their transportation infrastructure to cut expenses.

Using hybrid-electric vehicles is the most obvious way to cut fuel costs. In 2007, for example, bottler and distributor Coca-Cola Enterprises introduced 120 hy-brid trucks across the U.S. which use a third less fuel than standard trucks.13

There are many other innovations that are less obvious. According to Jack Ampuja of Supply Chain Optimizers and Niagara University, something as simple as having freight ready to go so the carrier pickup is as rapid as possible can cut fuel costs and labor expenses. Another suggestion: coordination of pickup times with facility work schedules. Trucks should not arrive as the dock closes for lunch. Successful suppliers give Wal-Mart what they want, but only to the extent that it creates value for their own shareholders.

Stay focused on your customers, says Jack Welch. Especially when you’re cutting costs. “You may be on a diet, but they don’t need to know it,” he wrote in one of his 2008 Business Week columns.

In the fervor to cut costs, especially in a sluggish economy, nothing is as costly as the design and development of extraneous product features that your buyers

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can do without. Abandonment or absence of a relevant value proposition can represent onerous costs: marketing communicates what buyers don’t want to hear, sales cycles slow or grind to a halt, R&D squanders resources on low- (or no-) return projects. Your brand fails to gain traction against competitors who were smarter and better attuned to customer value – hardly the things that gladden the hearts of shareholders.

Knowing where customers perceive value is essential to growing a successful business – so that your cost cutting does create value. Wal-Mart focuses much of its own innovation on making its supply chain more efficient. The retailer has set green-inspired, global-packaging benchmarks for suppliers that are part of a long-range and far-reaching packaging mandate that will reduce waste on a number of levels. The goal: reduce packaging by five percent by 2013. Longer term, by 2025, the company wants “packaging neutral” status for itself and replacement of polyvinyl chloride (PVC) in private brand packaging.

The Clorox Company is one of Wal-Mart’s largest suppliers. Vice President Beth Springer recently noted their own “strong heritage of innovation to delight consumers.” As a result, sustainability appears to be more than just an issue of making packaging less wasteful, but an opportunity to create new markets. This has inspired the company to introduce Clorox Green WorksTM products, “99% natural,” planned to be available in 24,000 stores nationally, including Safeway and Wal-Mart.

Green Works is the first such effort from a major consumer products company. Even the Sierra Club endorses it. “We are supporting Green Works in hopes that more people will have access to these kinds of products,” said Orli Cotel, a Sierra Club official. Clearly, Clorox sees green as a way to burnish its value proposition.14

Superior companies innovate their products around the customer. They develop the innovations with which customers will associate the highest value. Just as your innovation must be about customer value, so should the full measure of your marketing initiatives. Irrelevant differentiation is not marketable. Relevant innovation is.

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SEEINg THE WORlD YOuR CuSTOMER SEES

Successful marketers understand that the marketing mix has more than four traditional elements of product, price, placement (distribution) and promo-tion. They understand that the people who make purchasing decisions are at the center of those efforts and that they demand a relevant value proposition. Outside-in innovation relies on a strong marketing function to understand customer problems. This can result in changes to a product, new business models or ways to push the supply chain to be more agile.

Strong marketers pay attention to what matters most to customers – such as adoption costs. For retailers, the cost of adoption includes everything from return policies to availability of replacement parts. By making buyers feel comfortable with the available options after they buy, retailers like Zappos are capturing greater market share. Zappos is growing dramatically faster than its industry. Between 2001 and 2005, the footwear industry grew 22% while Zappos grew a whopping 4,302%. Their web site lists 1,137 brands and the 2,689,369 products it sells reflect the importance of choice and the buying experience. “Our focus on service will allow us to WOW our customers, our employees, our vendors, and our investors,” the company says. “We want Zappos to be known as a service company that happens to sell shoes, handbags, and anything and everything.”

Zappos realized that the purchase experience should offer everything buyers want. This retailer has made a clear return policy (free for a year) and fast service central to its value proposition. “The speed at which a customer receives an online purchase plays a very important role in how that customer thinks about shopping online again in the future, so at Zappos we have put a lot of focus on making sure the shoes get delivered to our customers as quickly as possible,” the company says. “In order to do that, we warehouse everything that we sell, and unlike most other online retailers, we don’t make an item available for sale unless it is physically present in our warehouse.”

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Zappos’ presents “transparent” user-generated content on its web site: ratings, testimonials and comments on products. This gives buyers insights from other people like themselves. The generation born into the digital culture looks to each other and places high premium on “authenticity.” They don’t pay much attention to celebrity endorsements or product pitches that may or may not be relevant to them.

One of the best ways to relate to customers and see the world they see is to think about your own consumer behavior. Think of your own purchases and how you made them: a new or used car, a piece of furniture, your most recent vacation, your new cell phone. What motivates your kids to buy one brand of shoes over another? What process does your spouse use to compare products and prices? What about your parents and their friends?

Too many marketers are tasked only with the promotional elements of marketing, and aren’t given permission to pay close attention to what matters to buyers. That’s the sign of an inside-out approach that ignores the realities of a market. Expecting customers to spend time trying to decipher arcane selling messages is self-delusion. People have no time to learn the nuances of your pitch, including the one designed for the proverbial elevator ride.

They want simple reasons. They want a simple statement of value. Above all, they want a simple product. Once they buy it, they don’t have a lot of time to learn how to use it. Your product may be the center of your world, but in your customer’s scheme of things it occupies a much less exalted niche. Among other things, this means that it better be easy to use, deliver immediate benefits and buyers should be made to feel that the price they paid was well worth it and that you appreciate their business. Customers have more choices than ever today, including the choice not to buy at all. If they do choose you, make them feel that they chose wisely.

Customers can tell when a business is run with a focus on the market. Value is created when the disciplines of marketing and innovation work in concert, by obsessing on those things that matter most to buyers. On the pages that follow we present a five-phase customer value-creation model:

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Phase One / Value Creation Model

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Marketing involves knowing the customer well enough to develop products that sell themselves. To do this, marketing must be mandated to identify the benefits that customers will pay for. In fact, one dominant benefit is better than twenty that nobody can remember. The power of this benefit sells the product – as long as people see its relevance to their lives and problems. It can be a way to minimize risk – helping the buyer to assuage a fear. It can also help them achieve a goal and satisfaction.

1 / marketing identifieS benefitS tHat cUStomerS valUe

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Phase Two / Value Creation Model

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Knowing the benefits customers value the most is the primary source of value creation and the best guide for developing product features that give users the most elegant experience possible. In this experience, it’s the benefit that’s visible, not the feature. Thus, the most challenging aspect of product development is to keep features simple andrapidly make improvements as many customers provide feedback. The simplestfeatures are intuitive for users – they see itand have an idea how to use it.

2 / innovation createS relevant featUreS

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Phase Three / Value Creation Model

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The biggest blind spot for innovators is the customer’s cost of product adoption – what it will cost to climb the learning curve and make the product work as promised. Product innovation never occurs in a vacuum. Customer-minded engineers and informed marketers must work together to make the product simple to learn and use. COOs must facilitate and encourage a culture of simplicity. Adoption costs, a central element in meeting customer expectations, make the difference between market acceptance and rejection.

3 / adoPtion coStS matter to tHe market

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Price Point

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Phase Four / Value Creation Model

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Pricing has the largest impact on operating income. CFOs must work closely with marketers to understand benefits most valued by buyers. Financial officers are in the best position to quantify this value in the form of the right purchase price and evolve the business model to ensure that buyers get what they want – including the possibility that the busness model must evolve. Price points will shift over time, but it is critical to not let competitors dictate your pricing model, especially if you are uncertain of the true value of your offering.

4 / market inSigHtS reveal tHe oPtimal Price

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Price Point

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Phase Five / Value Creation Model

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Analyzing the relationship between pricing and internal costs, your organization must simplify how it operates. The marketplace rewards you for being innovative about business models, operational structures and the supply chain – based upon the price point that a market will bear. This requires innovation from finance and operations – not just R&D or engineering. It can open the door for outsourcing, or for new technology that increases throughput. It can also be a driver behind more sustainable and efficient business practices.

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DO YOu YATTl (YET ANOTHER TOP TEN lIST)? A relevent value proposition emerges from companies that innovate based only on what customers value. You know you’re ready to formulate your own relevant value proposition if you can answer “yes” to the following questions.

1 / Are you serious about making serious money and building an enterprise of growing value?

2 / Are you now selling a product or a service?

3 / Does your current product and/or service solve a real problem for your customers?

4 / Is there a sufficient number of prospective customers on which to build a viable business?

5 / Do those customers currently reference each other, i.e., do they share their experiences with one another about the positives and negatives of existing products they use to solve the problem that your new product purports to solve?

6 / Does filling the need you’ve identified amount to some financial value to the customers you’ve targeted?

7 / Are the costs to produce your product, or render your service, less than the price the customer is willing to pay?

8 / Is your business sustainable with customer value as the foundation?

9 / Do you truly want your business to grow?

10 / Do you want to have an advantage over your competitors?

While we can’t imagine any entrepreneur or executive manager hesitating for an instant to shout an affirmative response to any of the above, in the practical reality we’ve witnessed for years many people are nagged by doubts about customer benefits, purchase price and adoption costs. By avoiding the honest exchange with the market that is required to understand what customers’ value and what they think is just too complex, value is destroyed.

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ExECuTIVE SuMMARY: PART I

Successful companies understand and address the product benefits of greatest value to their customers. These are the benefits their customers tell them are the most important and valuable. For example, WD-40 Company conducted obser-vational research and, based on what it learned, the all-purpose lubricant maker added value and profit margin to its product. Others, such as Network Equipment Technologies (N.E.T.) lost an edge by losing touch with their respective markets.

Still others, such as SAPPI, come to believe that revealing their value proposi-tion, even to customers, will somehow compromise their competitive advan-tage. Then there are those who never had a value proposition to begin with and were doomed to fail, such as DNA Plant Technology. From each example we can learn much that is relevant and practical in the pursuit of value.

Effective businesses create value through marketing and innovation. Wielding marketing programs informed by a relevant value proposition enable organi-zations to identify prospects/users/customers who reference one another and identify the benefits that matter the most to their market(s). This informs in-novation, through which a minimum number of product features can be devel-oped or refined to deliver the lowest possible adoption costs.

Innovation also applies to business models, supply chains and finding ways to contain costs based on pricing that the market deems acceptable. These three elements – benefits, pricing and adoption costs – form the basis of the Turner DeVaughn value proposition model: the simplest way of articulating and practicing customer value.

Breakthroughs in products and business models, in other words the creation of greater value, derive from understanding precisely what customers face. Knowing what they expect a product to deliver in terms of experience and good value for the money are essential for success in the market. A relevant value proposition is a conduit between the market and the operations of a company. By changing the value proposition to adapt to changing market conditions, a company must also change its operations accordingly.

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Your value proposition must be market-tested and quantified. For example, any feature of product must create a benefit, such as higher yield or speed. To quantify value, you must quantify the specific amount of the increases in yield or speed, which could be 1.25x or 100x. This, in turn, allows a financial value to be assigned to the benefit, leading to a rationale and justification for pricing the market will accept. You can use your value proposition to break away from the competition – especially if those competitors don’t quantify their own value. More complex value proposition models exist, such as those developed by SRI

International and Gistics, which each merge the value proposition with market-ing positioning.

END NOTES: PART I

1 / Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” Strategy + Business Winter 2007, Booz Allen Hamilton.

2 / Michael V. Marn, Eric V. Roegner and Craig C. Zawada, “The Power of Pricing.” McKinsey Quarterly, 2003 No 1.

3 / Michael E. McGrath, Product strategy for high technology companies, McGraw-Hill Professional, 2000.

4 / Robert Herbolt, The Fiefdom Syndrome, Currency Doubleday, 2004.

5 / Campbell’s Soup Company web site, Frequently Asked Questions, http://www.campbellsoupcompany.com/faqs.asp

6 / Mark Gottfredson and Mike Booker, “Finding your innovation fulcrum,” The Wall Street Journal, Dec. 20, 2005.

7 / Autonomy web site, “The value proposition.” http://www.autonomy.com/content/ROI/Benefits/Value_Proposition.en.html

8 / Stephanie Barry, WD-40 Director of Global Innovation at Top Line Conference, May 17, 2007. http://www.toplineconference.com/webcast/v-wd40.php

9 / Frank Ahrens and Sholnn Freeman, “Toyota topples the king,” Washington Post, April 25, 2007. http://www.washingtonpost.com/wp-dyn/content/article/2007/04/24/AR2007042400167.html

10 / See #9.

11 / Jobs at NVIDIA, NVIDIA Corporate Web Site, http://careers.nvidia.com/pljb/nvidia/nvidiaemployment/applicant/index.jsp

12 / Zyvex web site, http://www.zyvex.com/Products/home.html

13 / http://www.franklygreen.com/my_weblog/alternative_energy/index.html

14 / http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/14/MNN7UC1IQ.DTL

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Part ii

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I said to my dad, ‘I’m just one good idea away from starting my own venture.’

My dad said, ‘No, what you need is not an idea, it’s a customer.’

— Sarah Nowlin (daughter of former president of Hekimian Labs)

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In Part Two, we look at what you have to do to create value. We take a look at real companies for examples of how to as well as how not to. Some are legendary, others unknown. Some are on the rise, others in decline and can’t regain their footing, but they all deal – and have dealt – with common challenges and similar problems. How they handle these issues sets the superior players above and away from the pack.

All companies must confront downward pricing pressure amid rising production costs just as they must deal with the changing tastes and needs of their customers. And we’ve never heard of any organization whose people are always on the same page at all times.

Entrepreneurs face entrenched interests, established buying patterns and often lack sufficient funding. Small wonder why entrepreneurial failure is far more common than success. Yet those entrepreneurs with great ideas and execution that create customer value are able to break through and serve new markets. They succeed.

Taking an entrepreneurial idea and growing it into a successful and sustainable corporation has always been fundamental to our economy. Look around at the large and successful private-sector employers today. They all began as a gleam in the eye of the founder(s).

In the fairly new world of social media, this has a lot to do with improvements over existing applications. MySpace founders Tom Anderson, Josh Berman and Chris DeWolfe imagined a site better than Friendster. YouTube’s founders Steve Chen, Chad Hurley and Jawed Karim imagined having a site that made it easy to upload and share video. And, Craigslist founder Craig Newmark imagined a better version of The WELL and Usenet localized to San Francisco.

iiWhy You Win with a Value Proposition

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More than ever, technology affects the way how value propositions translate into innovative business models. The question is, especially with today’s digital culture and web-savvy customers, can you make this process more efficient? Can you do things online that boost your chances? In the Internet age, can you improve the daunting odds of successful entrepreneurship?

We say that you can, absolutely. Here in Part Two, we show you how.

A value proposition is every bit as essential to a new venture as it is a multi-national, global enterprise. Who would argue that the predictor of success for startups isn’t simply how well they can fill the need they identify in the market-place? And, since marketing is really anything and everything you do to give people reasons to buy your “filler” of the need, all marketing initiatives must, at their core, address and continually reinforce your value proposition. Marketing, as we continue to note, is all about the market – and the market is comprised of like-minded people who refer to one another about the comparative value they discern in the multitude of commercial propositions hectoring them every hour of every day. They look for benefits and assign relative value to them.

Don’t make the mistake of thinking that a value proposition is solely about the benefits your product delivers. If the benefits are of low or limited value, in other words not fully relevant to your target customer, they will result in an offer the customer can easily refuse. The most relevant value proposition, as we have noted, must address (1) the benefits, (2) the optimized purchase price and (3) an acknowledgement of the adoption costs.

Part Two looks at examples of the evolution from entrepreneur to enterprise and should inspire founders and CEOs to respond more effectively to a ques-tion they will, on some level, hear from customers, partners, board members, and investors of all types: “So what’s your value proposition?”

SMAll VS. lARgE : STARTINg WITH AN IDEA – ENTREPRENEuRS There are few symbols more synonymous with hope and optimism than that of the American entrepreneur. The most venerable icon? Our vote goes to

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Thomas Edison who once said he “…never perfected an invention that I did not think about in terms of the service it might give others... I find out what the world needs, then I proceed to invent.” That’s a pretty good description of a successful start-up.1

Edison was among a small minority of entrepreneurs who have been success-ful, but he still represents the definitive inspiration for all.

Entrepreneurship is fraught with challenges, of course. Consider the numbers. In 2003, there were 22,659,000 small businesses in the U.S., presumably run by entrepreneurs. The vast majority were loners. Only 5,679,500 employ other people in their operations.2

It is the ability to create and sustain demand that separates the winners from the also-rans in each scenario above. And demand will exist only if and when the product addresses a real need – a real problem – with a sufficient number of customers recognizing your product as the most desirable solution. Simplicity isn’t easy to achieve, but consumers reward products that are easy to use and give them the benefits they want most.

In consumer markets (B2C), research suggests that most people would prefer more leisure time, in which to enjoy their currently imperfect lives, to the prospect of having to work longer hours so they can have the money to spend on products that would ostensibly bring their lives closer to perfection. This labor-vs.-lei-sure tradeoff is one way of assessing your product’s value proposition and the true worth of your product. Is ownership of your product going to make work- ing longer hours worth the time and effort, or is the buyer’s current state satisfying enough to eschew your offering and retain the leisure time already being enjoyed?

Among businesses, if the purchase of a product or use of a service does not reduce headcount or current expenses, then it’s going to have to generate addi-tional revenue. As Rene White, managing director of The Chasm Group, high-technology market-development consultants, puts it: “It has to save you money or make you money. Or keep you out of jail.”

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Many entrepreneurs have come to us with brilliant product ideas and a good understanding of the problem their product solves. Going to market, however, is a daunting task that calls for an investment of time and other resources in highly targeted, innovative and efficient marketing initiatives. You can’t get there any other way.

Brilliant ideas are not always clearly focused on truly solving a large problem had by real people) or offering value to a specific market. Likewise, many would-be entrepreneurs are driven primarily by the independence and oppor-tunity for creative expression that are the benefits of the being an entrepreneur. Being their own boss also means that they are often not accountable to anyone else. This can be counter-productive. It can work against what is central to entrepreneurial success: connecting customer value to shareholder value. Entrepreneurs are the nexus between the two. When they see themselves as the only one that matters, they end up being alone with 16,979,499 other entrepreneurs who really are not accountable to anyone but themselves. Michael Roberts, executive director of entrepreneurial studies at Harvard Business School, has recognized this critical juncture: “It requires a fundamental change in the attitudes and behaviors of the entrepreneur.”4

Accountability is a key factor in success. In our experience with hundreds of independent-minded entrepreneurs, however, they are often willing to be held accountable for some things but not some others, especially when it comes to their blind spots. Being your own boss can give you the luxury of not having to acknowledge not knowing something.

For the more creative, right-brained entrepreneurs, this means that they often don’t like being held accountable by (and to) left-brained analytical types. For the more analytical entrepreneur, typical of technology product startups, it can be just the opposite. He is wary of those right-brainers who just don’t get the math and science of the development project he’s bent on taking to market.

There is a process – a series of breakthroughs or “aha” moments – through which entrepreneurs go as they come to terms with what they don’t know and

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the value of other perspectives. Maybe, as in other aspects of their lives, it’s just because they’re trying to prove something.

Serial entrepreneur Jerry Kaplan theorizes that many of them are “trying to prove that they are smart.”5 As a result, they don’t seek the support they might need and don’t share the credit. Kaplan says there are four other patterns he sees repeatedly:

• Greed – doing it for money (leads people to do it on the cheap and hoard their equity)

• Having unclear goals and an unclear mission (if everyone defines success differently, nobody will get there)

• Hiring people they like or are simply comfortable being around, rather than people that they need who have different skills and can provide a fresh perspective.

• Not knowing when to let go (skills vary as a company gets bigger).

It’s obvious that this isn’t a job for someone who talks a good game but doesn’t have the professional background and strategies to make a success. Real growth requires a team that has experience dealing with the unique changes that happen as companies grow. Only professional managers can help companies take this next step.

In the quickly changing world of these businesses, where the value proposition speeds the time to move from early adopters to mass market, informed changes need to be made immediately. The user adoption lifecycle is a way of looking at the different stages of growth. It doesn’t go up like a hockey stick, but has a beginning, middle and end – especially if they fail to add value over time – addressing changing market conditions.

Pierre Omidyar, co-founder of eBay, recognized what was required: “We were entrepreneurs and that was good up to a certain stage. But we didn’t have the experience to take the company to the next level.”6

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The early market of innovators/researchers are often people like the founder: willing to tinker and figure out how to deal with complex or incomplete systems, proud to be the first to try something, while seeing enough financial value in the innovation of the breakthrough itself to pay more. They think they are smarter than everyone else, and don’t need to be sold on the product.

It is extremely difficult for entrepreneurs to see the value in simplifying when it is time to push the product forward to early adopters and early majority – who demand lower adoption costs. Entrepreneurs (and many of the people who surround them) don’t realize that the simpler the product, the more people will buy it. It may not really be that important to them.

There are reasons why simplicity is a bad word among people with big ideas. Entrepreneurs – almost universally – believe that their product is being “dumbed down” when features are removed and it is streamlined. If Jerry Kaplan’s observation is correct – that entrepreneurs need to prove that they are smart – then excessive complexity is an expression of their desire to be recognized for their superior intelligence over most people, who need to be proven “dumb.”

If their spark of inspiration attracts innovators/researchers, but needs to be simplified or made whole, there is unrealized value. That’s when an experienced executive must be brought in to focus on minimizing complexity and maximizing value based on the benefits that matter most to customers.

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Growing from an entrepreneurial start-up to a full fledged enterprise is often painful because of the change that it brings to the culture (more rules), the profile of customer (no more early adopters), and the people you hire (less entrepreneurial). A deliberate process of creating value must be institutionalized, which requires many processes that can get in the way with aligning the culture to the realities of the market.

A product’s spot on the adoption lifecycle places demands on an organization that require a steady hand to scale-up while retaining profitability. So, a pricing strategy is essential from the very beginning, with a view of the entire arc and the implications throughout the lifecycle.

If an early-adopter segment is willing to pay a premium for a product, the company that makes it may wish to consider a high release price to capture the extra value, with planned reductions down the road to attract latecomers. Along with capturing more revenue over the life of a product, this strategy can also help companies match demand to production capacity for a new product.”7

Experienced professional managers should have the perspective to use a pricing strategy as a means to create long term value.

Experience tells them that the price will decline over the lifecycle as competitors enter the market and as their own company’s efficiency increases. As we discussed in Part One, pricing can be based on the costs to produce a given product, or can be value-based and modeled around the market. The latter is the preferable way to go, but requires some idea of what the market (composition) looks like and a mechanism to communicate with it.

Market research, something that unfortunately conjures negative imagery for many entrepreneurial startups, is absolutely essential to accurately identify the

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niche that offers the best opportunity for immediate results. With research largely in mind, at Turner DeVaughn we sponsor the Top Line Conference http://www.toplineconference.com) and annually showcase several companies at various stages of growth. In 2007, each got the opportunity to share how they stay close to their market. Presenters ranged from very early-stage, pre-revenue enterprises to a venerable and well-known public company. At the reception following the event, the smaller companies expressed the concern that the public company had the advantage of resources (that they don’t have) to do market research. Good observation. By comparing companies at different stages, it becomes obvious that market research is essential to the creation of value. It’s only by knowing what customers want that companies can prioritize their efforts.

Conference panelists observed what works in the real world. Shelley Harrison’s comments, as CEO of San Francisco-based market researcher, LaunchPad, addressed a common observation in Silicon Valley and beyond:

A very common case is the people inside the company have lived and breathed this product for a long time, and the respondents just don’t see the value there. We had a client who was going to spin off a whole new division based on a product evolution. It’s not that the target audience didn’t like it. They did like it. But the company was planning on selling it for $400,000. The price that the target thought they should pay was $40,000. So, thankfully the company listened and decided not to structure a whole new division around this.”8

Thankfully, indeed.

In fact, there are few new products that are anything more than evolutionary, incrementally improved offerings competing on price. Thus, we can see the importance of the research that enables management to see how the product stands relative to other brands already out there – how valuable different benefits are and the possible price points that could be established:

If you’re considering an economy pricing model, it means you must eliminate all frills. So, there better be enough sales volume to make up for the skinny margins. This approach works when the market is crowded with competitors and no one is addressing the economy buyer.

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Standard pricing leaves more room for margins, and will probably attract the largest customer base and the most competition. The bell curve illustrates this principle in action. When looking at this part of the market, segmentation can be valuable. But, again, market research is essential.

Premium pricing reflects a larger investment in the brand and an assurance of quality, but the profits are worth it. First with the dot-com boom, then the housing bubble, there was no shortage of people who were more than happy to buy perceived luxury brands. In the aftermath of such meltdowns, this trend may not be as intense. The added value of benefits, consistent branding and delivering on the promises of the particular brand are more important in this context.

CHAllENgE AND OPPORTuNITY

Many companies leave money on the table by focusing on cost reductions and not looking at their value proposition and business model. According to consultants at the Aberdeen Group, 93% maintain at least some strategic emphasis on reducing product costs.9

Yet, it is often a better use of time to find and serve the most profitable markets and add value for them. Market research is essential to make pricing decisions that impact the entire value proposition.

Before beginning the research, strip away assumptions. Just because things have always been done a certain way doesn’t mean they are ideal. Research provides an opportunity to learn from people who are open to a new way of doing things. And it just may provide the insights that lead to better approaches and methods.

A key component in the value proposition is the justification for a specific price point. It need not be as simple as a one-time purchase, especially as downward pricing pressure is forcing companies and product managers to innovate around the business model. Jeff Raikes, group vice president of productivity and business services at Microsoft, observes that equally important to the company’s success in technology advancements and innovation has been its success in innovating business models. He cites Microsoft’s licensing of operating systems to other hardware companies as a business model breakthrough.10

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Based on research among over 700 CEOs by IBM we find similar ideas: “Business model innovation matters – competitive pressures have pushed business model innovation much higher on CEOs’ priority lists than expected. But its importance does not negate the need to focus on products, services and markets, as well as operational innovation.”

Recommendation: Make the business model “deeply different...find ways to sub- stantially change how you add value in your current industry or in another.”11

One of our own research efforts (The 1999 Turner Investor Survey) spotted a trend toward the growing importance of business models among investors. Nearly one out of four respondents said that they look to companies and their annual reports to explain the business model in detail. That was second only to historical performance/results at 29%. Since then, we have learned more and more about this issue because customers are willing to consider alternatives that reduce their risk, reduce upfront expenses and justify changes.

The value proposition, again and again, is central to any business model in every industry. And, companies with innovative business models that offer true customer value are more likely to grow into sustainable enterprises.

1-800-GOT-JUNK?® founder Brian Scudamore had a vision to do for junk what FedEx did for overnight shipments. It was about a new value offering, backed up with a new business model. Fed Ex company founder Frederick W. Smith realized that existing shippers (such as the US Postal Service) were not as reliable as business customers needed when it absolutely, positively needs to get there overnight. Smith created a vertically integrated business model in order to rectify the problem and named it Federal Express. He considered everything from planes to trucks to boxes and the technology required to tie it all together.

In 1989, Scudamore invested $700 and an old pick up truck to get his own business going. He had realized that people with junk did not have a simple or reliable way to remove it all. He translated that customer problem into a vertically integrated business infrastructure. By 2007, the company posted systemwide revenue of $160 million. Today, 1-800-GOT-JUNK? has more than 400 locations in on three continents.12

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According to journalist Scott Allen “Their recipe for success has been simple. Take a fragmented business, add clean shiny trucks that act as mobile billboards, uniformed drivers, on-time service and up-front rates, and then mix in with a culture that is young, fun and completely focused on solid, healthy growth. He has managed to retain 100% ownership and bootstrapped the business solely out of cash flow – something that is very rare these days.”13

Scudamore has expanded through franchises wherever there is junk – even paradise. Sandi McDowell, owner of the Honolulu franchise: “I love giving people their space back,” she said. “It’s hard for people to let go of their stuff, but once they get the ball rolling, they typically will add to their load.” The cost for the volume-priced service starts at $120 and goes up to $598 per truck load. The average job in Hawaii ranges from about $375 to $400.14 The value proposition for consumers: pay a premium to get a trusted brand to come out and deal with everything. For anyone who has tried to move or remove junk on his or her own, they quickly find that this is a huge convenience. For anyone who has hired an unreliable local contractor, it’s easy to argue for having a brand that stands behind the work (especially when strangers are coming into your home). The adoption costs are low: pick-up the phone and dial a toll-free number and soon someone shows up to do it all. It’s a whole system that solves the problem completely. The brand promise is so simple for people to understand, but the processes behind the scenes required tremendous innovation as far as the junk business is concerned).

Allen observed “Although this is a simple business, they couldn’t possibly have grown this quickly without technology. Taking a low tech business and putting a high tech spin on it allowed them to rapidly distinguish themselves from their competition. All calls come into a central 1-800-GOT-JUNK? call center where they do all the booking and dispatch for their franchise partners. Franchise partners then assess all of their real time reports, schedules, customer info, etc., off of JUNKNET, their corporate intranet.” This allows franchise partners to get into business quickly, and to focus solely on growth – working on the business vs. working in the business.15 Junk removal is a simple idea but it

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still required an understanding of customer value. Technology products, while rarely simple, require nothing less. _______ Professor Henry Chesbrough, executive director of the Centre for Open Innovation at the Haas School of Business at the University of California, Berkeley, is an expert on disruptive business models. “Put simply, bad things can happen to good technology,” he says. “Much of what can happen is due to the business model the company uses to commercialize the technology,” he explains. “This is the next wave in innovation: to innovate the business model that commercializes promising new ideas and technologies. Doing so is, for the most part, a simple process of trial and error. But at most companies it also requires the removal of some barriers to such innovation.”16

At a workshop on wastewater treatment systems conducted in 2007 at LaTrobe University in Australia, Alex Osterwalder gave an example of an innovative business model where you wouldn’t think of looking for one. Prior to his firm’s involvement, the model was based on a one-time sales fee to build waste water treatment systems for Canadian mining sites. Once the system was built, the company did some follow-up but walked away. This model required that sales people continually look for new mines to work with. Ostertwalder’s innovation? He added a call center for ongoing service support which led to a recurring service fee to dispatch repair teams based on the work required. The new model required that the company recognize the potential value of an installed base of customers. It allowed the company to completely change revenue streams – as well as its relationship with customers which made life easier for them.17

Osterwalder describes the building blocks of a business model as Customer Segments, Value Proposition, Communication and Distribution Channels, Customer Relationships, Revenue Streams, Key Resources, Key Activities, Partner Network and Cost Structure. Put together, this should add up to a solid model for delivering real benefits and a lucrative bottom line.

Stan DeVaughn has worked closely with Paul Wiefels, a managing director of The Chasm Group in Silicon Valley. Beginning on page 106, he describes how business models contribute to value.

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In a perfect world, a firm’s business model – simply defined here as the way in which value is created and transferred to a customer willing to pay for such value – evolves and adapts as a result of ongoing market insights, customer feedback, strategy course corrections, financial acumen, organizational tal-ent and flexibility, and a bias to efficient, well-orchestrated execution. In re-ality, we’ve seen how the business model often becomes the firm’s strategy de facto, imposing market, financial, organizational, and other constraints both tangible and intangible on the firm’s evolutionary potential. To some firms, these constraints eventually become fatal. Given this eventuality, the firm typically is the last to realize that it is largely responsible for its own demise. So much for a perfect world.

At Chasm Group, we hold that a firm’s value proposition in the digital age – the age of virtually ubiquitous and free information as well as a seemingly infinite number of alternative choices available to customers – is directly tied to how well a company can innovate, design, evolve, optimize and retire its core and supporting business models, strategies and programs – on an ongoing basis and with a repeatable process. Value propositions and business models are now inextricably linked. This spells opportunity for some and doom for others.

Here’s why.

A firm’s business model success and sustainability depends on achieving the means to create, deliver and communicate the value that customers are looking for – and doing it so well that other competitive alternatives pale in comparison. Consider the past half-decade: in the 1950’s, the world witnessed the advent

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of both network television and McDonald’s restaurants. In the 1960’s, cor-porate conglomerates were in vogue and a retailing equivalent, Wal-Mart, was spawned. The 1970’s ushered in FedEx and more big-box retailers like Toys ‘R’ Us which gave rise to Costco, Home Depot and Blockbuster in the 1980’s. During the same time, we witnessed a renaissance in information technology as thousands of successful companies were spawned around the business models pioneered by Apple, Intel, Microsoft and Dell. The IT revo-lution made 1990’s business model innovations such as Amazon.com, eBay and Yahoo! possible, not to mention the means to decipher the way living things are fundamentally constructed. But this decade also celebrated busi-ness models not rooted in IT such as Southwest Airlines (founded in 1967 and profitable for the past thirty-five consecutive years) and Starbucks. Of course, the 90’s also featured the most notorious business model parvenu, the undifferentiated, first generation dot-com. Today, as two slender white cords dangle from our ears, we Google, make “friends” with, blog to and text message anyone and everyone while driving our hybrid cars and drinking vitamin-enhanced, naturally flavored water.

Each of these examples illustrate the ability to combine insights and knowl-edge with a particular set of assets and capabilities, all orchestrated effec-tively to provide a product or service that becomes virtually irresistible to vast numbers of us. They demonstrate the integration of a “what” combined with a “how” directed to a “who” at a “when” with an overriding “why” – the essential essence of business model and market development strategy. In most every case, they are spawned by what has preceded them in either evolutionary increments or revolutionary leaps forward. There are case his-tories in abundance but most management teams want to know how you do all this and run the business too. And what can you do to stack the deck in your favor?

Every business faces two fundamental and sometimes conflicting demands: it must execute to survive and prosper given today’s immediate environment and circumstance; and it must adapt its value creation and delivery to antici-

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pate and survive tomorrow’s challenges. This dialectical dilemma has been a fundamental theme in management literature over the past 20 plus years. While there are prescriptions aplenty, the history has not been encouraging. Richard Foster and Sarah Kaplan, authors of Creative Destruction, point out that only a small fraction of companies survive for a very long time, and the survivors end up as mediocre performers. Must the good really die young?

Bill Gates was once asked where Microsoft would be in the year 2025. His re-ply suggested that the company he founded might not exist by then if it didn’t find ways to innovate and create value for both customers and shareholders. He also indicated that he himself would be just fine, thank you.) The oft-stated notions of “owning the customer,” maintaining “account control,” creating recurring streams of revenue,” imposing “barriers to competitive entry and customer exit,” “creating lifetime brands” and other well-intended but self-deluding “strategies” were absent from Gates’ thinking on the subject.

Getting beyond such conventional wisdom requires a fresher, more pragmatic perspective in planning for your future including accounting for the following: • Business models (and the firms that utilize them) germinate, blossom, wither and die.

• All sources of competitive advantage are ultimately temporary as are the value propositions that arise from these sources.

• It is extremely difficult (though not impossible) to create a source of competitive advantage after the historic source has declined or is no longer viable.

• Technology, category and product life cycle forces tend to favor certain business models types over others.

We believe the last bullet point above is especially crucial to reconciling how and why certain types of business models build traction over time while others lose their grip. In The Chasm Companion (HarperBusiness, 2002), I described various adoption “inflection points” found during the life cycle of a disruptive innovation – from birth through old age – and the implica-

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tions for the market development and go-to-market strategy for each ensu-ing wave of customer adoption.

Our corollary approach and organizing principle to business model adaptation as it intersects with value proposition design and development is drawn from Michael Treacy and Fred Wiersma, the authors of The Disciplines of Market Leaders. The authors postulated three fundamental disciplines or biases that governed the orientation and operation of successful enterprises. These are 1) product leadership; 2) customer intimacy; 3) operational excellence. These value disciplines represent different pathways for creating value po-tentially within the same category. Treacy and Wiersma argue that excelling in one of these disciplines provides a significant advantage to the enterprise willing and able to use the discipline as a driving force in both strategy and execution. Note that the phrase product leadership could equate to either a product or a service. We are referring here to what is on offer. A focus on product leadership contrasts with models, value propositions and strategies that do not emphasize the product per se but rather how one experiences the offer (customer intimacy); or the effectiveness of an organization to deliver the offer (operational excellence) and the benefits to customers that follow as a result.

THE PRODuCT lEADERSHIP ADVANTAgE

Business models and value propositions that emphasize product leadership are often found in the early phases of a category’s life cycle. Principally, they cluster around three vectors. The first is that of disruptive innovation. Value propositions based on this vector are created based on some discontinuous technology change or an equally discontinuous business model. Importantly, such disruptive business models are typically incompatible with existing standards and value chains. They create new markets entirely. The most no-table example is Apple’s iTunes. Practically, iTunes was the first legal way to download music via the Internet. Thus, it was the first legitimate business model to be substantially monetized and it remains the leader today.

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The next vector is built around application or solution innovation. Here, business models and value propositions are created by finding new uses for existing products or by introducing new products into industries that have not previously used them. Consider Adobe Systems. The company’s novel software technology initially was designed to drive laser printer output, but grew to revolutionize how advertising, graphic design, print production, and even document copying got done. Adobe introduced new tools and economics into several related industries that had not fundamentally changed in fifty years. Adobe has now expanded again to shape how video content is designed, presented and engaged dramatically expanding its potential market by, ironically, keeping its focus on serving these same industries. Now everyone can be a web designer, produce commercials and protect the fidelity of their content.

The concluding vector is one that typically is coveted by many but available only to the few. It extends the previous vector to platform status: figuratively and literally a foundation upon which lasting value chains can be built and sustained, nourished by an ecosystem of enterprises that have economic allegiance to the platform provider. Platform business models arise out of one company winning the most customers in a product category that is characterized by a significant level of complexity – typically either at the user or value chain level or both. In the tech world, think SAP and Oracle and the aforementioned Adobe. Consider Microsoft and Intel in the PC category and Qualcomm in wireless telephony. Each of these companies started by offering superior application-based products that were highly complex and in great demand. By masking the complexity for end users, they effectively became “hosts” of sorts to many other companies who could now serve the same customers with complementary applications while taking advantage of a greatly simplified foundational technology layer found in the original application.

The trade-off to product leadership business models and value propositions has largely to do with the significant investment required to generate an

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advantaged position, all of it subject to the fickleness of customers’ tastes and proclivities. Companies that achieve platform status can further be ham-strung by the very nature of their model. Not wishing to risk disturbing their hard-won gains or the supporting ecosystem that they have created, they miss the next wave of business models looking to overthrow them based on a completely different, organizing discipline. Thus, these models are really most favored where there is still significant potential for category growth.

THE CUSTOMER INTIMACY ADVANTAGE

Of the possible vectors available utilizing this discipline, several elements are common. First, business models and value propositions based on customer intimacy tend to be found in mature categories and industries. Since actual differentiation among products may be minimal, the challenge is to differ-entiate as much as possible to achieve customer preference without making significant investments in the underlying core offer. Here are two examples:

The first is built around the ability to enhance and extend existing products and services using extremely targeted segmentation to tease out unmet wants or latent desires amongst a particular market segment, and then create and market these line extensions without having to significantly invest in R&D. The automobile industry worldwide created the sport utility vehicle (SUV) for activity-minded “weekend warriors” or those who thought of themselves as such; the minivan, for so-called “soccer moms;” and the “crossover” vehicle for those who a) want better mileage and agility than possible with an SUV; and b) do not want to be thought of as soccer moms. Athletic shoe manufacturers have got a shoe for every for every sport, for every type of man, woman and child, and in an endless array of colors and styles, all of which will be available in the bargain stores one year after their introduction. These value propositions and can be thought of as fashioned around fad, fact or fancy, and often the intersection of all three. Organizational agility, marketing acumen, supply chain optimization, and widespread distribution are all hallmarks of the business model.

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The next model is focused around the optimization of experience and may span from how an offer is marketed to the actual adoption of the offer and its usage. The former is represented in business models whereby the emphasis is on differentiating how the offer is communicated, merchandised and sold. For example, we prefer some companies over others simply because we like their advertising or how their products look (e.g. Apple). We might prefer meeting our insurance needs through GEICO simply because they do not utilize traditional insurance agencies and thus “no salesperson will call.”

Alternatively, we may choose to emphasize the actual experience of using the offer itself. Delta, American and United Airlines ship you and your luggage from point A to point B. Singapore Airlines, Virgin Atlantic and Qantas take pride in flying you from point A to point B with hospitality, reliability and a bit of fun. Macy’s is a merchandising giant. Nordstrom is more of a shopping experience. All these examples work as business models (though the U.S. airline industry seems to have deteriorated severely over the past ten years due to circumstances, we’re repeatedly admonished, that are beyond their control). Well-differentiated, successful customer intimacy business models are novel primarily because their core offerings are fundamentally the same.

THE OPERATIONAl ExCEllENCE ADVANTAgE

Business models based on this discipline are more about creating customer value by manipulating and optimizing the means of production rather than what is actually produced or how it’s experienced. Think of the organizing principle here as focused on the supply side rather than the demand side. However, this focus produces results – lower costs, faster time to benefit, minimal capital investment and so on – that are often highly coveted by customers particularly when the underlying offer is once again hard to differentiate on its own. Here are two approaches that stand out:

When you think of Wal-Mart, you undoubtedly think of their promise: “Always low prices.” How do they do that? By employing a process integration business model. Wal-Mart “rents” shelf space to manufacturers who are then responsible

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for managing their own inventories. If you want to sell your stuff at Wal-Mart, you first have to tie in your supply chain process to Wal-Mart’s IT system. Wal-Mart knows how to optimize its supply chain by managing its inventory turns, except the onus for so doing becomes that of the manufacturer. Want to sell your stuff at Costco? You need to provide them with a unique, “bundled” offering available that significantly reduces per unit cost to their customers when compared to other retailers. If you want one 16 oz. can of stewed tomatoes, go to Safeway. If you want a gallon of stewed tomatoes for the same price, go to Costco. These examples require a six-sigma operational orientation; extreme sensitivity to sources of inefficiency in supply chains specifically and value chains overall; and a never- ending battle against costs.

A variant of this model is the value migration model. This model transfers one value delivery offering or mechanism to another, particularly under conditions whereby the original offer is becoming commodity-like; or, paradoxically, where a significant degree of complexity still remains thus decreasing the offer’s attractiveness to a particular market segment who otherwise would covet it. Examples of the former include the switch from highly R&D intensive products like biotech instrumentation to more margin-rich consumables like custom reagents; or moving from building printers to supplying ink cartridges.

The latter example is increasingly popular in the IT sector. Software-as-a-Service SaaS), represented by such companies as Salesforce.com and NetSuite allow customers – many of them in the small and medium business category – to obtain all the benefits of, for example, sales force automation (SFA) and customer relationship management (CRM) software without having to buy the damn stuff. Customers subscribe to these benefits with the vendor hosting the software and being responsible for its maintenance and upgrades. Or consider long-time IT systems vendors who ended up as also-rans in the hardware business, e.g. Unisys. Companies such as this have found new lives as systems integrators, consultants with specific domain expertise, and outsourcers. These model orientations by and large have enabled enterprises

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to leverage market segments who otherwise would be unimpressed with more of the status quo; or who need to deepen customer relationships with the customers they have now, rather than seek opportunities for new customers. To sum up, when you believe that your market development strategy has become your business model which has now become your value proposition, ask yourself a fundamental question: is this the result of a well-considered, well-orchestrated company-wide strategy that maximizes your return on capital, both human and financial? Or have you become captive to market forces that are “beyond your control?” One path leads to sustainable mar-ket advantage, even market leadership. The other path leads to victimhood. Here’s to making the right choice.

ABOUT THE EXPERT

Paul Wiefels is a managing director and original partner in The Chasm Group having joined Geoffrey Moore at the inception of the firm. He provides counsel to companies in the areas of corporate, business, and market development strategy. He is the author of The Chasm Companion: Implementing Effective Marketing Strategies for High Technology Companies, published in 2002

by HarperCollins. More about the practice at: http://www.chasmgroup.com/

Prior to joining Chasm Group, he served as director of consulting for Landor, the world’s largest branding consultancy. Prior to Landor, he was worldwide director of product marketing for Ingres Corporation. Wiefels began his high tech career with Apple Computer serving in marketing management positions.

Wiefels earned a Bachelor of Science degree from the University of Southern California and an MBA from USC’s Marshall School of Business. He has served as a faculty lecturer in the California State University system, and currently lectures at Pepperdine University and Stanford’s Graduate School of Engineering.

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A company’s business model provides an organizing principle for operations, but must be driven by the value proposition that customers will embrace. It’s the reason why customers will part with their money – the organizing principle for the transaction. If developed with an understanding the real problems that face your target market and the real costs that they are willing to pay, the value proposition will accelerate transactions. It’s the true north of the enterprise’s course. The magnetic force of customer value is strong, but every business re-quires a compass sensitive enough to feel the force. Even more challenging is that the CEO must have a willingness to align the business with the market. We have observed that many businesses are oblivious to what buyers want.

WHAT buYERS WANT

In our quest to know what separates success from failure, our extensive re-search compared what buyers want to what sellers offer. The difference can be dramatic. Before we share some very revealing statistics, we will offer an analogy to set the stage.

If it is true that “men are from Mars and women are from Venus” then one could say that buyers are from Earth and sellers are from the Sun. By that, we mean that many sellers come to believe that the customer’s world orbits around them. In fact, it’s just the opposite. The seller is, in reality, only one of many satellites circling around the buyer.

From the observations of someone on Earth, it would seem the other way around (at least until 1514 when Copernicus first postulated his thoughts). We see the Sun move across the sky as if it’s moving and we are not. Our place in the world and our view of it is fixed. Such is the case with buyers (customers). They see things exclusively through their eyes and not through product literature. And they have the money and the power to purchase. It does not matter how much of your toil went into the product. They care only about its value and utility to them. What will it do for them? Is it worth it?

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There is too often a disconnection between what companies believe they are selling and what people actually want to buy. Let’s continue the analogy: the Sun produces colossal light and heat via nuclear reactions. However, what peo-ple on Earth care about is whether or not the sun is shining and how warm or cool the temperature is – wherever they happen to be.

Yet, if the Sun was selling itself (as most companies sell their features), it would focus on some very impressive product specs:

• It generates 3.83 × 1026 watts of power • The mass is 1.989 × 1027 metric tons• The temperature of the surface is 5500°C

Astronomical numbers, for sure. But is any of it relevant to your picnic plans?

If it doesn’t close the deal, the Sun may want to share comparisons of its stats to those of other stars. If this sounds ridiculous, you’re right. But that’s basically the way many companies are inclined to sell their new products. Small wonder why only two or three percent of online prospective buyers get it and convert to customers. Most buyers actually figure it out for themselves, despite the ir-relevance of the pitch, and make a decision – often declining to purchase.

More foolhardy than ever to dismiss buyers as unsophisticated. And it has always been dangerous. Consumers commonly have a few seconds to consider a pur-chase – typically with incomplete information. In fact, they are thinking very rapidly and efficiently. And, they are ruthless.

THE WEb: A WINDOW ON HOW SEllERS (MARkETERS) THINk

Since 2006, Turner DeVaughn Network (TDN) has formally scrutinized buyers’ and sellers’ interaction online. TDN has analyzed, or “benchmarked,” more than 400 various companies and their web sites. You can see most of them at http://www.benchmark-tdn.com. You can also use our interface to benchmark your own company based on your site’s content.

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Why did we do it? We wanted to test what proved to be true in every one of our engagements over decades – the importance of selling benefits and the primacy of a value proposition. It took time and battle scars to make some observations that eventually developed into theories about the old verities of marketing and how we might be able to predetermine the relative success of early-stage enterprises and even more mature companies. We’ve studied what makes some businesses wildly successful, others modestly viable, and still others struggle and fail. We have also looked at businesses that were successful for a time before losing their edge.

Our conclusion: successful companies most consistently identify and sell what their customers value. Their customers are drawn irresistibly to these brands’ value propositions because the buyers instinctively identify their need with the benefit offered. This is no coincidence. These companies know what benefit their target customers place the most value upon and organize their operations, especially marketing, around it.

Knowing what customers value is essential to value creation. Booz Allen Hamilton presented research on this topic in the Winter 2007 issue of Strategy + Business. It revealed that companies engaged with their customers have twice the return on assets and triple the growth in operating income of companies not engaged this way.

Without an idea of what customers value, it is nearly impossible to put forth a relevant value proposition. Remarkably, we found that only a minority of companies even mentioned one. Our findings revealed a 100% correlation between having success in the marketplace and having a quantified value proposition relevant to a target market. If you have one, you succeed because you are not fooling anyone – including yourself. CEOs who tell us that they don’t need one because they are “different” fool no one but themselves.

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It is impossible to simply slap what you might think is a quantified and validated value proposition on a product and declare the process “done.” The process reveals one of three things:

The first (and most common) is the reality of an inadequate offering. If such is the case, any customers at all are a wonder. The company in question may fear that everything will collapse around them if they have to evolve (read: change) what they are doing. Especially if the key learning is that their price is too high. DNA Plant Technology (see page 8) is a good case in point.

The second situation is an offering that has hope, but may be incomplete or overpriced. By taking a fundamental look at what a product or service can ac-tually do for customers, it may be possible to come to terms with a more mod-est value proposition than one had envisioned. This often forces companies to innovate with their business models – which can offer more value than was originally considered.

The third scenario is a company that has informal mechanisms in place to monitor customer value, but never puts a formal system in place to capture it. WD-40 Smart Straw (see page 58) matches this criterion, and by putting formal processes in place – such as observational research – they were able to create even more value.

Remember that a value proposition is nothing more or less than the benefit you’re selling at the price point you’ve set, plus the cost of adoption. The very act of doing so requires a commitment to customer value. We have found that companies follow a pattern when they are realizing that a commitment is required. Perhaps it is because the new people who join the company come in with certain skills not focused on customer value.

This pattern increases the chance of failure, and creates needless expenses that have nothing to do with creating value. Turner DeVaughn Network offers a model that does not allow a company to wait years until it has a value proposition. Just as 1-800-GOT-JUNK? had a clear value offering from early on, you must get it right as quickly as possible.

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Based on our buyer research, we developed an analytical model called the Con-version Curve© that includes all the elements that are essential to converting a prospect into a customer. Looking at the world from the perspective of the cus-tomer is, unfortunately, unfamiliar territory for many innovators and market-ers, but the Conversion Curve facilitates this view through the lens of the buyer. The curve is made up of seven elements that are most relevant to buyers. It is a lens through which you can see how effectively a company is offering what customers value. Analytical elements correspond to visual and textual elements that may or may not appear on a company’s web site: features, benefits, value proposition, proof points, testimonials and dialogue between buyers and the brand. The seventh, and most basic, measure is simply whether the web site is functional and can be found on a Google search, which is pretty fundamental for any business.

Seven simple questions are the source of this data. If the answer is “yes,” points are awarded, regardless of quality. If the answer is “no,” points are not removed, but they are not assigned. It’s an objective assessment and anyone can see what’s on their site and answer yes or no:

Is the site functional and found on Google? Does the site list and describe product features?

Does the company describe what the product will do for buyers?

Is the company able to articulate a value proposition?

Does the site list proof points of the benefits and value proposition?

Are there testimonials from customers about what they value?

Is there a web-based dialogue with the company about what customers value?

Your Competitive EdgeGiving Customers Better Reasons to Buy

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IS THE SITE FuNCTIONAl AND FOuND ON gOOglE?

40 points: It’s hard to find a company today that doesn’t have a web site. More companies also realize that they must be easily found in different ways. Although there are many search engines and directories, we happened to choose Google’s related” search function in our research. A site found according to a related search suggests that the company understands the importance of its web site being contextualized among peers based on the content on its site. The language used on the web site contributes to Google’s perception of products and its competitors. The more the content addresses what customers value, the better the Google results tend to be. The other factor in Google results are the references links) from other sites.

We disqualified companies from the benchmarking if they did not have a site.

We do have standards, after all.

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65 pointsis the average score of 241 web sites studied by Turner DeVaughn

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DOES THE SITE lIST AND DESCRIbE PRODuCT FEATuRES?

10 points: Some companies provide detailed statistics about their products. Others describe how their products work. And some simply show the product, and provide different options to select from. Product features are the most common type of content found on product web sites. It represents a way to highlight the accomplishments of internal product development staff, however, more than it amounts to effective marketing and selling.

Product development staff and engineers often look askance at the marketing function. To them, product spec sheets, facts and features are the only essentials. Everything else is, well, marketing. They see marketing as “spin” that oversimplifies and distorts the scientific and technical purity of their creations. This might be why features are the most common type of content on a web site. In fact, companies in our researrch exceed market expectations when they communicate the functionalities of their products.

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68%of web sites published by sellers present product features

66%of buyers responded that they want to know product features

+2%is the positive gap between what buyers want and sellers offer

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DOES THE COMPANY DESCRIbE WHAT THE PRODuCT WIll DO FOR buYERS?

10 points: Describing benefits demonstrates your concern for, and solidarity with, your buyers – your customers, just as David Ogilvy observed a half- century ago. And the first step toward a value proposition is to look at what the product will do for customers. A benefits statement or list must address what matters to customers. Many sales people know that “features tell, benefits sell.” And some sales people are also empowered to negotiate the selling price with buyers, so they create a dynamic value proposition during their conversations with prospects based on the benefits statement. They develop an instinct or an intuitive feel for the right price and assuage buyer concerns about adoption costs. They can even work with the buyer to get up and running (test drives of automobiles or clothing alterations). But in an age where more people are making purchase decisions online, benefits statements have limits.

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44%of sellers describe what a product will do for customers

94%of buyers who want to know how a product will benefit them

–50%is the negative gap between what buyers want and sellers offer

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IS THE COMPANY AblE TO ARTICulATE A VAluE PROPOSITION?

10 points: More than ever, a value proposition has become a requirement for companies that do not strictly rely on sales people to close the deal. Online transactions and sales through distributors or channel partners mandate a value proposition. But sales people appreciate a way to close deals faster according to a proven method sponsored by their company. They will often ask for better reasons to buy” or “products that will sell faster.” The value proposition forces innovators and marketers to work together to provide sales staff and strategic partners with what they need to do their job. Yet, sales people often feel disconnected from marketing and marketing staff, and marketers are not viewed by R&D as “one of us.” This dysfunction creates the greatest gap between what buyers value and what companies tend to offer. The data is stunning.

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9%of sellers describe their value proposition on their web site

71%of buyers want a justification for the price point of a product

–62%is the negative gap between what buyers want and sellers offer

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DOES THE SITE lIST PROOF POINTS OF THE bENEFITS AND VAluE PROPOSITION?

10 points: Case studies are common to many web sites in their corporate narrative. It’s a starting point, but many companies have case studies or testimonials on their sites that say little more than flattering things about the manufacturers and fall short of delivering the beef sought by prospective customers. Proof points represent the opportunity to quantify and validate the value proposition by learning from specific customers or consumers about their personal usage of the product. How many case studies actually reveal an ROI and daily benefits actually experienced? How many address user adoption costs? In-depth case studies with candid commentary and honest appraisals of positives and negatives are crucial to credibility and goodwill. Entrepreneurial and small businesses especially tend not to understand the importance of useful, relevant case studies and their potential.

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27%of sellers publish customer case studies on their web site

66%of buyers seek proofpoints that affirm the value proposition

–39%is the negative gap between what buyers want and sellers offer

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ARE THERE TESTIMONIAlS FROM CuSTOMERS AbOuT WHAT THEY VAluE?

10 points: A market consists of people who refer to one another. Testimonials are simply an effective way for you to acknowledge this. As a result, testimonials are more common than the use of case studies. They are also typically (and woodenly) written by the company to reflect the corporate line. And buyers know it. Yet, despite its pretense of being a “real quote” in language rarely or never used in natural, everyday conversation, it is really a symbol. It represents the fact that the seller obtained permission from the buyer’s legal counsel to use their name and affiliation with the corporation. Regardless of the words in the quote, the fact that the testimonial exists at all is a near miracle. We’ll give credit where it’s due. Still, testimonials could be put to better use to validate the value proposition – including product benefits. Examples are explored on page 139.

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34%of sellers publish customer testimonials on their web site

53%of buyers surveyed want to read customer testimonials or quotes

–19%is the negative gap between what buyers want and sellers offer

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IS THERE A WEb-bASED DIAlOguE WITH THE COMPANY AbOuT WHAT CuSTOMERS VAluE?

10 points: Our research suggests that this is a primary method for companies to continue to learn from their markets. It’s also important to aid in converting prospects to customers – raising questions that are critical to them – and finding other customers with experience in that area.

So-called “Web 2.0” tools and applications have been largely ignored in these capacities. It’s ironic when you consider how much hype has been associated with this social media. Today there are simple ways to give both companies and consumers a way to quantify and validate your value proposition – and generate authentic testimonials. In fact, many companies are reluctant to learn what their market has to tell them – things they’d better learn sooner rather than later when course corrections might be too late. No marketer can ever know enough about how his or her target customers make purchase decisions. Implementing a dialogue capability on your site is an exceptionally useful and easy way to start the process and keep learning from it.

7%of sellers provide some sort of an online dialogue function

62%of buyers would like to engage in conversation with other customers

–55%is the negative gap between what buyers want and sellers offer

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CASE STuDIES

Based on the Conversion Curve, Turner DeVaughn has analyzed how hundreds of brands perform. Our conclusion? There are three stages of growth: feature-minded, benefit-minded and revenue-minded. Of the things buyers look for features, benefits, value proposition, proof points, testimonials and dialogue), start-ups typically focus only on their product features. Being feature-minded isn’t sustainable as one’s market becomes more competitive.

Survival depends on giving people reasons to buy: becoming benefit-minded. Most enterprises achieve a run of success because they arm their buyers with enough data to connect the dots and draw their own conclusions about value.

The value proposition one of the the last things companies develop (if ever). They tend to do so only when competitors / peers are threatening their success or already have a value proposition). Companies that are revenue-minded are able to most readily and crisply answer the question: What’s the ROI on this product? They have a value proposition and know how to use it effectively to accelerate the sales process and inspire and prioritize innovation.

We chose six companies to illustrate this evolution:

Stage Score Case Study Peer Average _______________________________________________________________One: Feature-minded 50 points Nanonex 52.5 points

Two: benefit-minded 60 points ING Direct 65 points 70 points Real Capital Markets 67.5 points 80 points VCS Timeless 67.5 points

Three: Revenue-minded 90 points GE Healthcare 80 points 100 points Sugar CRM 90 points One of the most interesting findings of Turner DeVaughn research: companies don’t stray far from their peers. The average gap between the subject of the case studies and their peers was seven points. No company was more than 12.5 points away from the average of their peer group.

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Features / 50 pointsCase Study

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nanoneX / 50

NANo opTo / �0

Peer average / 52.5

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INSIgHTS

The Nanonex company mission, according to its web site, is “to deliver, today, user-friendly nano-imprint lithography (NIL) tools and solutions to a broad spectrum of markets and to both experts and non-experts of micro-fabrication.”

If any non-experts are numbered among prospective customers, they will struggle on this site. It does nothing to translate the company’s technical prowess into user benefits. For example, Nanonex Material Family is very clear about features such as viscosity, level of stability at room temperature, response and flow. But will the non-expert know how these specs translate into benefits (let alone a value proposition)?

The following list illustrates the concept of being feature-minded at stage one. These are the features Nanonex presents on its site (verbatim) in an attempt to convey reasons to buy:

1 / Best nano-imprint solution technology

2 / Versatile tools for all forms of imprinting

3 / UV or thermal imprint, or both (operating simultaneously), within a single machine

4 / Air Cushion PressTM for wafer-scale uniformity on non-flat substrate and high yield

5 / Smart Sample Holders for substrates and masks with arbitrary shapes and sizes

6 / Fully automated nanoimprint operation

7 / Radiative heating for ultra-fast thermal NIL

8 / Broad range of tools to choose from

Nanonex 1 Deer Park Drive, Suite O

Monmouth Junction, NJ 08852 Phone: (732) 355-1600

http://www.nanonex.com/

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9 / A variety of NIL materials and processes

10 /IP protection

How many of these features can and should be translated into true benefits? We offer some suggestions:

1 / Who is to say that Nanonex is the best solution, other than Nanonex? Proof points and testimonials would validate that claim, based on the experiences of customers. They do offer a list of representative customers, but don’t seem cognizant that markets are comprised of buyers who reference one another. Customers are assets. They should not be underutilized.

2 / Versatility implies that a buyer can purchase one tool and use it many times. Rather than subtly imply what may be a key benefit, it should be explicitly stated. Then an ROI model could be presented and compared to common industry practices.

3 / Pitching the idea of a single machine implies that there is a core product that is also versatile. Nanonex could substantiate this claim with data about a smaller footprint and greater throughput. Customer proof points would quantify “throughput per square-foot.” If it can be measured, it can be sold at a higher price.

4 / Wafer-scale uniformity apparently differs from a non-uniform manufac- turing technique. Possible conclusion: there are competitors who have equipment that produces non-uniform wafer-scales. If so, Nanonex is positioned to provide a contextual argument for the benefit of uniformity and why it matters to non-experts. “High yield” is thrown in at the end. How high is high? How much time and money does high yield save? Does it simplify the quality assurance processes for customers?

5 / Holders and masks are supporting products. The implication is that you don’t have to go out and buy lots of different sizes and shapes when using Nanonex products. Is this really a good thing? People who operate the equipment may think so, but do they have any say in the purchase of the equipment? Why would this feature matter to the people who actually

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make the purchase decisions? Does it simplify managing inventory, conducting maintenance and ordering supplies?

6 / The logical conclusion to draw from “fully automated processes” is that the equipment does not need an operator. If that’s true, what are the larger implications here? It depends upon the role and the perspective of the person who is evaluating the technology for purchase. It’s probably a good thing if you were a machine operator and realize that much of your job could be automated. On the other hand, it’s a very good thing if you were the head of procurement and find that the product would pay for itself in cost savings.

7 / Ultra-fast, nano-imprint lithography is not quantified. If it’s a few seconds, then buyers can compare it to what they do now, which may take minutes, hours or even days. Speed speaks to the case for throughput.

8 / A broad range of tools offers experts choice – and non-experts further complication – in a job which may already be complex. Is it better to have one tool that does all things, or many tools that do many things? It is difficult, to say the least, to understand the value proposition here.

9 / A variety of materials and processes offer flexibility, choice and custom- ization. This idea should be incorporated to amplify items two and three and above.

10/ Protected intellectual property (IP) is only relevant in the event of legal exposure and of being forced to stop production of certain tools. Why doesn’t the company focus on how it will avoid disruptions in supply and ensure its financial viability? Sustainable business operations are essential when a buyer needs to purchase more parts or equipment. It is also essen- tial if Nanonex has proprietary processes and no one else supports its equipment. All of which raises a key question: does Nanonex understand that buyers are always biased toward a whole system? If there are no partners who support the technology, then there is no practical ecosystem. Recall Rokonet and its WisDom product (see page 43).

NET VALUE���

Nanonex appears to have three key benefits they could start selling right now:

A/ Higher throughput per square-foot, enabling greater return on assets.

B/ Full automation, which reduces head count and pays for the equipment more quickly.

C/ Ability to customize solutions with fewer tools, reducing inventory and maintenance costs.

What’s more, these are quantifiable benefits. You can measure them and assign a dollar value which is what customers like to do. More and more companies demand internal ROI data, so they are probably going to come up with some metrics if Nanonex doesn’t. Offering clear benefits enables customers to know what success looks like. Clear ROI makes them look good to their bosses, board and investors. In turn, they will happily report the ROI back to Nanonex which can then form the basis of proof points, testimonials and an online dialogue with the company.

Two more benefits jump out:

D/ As a complete system with only essential features, user adoption costs are very low.

E/ With stable financials, a reliable supply chain and highly-protected IP, Nanonex can be the supplier-of-choice for the long-term. (The product probably needs additional R&D to achieve the adoption cost benefit (D); also, an ecosystem needs to be developed and the company’s financial strength needs to be built-in order to be the “supplier of choice.”)

Nanonex in among the 68% of companies that present product features on their web site. It fails to offer more – even benefits to buyers. Only 44% of companies describe the benefits of their products, while 94% of buyers want to know what a product will do for them.

NET value / Nanonex doesn’t understand customer value and doesn’t utilize the NET to make it relevant for new buyers.

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Benefits / 60 pointsCase Study

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INSIgHTS

Arkadi Kuhlmann was a vice president of the Royal Bank of Canada when Dutch financial-services conglomerate ING decided in 1999 to run an experiment. Rather than buying or building branches in North America, it wanted to build a business using the Internet as its primary channel (supported by phone and mail). This is a classic application of marketing and innovation working in tandem to create customer value. By reducing overhead, the potential existed to provide consumers with better interest rates and generate higher profits at the same time – which could also enhance shareholder value.

Similar models have worked online with Amazon and travel agents such as Priceline. Offline, Southwest Airlines eliminated the expensive convention of assigned seats and Ikea has found a niche with cost-conscious buyers willing to assemble their own furniture. Bottom-line: consumers respond to value propositions that eliminate needless features and overhead – as long at the user adoption costs are not high.

ING hired Kuhlmann to run ING Direct to redefine how people save money. Something as simple as having real people answer the phone when calling an 800 number reduces user adoption costs, and creates a competitive advantage as other banks often route their customers through a frustrating telephonic maze. Moreover, ING put policies in place to keep from selling customer information to other businesses.19

ING Direct’s web site is the essence of simplicity and, as the primary sales channel, does an admirable job of describing the benefits of its Orange Savings Account: A great rate, no minimums, no fees and no catches.

ING DirectP.O. Box 60

St. Cloud, MN 56302 Phone: (302) 255-3473

http://home.ingdirect.com/

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ING Direct doesn’t offer proof points, testimonials or a web-based dialogue and stops just short of offering a value proposition. Perhaps because of perceived regulatory barriers, many banks limit how they sell. But a value proposition is simply the benefit you’re selling at the price point you’ve set, plus the cost of adoption. In the case of the Orange Savings Account, the primary benefit is a higher interest rate. It fluctuates, but as of March 2008, ING was offering 3.10% compared to a national average at traditional banks closer to 2.6%. The other benefit is that the account balance doesn’t matter with ING, compared to many other banks that often have minimums of $10,000 or more.

The purchase price is zero: there are no fees or service charges. Many other banks charge hidden fees and service charges that mask the real cost of doing business. But, in considering a provider of financial services, risk is a factor. CDs tend to have higher interest rates but they require that a consumer forego use of the capital for a fixed period – say six or 12 months. This is a real cost. Savings accounts and money market accounts offer the benefit of access to capital but at a lower rate. ING has created a best-of-both-worlds product.

ING also partially addresses adoption costs with its benefit of “no catches.” Not being able to go to the bank branch to make deposits or withdrawals is an unspoken adoption cost that is quite significant and disruptive. Another unspoken cost is learning to use the Internet to do essential personal business. According to Pew Internet Research, among Americans who use the Internet with household incomes over $100,000, 69% have done online banking. This is the market sweet spot for ING. Among consumers with incomes less than $25,000, only 19% have done online banking. In essence, the way ING presents the benefits of its particular brand of online banking is a rifle-shot at the bank’s demographic.20

According to Nielson Net Ratings in February 2008, about 150 million Americans or roughly half the population) use the Internet at home. Among those over age 65, only 30% use the web, or almost 11 million. That means that only about seven percent of web users are over 65 in the United States, even though they have a significant amount of wealth and an above-average desire and reasons to minimize risk.

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If you don’t use a computer at work or you’re already retired, the computer learning curve can be a bit intimidating. You can buy a computer for $500 and another $20 a month can get Internet access. Doesn’t sound like much, but if the only reason to spend that money is to do banking, it probably isn’t worth it. The Internet has a lot to offer but there has to be a more compelling ROI in personal time.

In a recent study by the Pew Foundation, 43% of Internet users expressed frus-tration at the lack of information they encounter while using the Internet to find out about or buy goods or services.21 Almost one out of three users has been confused by information found online during their shopping or research. The web is not the ideal place to make purchase decisions, especially without quantified and validated value propositions to consider.

There is little that ING can do to bring non-web users online without spending heavily on promotional costs, or partnering with a brand like PeoplePC to create a whole system of bundled hardware, web access and a prominent location on the web browser’s home page. However, once consumers are online, ING can do more to acknowledge the adoption costs. It may be in the interest of consumers to do so, but it just might serve their business model to be vague about the adoption costs. ING clearly doesn’t want high maintenance consumers – self-service is an increasingly exclusive model appealing to highly profitable customers. By focusing on the four specific benefits listed above, ING is attracting people who are already familiar with online banking and excludes those who aren’t experienced.

ING has generated a high-level of awareness with advertising but it relies on word-of-mouth to do the real selling. ING lets consumers complete the value proposition, assuring their friends and colleagues that the adoption costs are worth it. People have attracted like-minded people and ING has built a sizable market of more than five million account holders.

Without that word-of-mouth, ING would be at a disadvantage. The site scores 60 out of a possible 100 points by virtue of its features and benefits; additionally, it includes a useful section with tips and tools that includes advice on savings, improving credit and teaching aids for parents and teachers. Still, for a company

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that relies on the web as its primary sales channel, it doesn’t do nearly as much as it could to appeal to those who are web-savvy – especially the 69% of people earning more than $100,000 per year. Many more companies are using social networking to drive their revenue line: they are appealing to people who are ac-customed to voicing their needs to get what they want from service providers.

Bank of America (B of A) ranked among ING’s top three peers identified in a Google “related” search and maintains an online community for small business. Using a web-based application, the B of A site enables people to connect with one another, share expertise and learn best practices from B of A in a more casual environment. Many financial services institutions are weighing their options in this realm. A survey by KPMG revealed that 60% of managers and executives in the financial services sector feel that protecting and securing critical data is the chief barrier to adoption of Web 2.0 technologies like the tool that enables B of A to build its online communities for small business.22

Maybe it’s the conservative nature of the beast. But the facts are in: one of out five companies use social networking tools, exclusive of those in the information, communications and entertainment industries. They reported a 17% jump in revenue as a result.

Nothing stands still in business, of course, and change is further accelerated online. Smart, educated consumers are always assessing and re-evaluating brands and, as we’ve seen so often, companies that live by the web can also die by it. Right on schedule, competitors have been aggressive to copy and improve upon ING’s model: HSBC Direct Online Savings Account responded with interest of 3.55% and the E*Trade Financial Complete Savings Account offered 3.45%. So HSBC is offering .45% more than ING Direct and E*Trade is offering .35% more.

Companies that break new ground online, as ING Direct did, must never cease to innovate and continually reconsider the relevance of their value proposition. NET value / ING Direct begins to understand customer value but doesn’t utilize the NET to make it relevant for new buyers.

NET VALUE���

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Testimonials / 70 pointsCase Study

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INSIgHTS

One of the first things an early-stage company would like to do when they have a happy customer is secure a testimonial. Steve Alter, CEO of Real Capital Markets RCM1) near San Diego, California, is no exception. He aggressively solicits quotes and comments from satisfied commercial real estate clients and investors. Then he registers their remarks in a book that gets exposure to prospective clients. His firm touches about 25% of commercial transactions in the U.S., the total of which amounts to nearly three-quarters of a billion dollars.

RCM1 scores 70 out of a possible 100 because the web site spotlights features, benefits and testimonials, five of which are featured on the home page of their web site:

We love RCM1 and will continue to use it for our larger deals. It is very easy to use and the response from our account manager has been great. — Eileen M. Williams, John Sheehan Team Cushman & Wakefield – Philadelphia

RCM1’s e-teaser technology was very impressive and easy to use, and allowed us to get to the market much more quickly. What impressed me the most was the level and quality of customer service. — Tony Smaniotto, CBRE Office – Chicago

The beauty of utilizing RCM is the ability for you, the client, and us to monitor the progress of the sales effort. — Andres Albano, Jr., CB Richard Ellis Investment Consulting Group – Honolulu

Real Capital Markets6120 Paseo Del Norte, Suite Q1

Carlsbad, CA 92011

Phone: (760) 602-5080

http://www.rcm1.com/

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RCM is a well run and organized group of talented professionals who have made our marketing efforts shine... — Christopher Heald, Matthew Lawtob Team, Holiday Fenoglio Fowler, L.P. – Chicago

RCM1 has increased our efficiency by getting our offering memoranda out to the market. Their database allows us to contact additional unique investors quickly and efficiently that aren’t in our system. The level of expertise and customer support is second to none. It is a pleasure to work with their team of top-notch real estate professionals. — Jeff Kahan – Colliers International – Illinois

You get the idea. Testimonials from customers and partners demonstrate to prospects that RCM1 did what they said they would. Companies don’t typically offer testimonials without feeling good about the relationship.

Note that as a result of the importance of the relationship, four out of five emphasized service or the talent of the RCM1 team. It’s also worth noting that even as testimonials are commonly used (at the next evolutionary stage) to imply a value proposition, customers will rarely bring it up if the company has not already done so. In the case of RCM1, none of the customers mention the purchase price or service fees in their testimonials, so a prospect has no sense whether the benefits exceed the benefits and adoption costs.

Three out of five mention benefits:

Tony Smaniotto mentions getting to “market much more quickly.” Jeff Kahan says the database allows him to “contact additional unique investors… quickly and efficiently.” Andres Albano, Jr. indicates the ability to “monitor the prog-ress of the sales effort.”

Just one mentioned adoption costs as being low (Eileen M. Williams said RCM1 was “very easy to use”).

Still, RCM1 captures a mere .0008% of the value of the deals that it facilitates. So, it either charges too little in fees, or the market does not perceive that RCM1

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offers much value. Without a value proposition, RCM1 has little to substantiate its case for a bigger payday. Clearly, the testimonials are insufficient to quantify or validate an implied value proposition.

RCM1 asserts that its “toolsets enable transaction professionals to market, manage and track assets throughout the entire real estate lifecycle with increased speed, efficiency, transparency and security.”

The lifecycle includes virtual deal rooms, principals database, privately-branded property presentations and on-demand printing. Elements of the lifecycle are presented separately and can be used individually or in whatever combination the user may select.

But what is the perceived value of all of the above? The implication of these four offerings is that they offer a whole system. In fact, according to CEO Alter, a key sales goal is to convince clients to use the services in concert. The challenge with companies that offer multiple products that are supposed to work together is that clients need to see how the synergies benefit them. RCM1 doesn’t use testimonials to do that and neither does it offer much of a convincing argument on its site.

The best thing a company can do to sell a whole system is to reach out to the market and understand what the market sees as a way to offer a turnkey solution that’s as simple as possible.

Don Thorson, author of the blog Marketing 2.0, puts it this way:

Whole Product’ diagrams can be useful tools to get customers to understand that you need to have a ‘complete solution’ if you want it to take off. Early adopters will suffer through complicated instructions, difficult downloads and installa-tions, no customer support – but mainstream users need to be spoon fed. These questions should be answered in developing a whole system (verbatim):

Does It Solve A Problem? – Have you solved a problem the customer recog-nizes? Have you identified the customer’s pain? If not, you have a vitamin and not a pain killer. You want a pain killer – with minimal side effects.

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Is It Easy To Understand? – Seriously, five words should do it. Two words is better. Do the “mom test.” If mom doesn’t understand it, keep changing it until she does.

Is It Easy To Get? – Have you removed the barriers between you and the customers who use your product? In a 2.0 world, we are talking free trials, no cost, fast, easy. Get it in their hands or nothing good will happen.

Is It Easy To Use? – At Apple our rule was, ‘A minute after they start to use it, they feel like calling their friends... (and saying) ‘You will not believe what I just got.’

Is It Easy To Share? – In this ultra-connected world, your customers are your marketing department. If your customers are not marketing your product, you have problems. We used to call it evangelism, now we call it sharing. Your product needs to have ‘embedded viral components’ – active mechanisms built directly into the application that assume your customers will want to tell everyone they know. Make it easy for them to do so.”

RCM1 calls its idea of a whole system a “lifecycle” and lists four elements:

Virtual Deal Room enables approved users (attorneys, owners, brokers, equity partners and lenders) to download and print underwriting and due diligence materials related to properties. Some features and benefits include:

• The sell team can easily track who has viewed specific documents and generate detailed reports based on that information.

• Custom built and privately branded for the property and your sales team, it accelerates transaction time amounts to about a tenth of the cost of the client having to create and operate a comparable physical-document center.

Principals database can be queried for specific construction and use-purpose criteria. It also brings qualified buyers to deals from a variety of sources includ-ing insurance companies, investment specialists and REITs.

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Property teasers are custom-built and privately-branded teaser presentations to get the potential bidders excited about your deal and to deliver your confi-dentiality agreement.

Print on demand completes the offering, with full color and bound selling tools.

Still, the site fails to describe how these elements in the so-called lifecycle are integrated into a system that is easy to use (read: has low adoption costs). Each of the elements of the lifecycle are used as a component that generates marginal value. Is this really a whole product – one that’s easy to use, easy to get, easy to understand, etc.?

Unfortunately for RCM1, many prospective clients just don’t see what this firm offers that the client cannot build internally. Indeed, clients often already have a deal room capability and their principals’ database is generally good enough. Also, anyone can design serviceable marketing tools and then go to Kinko’s to print out inexpensive documents.

RCM1 fails to sell the whole system and stops short of using customer testimonials to communicate any economic argument on its own behalf.

NET value / RCM1 begins to understand customer value but doesn’t utilize the NET to make it relevant for new buyers.

NET VALUE���

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INSIgHTS

According to McKinsey & Company research of Fortune 100 companies in the U.S., 90% of the top performers are concentrated in the sectors of health care, financial services, high tech, and retailing. In the words of the study:

These sectors as a whole, or markets and segments within them, offer favorable growth environments supported by established trends: aging populations, rap-id product or format innovation, deregulation, and consolidation. What’s striking for large growth-minded corporations is just how crucial it is to have this kind of favorable wind at their backs when they try to achieve strong growth.23

A 180-employee French “alternative retail software” company, VCS Timeless, combines technology and retail and has organized itself around four values or principles: Proven methodologies, information sharing, customer support and innovation.

To this company, innovation is about customer value: “Providing technology which offers true value to the retailer is the underlying principle…and is reflected in all our technological choices and development projects.”

Results? More than 450 clients to date and 10,000 retail points of sale in 40

countries on five continents.

VCS Timeless describes its offering right on its web site: “Our solutions allow retailers to manage their activities, facilitate smart decision–making, from head office to store, and improve customer service and loyalty… ensuring the right products are in the right stores, at the right time and at the right price.”

VCS Timeless174 quai de Jemmapes 75010 Paris France, EU

Phone: (331) 445-2212

http://www.vcstimeless.com/

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The company, recognizing the different needs of different retail regions, offers a modular approach in several areas:

Forecasting

Assortment and range planning

Head office & merchandise management

Planning & supply chain optimization

Point of sale (EPOS)

Customer relationship management

Multi-channel management

Clearly, the company pays attention to its customers and eschews a one-size-fits-all approach. Case studies imply that consulting and professional services that integrate the modules make it whole product by addressing the specific objectives of each client.

VCS Timeless earns 80 points in Turner DeVaughn benchmarking because it embraces the importance of customers with case studies and testimonials, as well as the more standard approach of features and benefits. Larger, more established companies commonly score an 80. Case studies are an opportunity for companies to describe the problems real customers face and how a product actually addresses the problem. 27% of companies benchmarked offer proof points, typical in the form of customer case studies.

Profiles of worldwide clients include fashion house for children Bonpoint, sports apparel promoter ASO – Tour de France, women’s footwear retailer Aerosoles, fashion retailer NafNaf, fashion retailer Guess and luxury travel goods retailer Lancel.

The case study for Lancel is not simply about the VCS Timeless products Colombus Enterprise suite, Colombus Retail and Colombus Retail Franchise) but also about the need to retain the existing enterprise resource planning ERP) system and the integration required to complete the projects in just 140

days (which, in the world of implementations, is extraordinary).

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VCS Timeless provided rich context about why the engagement was so important to Lancel. In October it was opening a major flagship store in Paris on a tight schedule. Lancel management wanted to equip its outlets and head office staff with new retail technology.

Lancel chose VCS Timeless not just for speed, but simplicity. The project was called “Keep it Simple” with very clear objectives:

• Manage the movement of goods throughout the supply chain (from warehouse to store) with a goal of automatic stock replenishment

• Analyze sales to identify best-sellers

• Suggest ideal stock quantities and mix for each store, country, or season

• Easy access to a database of information to help support customer relations and high levels of service in-store (CRM)

VCS Timeless emphasized service – giving the client what they wanted – and reduced adoption costs such as lost time and eliminating needless features. There was no over emphasis on technology.

Using 20 on-site trainers and 50 linked computers, the process quickly familiarized around 300 of Lancel’s retail staff with the new solution, as well as 100 head office staff.

At the beginning of October, two pilot stores in Paris were tested using the new software, and rolled out to the remaining stores by month’s end. Within two weeks, the system went live and was fully up and running in time for the new store opening on October 18 as planned.

Thanks to the meticulous planning structures and methodology applied, the project was completed on time at each stage.

The Lancel case study also discusses a rare topic: money. The implementation had a budget of a million euros. The parent company, Vendôme Luxury Group plc, with sales of more than $2 billion, appears to have a secure investment in VCS Timeless.

NET VALUE���

Morever, consider how it enables a prospective customer reading the case study to weigh the benefits and costs (ROI). There are significant benefits implied:

1 / Complete visibility of the supply chain and ability to see how sales are performing throughout the group. At the head office, users can monitor and control the necessary stock levels required to optimize sales, manage product allocations and assortments, and update buyers on promotional or price strategies to increase each store’s profitability. It also addresses the first goal “manage the movement of goods throughout the supply chain.”

2 / Simplified inventory management with overall stock reduction and fewer out-of-stocks. This partially addresses the goal of “automatic stock replenishment.”

3 / Improved communication (not one of the overt goals).

4 / Better suited merchandise to fit local needs. A goal was to “suggest ideal stock quantities and mix for each store, country, or season.”

5 / Easier management as processes are standardized (which does not directly link to goal of “easy access to database” but is very closely related).

6/ New technology based on modern standards (radio frequency identification [RFID] compliant etc.), which was not one of the objectives.

By providing a list of objectives and the benefits actually achieved, VCS Timeless presents a model case study. In fact, it’s one of the most sophisticated we have seen. If the client agreed to a budget of one million euros based on certain objectives and they are achieved, the desired customer value has clearly been satisfied.

Finally, there is a testimonial which validates that the customer is satisfied: The success of the project is not just down to the investment made in powerful, new technology, but also largely due to great teamwork and the synergy between all parties involved. — Yves Aroud, IT project director.

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What this amounts to is true quantification and validation of the value derived by Lancel. There’s no substitute for a value proposition that is relevant to the prospect. It’s crucial to articulate your promise, just as it is important to demonstrate how you’ve lived up to that promise through relevant case studies. For around one million euros (purchase price), a retailer with more than ten stores can get a specialized retail software system driving millions of euros of waste out of the supply chain and improving the shopping experience for consumers. The system enables the right products to be on the shelves at the right stores, at the right time and at the right price (benefits). With an extraordinary focus on service in the implementation process, complexity is wrung out (adoption costs) and it can be up and running in less than half a year.

VCS Timeless strongly emphasizes consulting and professional services. The company claims to “keeps its finger firmly on the pulse of new developments in the retail sector to ensure that you benefit from the very best of what’s out there. VCS Timeless identifies the best practices, keeps abreast of new trends and anticipates leading-edge strategies.”

We already know that an emphasis on innovation is about keeping up with the market, rather than obsession on tech features.

Implication: VCS Timeless is clearly considering how it will use the web to advance its goals. If so, it appears it be at the head of the pack. According to McKinsey, 77% of retailers it surveyed plan to invest in social media over the next three years.24

In the view of IBM’s Institute for Business Value: “Becoming more customer fo-cused is a multiyear journey that will require executive sponsorship in order to orchestrate the changes required in culture, organization, processes and tech-nology. It is a vital strategy for all retailers and the means for turning shoppers into advocates and creating a sustainable, differentiated advantage.”25

NET value / VCS Timeless seems to understand customer value but doesn’t fully utilize the NET to make it relevant for new buyers.

NET VALUE��0

1/10 tHe fraction of web SiteS tHat PUbliSH a valUe ProPoSition.

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NET VALUE���

Value Proposition / 90 pointsCase Study

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INSIgHTS

To say that any competitor in the healthcare field must satisfy a multiplicity of constituents is an understatement. To craft and maintain a relevant value proposition in such circumstances poses a daunting challenge. Value for whom? What kind of proposal? Patients? Caregivers? Professionals? Who are the customers of the healthcare industry?

Healthcare remains a fast-growing segment of the economy driven by aging Baby Boomers. We don’t need go into the numbers here. We’re bombarded by them every day. The older generation grows older and larger at a faster rate than ever.

According to KPMG, in 2006, Americans spent more than $2.1 trillion – or 16.5

percent of the gross domestic product (GDP) – on healthcare services. These costs are expected to increase to $4 trillion and 20% of GDP by 2015.27

The value chain in healthcare starts with purchasers, such as government, employers, individuals and employer coalitions, and then moves on to fiscal intermediaries, such as insurers, HMOs and pharmacy benefits managers who sit between purchasers, and providers, weighing in on almost every expenditure. Providers, such as hospitals, physicians, integrated delivery networks and pharmacies, are increasingly dependant upon fiscal intermediaries and product intermediaries such as wholesalers, mail order distributors and group purchasers who connect to providers to producers.

Got all that?

gE HealthcarePollards Wood Nightingales Lane, Chalfont St. Giles

BUCKS HP8 4SP United Kingdom+44-1494-544-000

http://www.gehealthcare.com/

NET VALUE���

Much of the innovation in healthcare starts with the producers – the phar-maceutical manufacturers, biotech sector, medical device makers, medical suppliers and information technology firms – and flows upstream, first through product intermediaries, then to providers and so forth.

These five industry sectors are responsible for supplying a majority of the inno-vative products utilized by physicians and hospitals. And demand is on the rise.

The cost of new technology borne by the producers, and the pace and intensity by which it is used by providers, consistently accounts for anywhere from 20% to 40% of the rise in health expenditures over the past forty years. Technology has provided benefits in diagnostic and therapeutic applications.

Clinicians and hospitals must determine how much of these benefits from pro-ducers they can afford to utilize in patient treatment given the limited supply of funds received from purchasers. This is the point at which healthcare is pur-chased and consumed – where the consumption of healthcare products occurs.

And this is exactly where a quantified and validated value proposition can be most valuable. Problem is, the situation is complex and problematic. Technology alone does not cure patients. The human factor skews the data. A 2002 study published in The New England Journal of Medicine indicated that 11% of the time Americans receive treatments that may actually be harmful.

In 2006, The Institutes of Medicine reported that nearly 100,000 people die each year in the United States as a result of medical errors.28

This isn’t about whiter wash and higher gas mileage; this is about extending the quality of life for seriously ill people of any age. Optimal patient outcomes are the ultimate value proposition and it’s a critical calculation.

Eliminating ineffective care of diabetes, coronary artery disease and congestive heart failure, the US healthcare system could save 15% to 25% of the estimated $160 billion spent on diagnosis and treatment of those diseases. This would be a great value proposition if it wasn’t so unattainable.29

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Pharmaceutical manufacturers, biotechnology, medical device makers, medical suppliers and information technology firms or producers have a difficult time arguing that they can reduce medical malpractice.

Instead, producers must take a different approach to their value propositions. That means they can consider looking at metrics other than patient wellness and who the real customer is for their products and services.

In 2006, General Electric’s medical unit recorded revenue of $16.5 billion. GE Healthcare is a producer, particularly well-known for diagnostic imaging equipment, such as the MRI, ultrasound, and computed tomography (CT) scanners. GE’s radiology business operates as Centricity™. According to the web site, it brings together “a continuum of world-class solutions to improve the efficiency and quality of your radiology services. From our next-generation, completely integrated RIS/PACS to our proven ASP model, and industry-leading implementation, service and educational resources, Centricity radiology solutions enable you to optimize digital workflow within radiology and across your enterprise effortlessly and with confidence.”30

Centricity is a whole system that takes the burden off the Healthcare Provider (not the patient or Purchasers). It is designed to reduce adoption costs. Indeed, the site even offers an optimization tool that allows a prospective customer to determine exactly what they need (benefits) by filling out the fields of a simple web form:

GE’s Storage Needs Assessment Tool enables precise determination of network equip-ment required by customers based on individual situations. As a result, it delivers an entirely new way of using the web to create and offer customer value:

• # of Analog Labs • Total 512 Exams/Year

• # of Biplane Analog Labs (512)• Total Biplane 512 Exams/Year

• # of Innova 2000 Labs (1024)• Total 1024 Exams/Year

NET VALUE���

• Cath Acquisition Frame Rate (60, 30, 15)• # of Echocardiography Systems• Total Echo Exams/Year• # of Review Stations• # of Network Printers• Years of On-Line Storage• Image Vault Storage Required• Library Storage Required

The Web Access Assessment Tool calculates transfer time per echo exam and per cath exam, based on a number of different data points that can be adjusted to optimal levels:

• Diagnostic Quality Percentage • Compression Level• Months of Web Cache Storage• Web Cache Required• Network Speed

The bottom line – and the NET value – represented here: these tools enable prospective customers to dial-in the precise benefits they will experience as a result of the investment in the GE system quickly and efficiently. This is the essence of customer value.

The completion of their value proposition is represented by yet another web tool that is embedded within their Healthcare Financial Services group section of the site.

The Financial Services group, with 900 employees, offers financing for equipment, corporate investments, real estate and practice solutions. It details in a program called “At the Customer, For the Customer” (ACFC), which offers everything from articles and advice to on-site consulting about value creation, all from a financial perspective.

Even better, it offers the ultimate ROI calculator GE calls its “First Practice Cash Flow Calculator,” which more than justifies the purchase price.

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It converts a casual suspect into a prospect by requiring that the practitioner submit a significant amount of information:

Step 1: Registration (pre-qualifies with medical license number and requires all contact information necessary for a sales person to make contact).

Step 2: Login• List of projects• Starting month of practice• Projections (including per patient charge, number of visits, collection rates, lab charges, and so forth). As the practitioner enters the data, the worksheet automatically refreshes and reflects the values entered over three years.

Step 3: After completing the cash flow projections for three years, the worksheet identifies areas where the clinician is losing money or not charging enough. It benchmarks productivity against industry norms, per employee. It provides recommendations on salaries and puts GE equipment and services in context of a profitable business (that GE is also financing).

This model not only determines the ROI critical to the value proposition, but places responsibility on the prospect to forecast how they will use GE to solve their own problems.

At this point, the company has gathered so much information that it’s in a position to close business not by selling equipment and services, but by working closely with its new customer to grow a profitable business.

The GE web site reflects a global enterprise in every sense, where it takes time for a visitor to see how all of the parts of the whole system work together. It is confusing and complex which may reflect more on the web design than on the business model itself. The value proposition is not presented in one concise pitch. Instead, it unfolds as a visitor to the site realizes that GE can do much more than just sell components of a system.

NET VALUE���

Most important, GE understands what it needs to do to create customer value and it does much more than simply hawk product features. It almost redefines the idea of a whole product (complete solution).

We spend $5 billion a year in R&D, some of that centrally,” CEO Jeff Immelt said recently. “So we have things that bring us together. We have one common finance system. One common HR system. One balance sheet. One set of values. Together, that’s what makes GE. The financial premise is we ought to be able to grow our earnings in excess of the S&P 500 through the cycles. We won’t do it every year. But if you look through the cycles, we ought to be able to outperform. That’s why people invest in us.”31

One sign that GE is translating customer value into create shareholder value was news on March 11, 2008 that Immelt bought $2M GE stock at market-value.32

We assign 90 points to GE. It has features, benefits, case studies, testimonials and an extraordinarily quantified value proposition. It takes our notion of NET

value to a new level, utilizing the web to create and propose relevant value to its customers.

About the only thing it does not have is an online social networking community or dialogue with customers. Its magnetic resonance group promises to have one in the near future. As of March 2008, it was under construction.

McKinsey’s research reveals that in another closely related industry, pharmaceuticals, 53% plan to invest in Web 2.0 over the next three years.33

NET value / GE recognizes that its value proposition doesn’t exist in isolation. It is up to the customer to take full advantage of what the company offers, and the NET is used to make that easier.

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Dialogue / 100 pointsCase Study

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NET VALUE��0

INSIgHTS

GE Healthcare is a company that fully utilizes Web 1.0 to craft a value proposition relevant to a market. The problem is that Web 1.0 doesn’t enable users to post content accessible to other users.

Sugar CRM, our 100-point case study, takes it to the next level and embraces everything Web 2.0, which is another way of describing “social media” or “social networking.” With Web 2.0, people can post, comment and speak their mind with each other. Sugar CRM uses this capability to expose and reinforce its value proposition. It takes courage to do it, but the results speak for themselves. Privately held, it intends to grow to $25 million in 2008 from $15 million a year ago, and claims to be the world’s fastest growing commercial open-source customer relationship management (CRM) company in the world.34

Sugar CRM delivers benefits in a feature-rich set of business processes that enhance marketing effectiveness, drive sales performance, improve customer satisfaction and provide executive insight into business performance.

It quantifies its value proposition by showing that Sugar CRM represents a lower total cost of ownership, of which one aspect is the purchase price.

Using case studies, it presents proof points. For example, Athena provides quantified proof of the customer value delivered by stating that “the cost to complete the basic Sugar Professional customization and integration work was paid fully with just three months of their previous salesforce.com expense.”

It validates value with simple testimonials:

We were really impressed by how fast and easy it was to customize Sugar. Our product assortment and sales processes change frequently, and

Sugar CRM

10050 North Wolfe Road, SW2-130

Cupertino, CA 95014Phone: (408) 454-6900

http://www.sugarcrm.com/

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Sugar is flexible enough to meet those demands. —Steve Legge, Chief Operating Officer, SOUL

Sugar CRM’s web site explains in straightforward language how it can offer value that competitors cannot:

Sugar CRM’s grass roots approach means that we do not spend $.70 of every dollar on sales and marketing…The Sugar product speaks for itself and we pass the savings on to you. A novel concept that will make your CFO smile.”

A graph illustrates a three-year, $162,000 savings on Sugar Enterprise On-Demand compared to Salesforce.com Enterprise Edition. Further, it offers a one-month free trial – underlining the low adoption costs. It also describes why they have a “better way to build software,” which also reinforces the low-adoption-cost theme:

Sugar CRM is changing the game by finding a better way to develop software. We author and release Sugar Open Source to a community of 2,400 CRM experts and developers who use the software, provide feedback and develop extensions.

We then use revenues from our corporate customers to fund the development and release of new functionality for our development community.

This distributed development cycle produces a product that is more innovative and of better quality than closed vendors could ever produce. Put another way, who understands the CRM market better: 8 engineers or 2,400 CRM experts?

Sugar CRM’s value proposition assures a prospective customer that the company is a major player in the age of open information, built and refined by the very people who use the products. It enables transparent communications – with nothing to hide. If adoptions costs were high, people would not do this because other people would be complaining. The web site features community forums that invite developers and customers to start threads and continue conversations. These include (as of March 2008):

A/ SugarExchange providers forum with 22 threads and 54 posts

B/ SugarWiki discussion forum with 19 threads and 58 posts

NET VALUE���

C/ Sugar University discussion forum with 23 threads and 32 posts

D/ Sugar Developer web site with 2 threads and 5 posts

The design for each community presents a bare bones approach to social media that might be ugly, but it works. It doesn’t have the splashy, eye-candy visual elements that people are accustomed to seeing on many of today’s web sites. It takes a matrix form, with the number of threads, posts, replies and the dates of the last posts. It appeals to programmers or engineers, but the real message is that what you see is what you get. Authenticity rules. NET value: impact and effect. Not bad.

In fact, what Sugar CRM is doing here is very sophisticated. While social media has become almost faddish, Sugar CRM is implementing it as a standard tool to focus on its value proposition.

Sugar CRM is ahead of the curve and its customers benefit. According to the McKinsey Global Survey of corporations on five continents, Web 2.0 has a number of applications:

1 / 70% say they are using some combination of these (Web 2.0) technologies for communicating with their customers. For example, about one-fifth of them say they are using blogs to improve customer service or solicit customer feedback.

2 / 47% say they are using or considering peer-to-peer networking.35

3 / 31% of all survey respondents are using collaborative product-development tools, such as initiating discussions in blogs, to test ideas, involving customers in the use of collaborative design tools, or testing how well products sell in virtual worlds. Frequent users of digital tools for all marketing purposes are much likelier than others to exploit these collaborative product- development tools.36

Indeed, Sugar CRM recognizes the wisdom of crowds: “The software (Sugar 5.0) went through three beta cycles and was tested more than 30,000 times by members of Sugar CRM’s open-source community.” — Chris Harrick, senior director of product marketing 37

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Less than one percent of companies use social media to validate their value proposition. Turner DeVaughn’s research revealed that many companies simply do not want to be forthcoming about pricing and adoption costs, even if they communicate product benefits. Web 2.0 represents a risk to many companies because the truth about the value they offer is unknown. They rely on two to three percent of prospective customers to make purchase decisions without having all the information. For these companies, it’s seen as good enough.

Sugar CRM is in a position of strength and uses social networking to expose the favorable truth about their adoption costs, as well as the entire value proposition. It welcomes customers, prospects and Sugar CRM’s own employees to participate.

In an MIT, Sloan School of Management, Working Paper 4677-08, Takahashi, Yates, Herman, Ito and Nemoto concluded that “a company may not want to endorse opinions about trends or competitors in a formal channel but may be willing to have employees share this information informally. Thus, this research suggests to practitioners that they may want to resist the impulse to formalize and centralize all communication, recognizing the value of peer-to-peer communication in many situations.”38

Forrester Research sees the value in this new communication medium: In this new world, traditional CRM solutions will continue to aggregate customer data, analyze that data, and automate workflows to optimize business processes. But CRM professionals must find innovative ways to engage with emerging ‘social consumers,’ enrich the customer experience through community-based interactions, and architect solutions that are flexible and foster strong intra-organization and customer collaboration.”39

Clearly, it is in the interest of Sugar CRM to use its own medium and tools to show what it can do. Yet, few companies are willing to put it out there for customers to participate at such a level. Of course, detractors will voice their opinions.

Liz Herbert in 2006: “the (Sugar CRM) solutions lack enterprise-class func-tionality, have unproven scalability, and aren’t backed by the deep pockets of a

“

NET VALUE���

Microsoft or an SAP, meaning buyers must assume some risk around product support, maintenance, and upgrades.” 40

As they always have, people look to each other for opinions. Markets, after all, consist of like-minded people who reference one another and go to specialized analysts for specific guidance. Financial services professionals and manufactur-ing professionals are mutually exclusive. They look to each other respectively, not interchangeably. Peer-to-peer communications are powerful because they embrace the ways that people actually make purchase decisions. They seek to avoid unnecessary risk. Sugar CRM has a hypertext list of eight industries it serves on its site: Communications, Financial Services, Public Sector, Professional Services, Manufacturing, Technology, Retail/Distribution and Media. This puts even more information at a surfer’s fingertips.

Sugar CRM has a full web page for viewing a list of other customer companies in the media industry. It offers a quote from DigiData and EZ Publishing and then links to case studies for each to offer proof points of the value proposition.

So, between the testimonials, proof points and Web 2.0 conversation with other customers and staffers, there is complete validation of the value proposition. An overview of the customer relationship management (CRM) software evolution is on page 216.

NET value / Sugar CRM understands customer value and utilizes the NET to make it relevant for buyers.

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The Conversion Curve is a simple way of seeing if a company or brand is giving its market what it wants: value. It’s about converting prospective buyers to customers on their terms. As a result, the higher the score, the lower marketing costs are likely to be.

What we’ve tried to convey with our Conversion Curve is the importance of seeing the world through the eyes of your customers, rather than looking at your customers through the lens of your product, service or peers. Caution: it’s easier said than done.

Indeed, the vast majority of businesses pay closer attention to their competitors than their customers. It’s easier to hire people away from the competition, work with their creative agency or copy what they are doing than to really understand and internalize what customers value.

Benchmarking each of the preceding case studies illustrates a fixation on peers: companies at each stage tend to look to competitors (at a similar stage) for most of their answers. In turn, Google recognizes the patterns and returns search results that reflect the realities in which companies and entire industries live.

Granted, Google selected two companies out of 18 that were questionable as peers, but that is the nature of the web today. People search the Internet and the not-so-invisible hand of Google points people in a direction that is relevant – most of the time. Google uses algorithms to do this, and key factors include the content on a web site and the sources of traffic. If the same sites are linking to VCS Timeless and Christie First, who are we to question the results? Our job is to learn from them and advise our clients on ways to be more effective.

A Closer LookThe View Around the Conversion Curve

NET VALUE���

Seeing the world through the lens of your customer, things won’t look the same. It may be disorienting because it is unfamiliar and demands changes. So don’t underestimate the difficulty of making the leap. It requires almost everyone in an organization to adopt, and then to put into practice, a customer point of view. Of course, almost every company says that this is exactly what it does. Each pays homage to customer centricity and how important it is to know the customer. Problem is, talk is cheap. As customer-focused as Nanonex would certainly describe themselves, they are typical of those organizations which see the world through the lens of product features.

For a while, a number of companies may achieve a degree of success by focusing on benefits. ING Direct, for example, is doing well. But there will be challengers looming. ING Direct must add value to sustain its lofty position.

Real Capital Markets brandishes impressive client testimonials as a way to instill confidence in its prospective real estate clients. And VCS Timeless pushes benefits to the limit with case studies that illustrate multiple aspects of customer value. Very few companies move beyond being benefit-minded.Why? Because pricing is a complex issue and adoption costs are even more troubling. Both represent blind spots.

Justifying one’s price requires that a company be willing to relate its price point to the value that customers derive – which requires that they talk about money. The value proposition can only emerge when you and your organization breaks out of conventional thinking – the mindset that holds you back.

We present a few examples of Stage Three companies for inspiration:

90 points: GE Healthcare came to terms with the realities of its market and what was necessary to generate customer value. A practical ROI web-based tool was hardly a simple or obvious answer, but embraced the one thing that everybody understands to measure value: money. It also included a more expansive business model and factored in the value chain in healthcare. By looking at the value proposition of their customers and offering a way to help them make more money, GE is able to create demand for their products and services.

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100 Points: SugarCRM organizes itself around a clear premise – open source is good because it promotes simplicity, because it’s the ultimate sophistication. The wisdom of crowds makes for simpler code, just as the wisdom of customers makes for real value. The dialogues on the site encourage both.

Conclusion: The best companies have to push themselves to revenue- mindedness and pay much less attention to competitors. It doesn’t come naturally because it requires learning a new language – the ROI of the customer.

Leadership requires rapid development of a value proposition. As a product manager gets a handle on the features and benefits, the next step is to factor adoption costs and pricing into the message and operations. Instead, the average company evolves inefficiently, picks up bad habits and enables behavior inconsistent with customer value. It’s never too early to build customer value into the culture of a business.

This many be counter-intuitive to many managers who were taught that you build features and people buy benefits. A generation ago, when innovation was a simpler affair, it was enough to be benefit-minded.

For example, intermodal container systems were popularized by shipping com-panies such as Matson. A limited number of form factors offered the benefit of use on ships, trains and trucks – which was easy to understand. It eliminated much of the labor associated with loading and unloading ships, trains and trucks. This new solution enabled the explosion of global trade after World War II.

Today, such simple and profound breakthroughs are rare. Instead, there are many incremental innovations whose benefits are not obvious; radio frequency identifiers (RFID) offer better ways of tracking the intermodal containers. But those systems require new software and changes in behavior, and the benefits are not intuitively obvious for people who are not tech-savvy.

The most valuable breakthroughs today – especially within B 2 B – are based on innovation of business models around customers and their value proposition. If you understand what it is, you can have one for your own brand, but you can also guide your customers to improve theirs – and even quantify it.

NET VALUE���

Technology will aid in this evolution, but only among those who see past the features. Systems with multiple components have a way of sustaining the complexity that buyers tend to spurn. The same can be said of product features and using the Internet as a promotional and distribution platform.

In fact, the Internet, the online economy and incremental technological advances create a necessity for more relevant value propositions in the 21st century. Why?

Sales people are rarely part of online transactions. As a result, there is no one in the middle to hear the real world concerns of buyers and negotiate a value proposition dynamically in real time. Opportunities are literally lost in the cloud – an astounding 98% of the time. The Internet and the general trend toward technology have made much of today’s marketing and commercial trade more complicated and has actually impeded transactions because they don’t revolve around customer value. Do we need more banner ads, spam, web pages and video to distract our customers and even drive them away?

Used effectively (read: simply), the Internet delivers a self-service capability that facilitates the purchasing process, but it calls for nothing less than a new way of thinking and behaving toward our markets, customers – and our value propositions.

The Conversion Curve is a simple model that gives managers a smarter way to accelerate the process of converting prospects to customers. It enables a company to orient itself towards customer value. Go down that path, and your value proposition becomes an organizing principle with your market in mind.

This is true amoung consumers (B 2 C ), but even more so in the realm of B 2 B. A basic understanding of the value chain is required to address the real needs of business clients and customers. If you are good, you can enhance their current value proposition. If you’re great, you can transform it.

No matter what the economic conditions happen to be, we can’t think of a better way to gain competitive advantage.

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D-I-Y: How do you compare? Check out your own Conversion Curve. To benchmark your company and evaluate your business, visit us at:

http://www.benchmark-tdn.com/submit

You will be able to complete the following form to benchmark a web site.

Company name: ?? Company URL: ??Does a Google search return the web site on the first page of results? No / Yes

i / Features & benefits

Does the web site provide product features? No / Yes URL of page on web site:

Does the web site provide product benefits to users? No / Yes URL of page on web site:

ii / Value Proposition & Proof Points

Does the web site provide a value proposition? No / Yes URL of page on web site:

Does the web site list proof points that it had a positive impact on real customers? No / Yes URL of page on web site:

iii /Reference & Dialogue

Does the web site provide testimonials as reference? No / Yes URL of page on web site:

Does the site provide a section that shows a dialogue with customers? No / Yes URL of page on web site:

Benchmark your own web site

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ExECuTIVE SuMMARY: PART II

With apologies to The Beatles, the evolution from entrepreneur to enterprise is a long and winding road. Most companies don’t make it because they fail to understand, embrace and act upon those things necessary to create customer value. If an entrepreneur starts a business driven primarily by a need for in-dependence, customer value may be an afterthought. As a company grows, it is essential to attract and empower additional people who focus on value cre-ation and can put systems and processes in place that enable the company to grow along with the needs of the market.

Value creation often requires innovative business models, as described by Paul Wiefels of The Chasm Group, a market-development consulting firm. It is not enough simply to offer a product or service that promises desirable benefits. High-value offerings often can be even more successful by capturing value (revenue) in new ways. This may enable generation of recurring fees, for ex-ample, while also making it easier (creating fewer objections) for buyers to buy, lease, rent, engage in a service agreement or conduct whatever transaction may optimize value. Turner DeVaughn’s analytic model, the Conversion Curve, is based on what it takes for prospects to convert to customers. Research has revealed the infor-mation that people want most is embedded in the value proposition: almost three out of four buyers want a justification for the price. Yet fewer than one out of ten companies provide one on their web site. Benchmarking and ana-lyzing a variety of businesses and industries reveal patterns among peers. By breaking out of those patterns and focusing on customer value, you can dif-ferentiate yourself. Not so much through a slick message as through offering genuinely quantified benefits.

Stage TwoBenefit-minded

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1 / Scott Allen, “Quotations from famous entrepreneurs on entrepreneurship,” http://entrepreneurs.about.com/od/ famousentrepreneurs/a/quotations.htm

2 / Sources: U.S. Dept. of Labor, Employment and Training Administration; U.S. Dept. of Commerce, Bureau of the Census; U.S. Dept. of Labor, Bureau of Labor Statistics.

3 / See #2.

4 / “How will you manage the growth of your company?” Global Entrepreneurship Institute, December 9, 2007, http://blog.gcase.org/archives/208.

5 / Jerry Kaplan, Stanford Technology Ventures Program, Educators Corner: Entrepreneurship Education Resources, October 1, 2003, http://edcorner.stanford.edu/authorMaterialInfo.html?mid=364

6 / Adam Cohen, The perfect store. Little, Brown, 2002.

7 / Michael V. Marn, Eric V. Roegner, and Craig C. Zawada, “Pricing new products: Companies habitually charge less than they could for new offerings. It’s a terrible habit,” The McKinsey Quarterly, August 2000.

8 / Shelley Harrision, CEO, LaunchPad, panel discussion at Top Line Conference. May 17, 2007, http://www.toplineconference.com/webcast

9 / Aberdeen Group, “The product innovation agenda benchmark report: Product innovation, product development, and engineering improvement for profitable growth,” September 2005, http://www.3ds.com/uploads/tx_user3dsplmxml/prod_innovate_agenda.pdf

10 / Jeff Raikes, group vice president of Productivity and Business Services (PBS) at Microsoft Corporation, Stanford Technology Ventures Program, Educators Corner: Entrepreneurship Education Resources, http://edcorner.stanford.edu/authorMaterialInfo.html?mid=911

11/ “Expanding the innovation horizon: Introduction to the 2006 CEO Study,” IBM Strategy & Change, IBM Institute for Business Value, IBM Global Business Services As featured in Building an Edge, 02 May 2006 Volume 7, Number 2.

12/ Allison Schaefers, “1-800-GOT JUNK?: Franchisee turns junk-removal business into treasure,” Star Bulletin, http://starbulletin.com/2007/04/29/business/story01.html

13/ Scott Allen, “Entrepreneur Success Story: Brian Scudamore of 1-800-GOT-JUNK?” About.com, http://entrepreneurs.about.com/od/casestudies/a/1800gotjunk.htm

14/ See #13.

15/ See #14.

16/ Henry Chesbrough, “Why bad things happen to good technology: New ideas take you only so far. Firms also need to innovate their business models,” The Wall Street Journal, April 28, 2007

17/ Dr. Alexander Osterwalder, “How to describe and improve your business model to compete better,” Arvetica, http://www.privatebankinginnovation.com/en/wp-content/uploads/tools/Draft-Business-Model-Manual.pdf

18/ Stephen Turner “Turner Investor Survey, 1999,” Conducted among 766 investors by Turner & Associates, Inc.

19/ http://www.time.com/time/magazine/article/0,9171,1633064,00.html

20/ http://pewresearch.org/pubs/733/online-shopping

21/ See #18.

22/ KPMG Report: “Enterprise 2.0: The benefits and challenges of adoption” by Gary Matuszek, Global Chair, Information, Communications & Entertainment.

23/ Sven Smit, Caroline M. Thompson, and S. Patrick Viguerie, “The do-or-die struggle for growth: The largest corporations rarely sustain strong growth unless they compete in the right places at the right times,” The McKinsey Quarterly, August 2005.

24/ “How businesses are using Web 2.0: A McKinsey Global Survey,” The McKinsey Quarterly, March 2007,

END NOTES : PART II

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http://www.mckinseyquarterly.com/Information_Technology/Applications/How_businesses_are_using_Web_20_A_ McKinsey_Global_Survey_1913

25/ “Turning shoppers into advocates: The customer focused retail enterprise,” IBM Institute for Business Value. 2006, http://www-935.ibm.com/services/us/gbs/bus/pdf/g510-6554-03-shoppers-advocates.pdf

26/ Buyer research by Turner DeVaughn is ongoing, based on a survey at: http://www.surveymonkey.com/s.aspx?sm=F4Xw 5yYQcWp2C00mzv_2bzrw_3d_3d. Benchmarking of sellers by Turner DeVaughn is ongoing, based on analysis at: http://www.turnerdevaughn.com/benchmark/listing.html

27/ “Healthcare Industry Report,” Third Edition, KPMG LLP, http://www.us.kpmg.com/RutUS_prod/Documents/12/ HealthcareIndustryReport06.pdf

28/ ibid.

29/ Phyllis Yale and Kara Murphy, “Improving healthcare effectiveness,” Bain Brief, Bain & Company 01/25/07.

30/ http://www.gehealthcare.com/usen/img_info_systems/index.html

31/ http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2004/06/06/BUIMMELT.DTL

32/ http://www.247wallst.com/2008/03/ceo-immelt-buys.html

33/ “How businesses are using Web 2.0: A McKinsey Global Survey,” The McKinsey Quarterly, March 2007, http://www.mckinseyquarterly.com/Information_Technology/Applications/How_businesses_are_using_Web_20_A_ McKinsey_Global_Survey_1913

34/ The VAR Guy, “SugarCRM revenue doubles,” August 27, 2007, http://www.thevarguy.com/2007/08/27/sugarcrm-revenue-doubles/

35/ See #30.

36/ “How companies are marketing online: A McKinsey Global Survey,” The McKinsey Quarterly, September 2007.

37/ “SugarCRM offers biggest upgrade yet,” IDG News Service, December 19, 2007, http://www.computerworld.com/action/article.do?command=viewArticleBasic&taxonomyName=crm&articleId= 9053539&taxonomyId=120&intsrc=kc_top

38/ Masamichi Takahashi, JoAnne Yates, George Herman, Atsushi Ito, Keiichi Nemoto, “The shift from centralized to peer-to-peer communication in an online community: Participants as a useful aspect of genre analysis,” MIT Sloan School of Management Working Paper 4677-08, 1/1/2008.

39/ William Band, “The CRM 2.0 imperative: Look to new solutions to keep pace with the emerging social customer,” Forrester Research, March 10, 2008.

40/ Liz Herbert, “Open source CRM continues to gain momentum but isn’t enterprise-ready,” Forrester Research, March 27, 2006.

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Part iii

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Make sure your innovation is a pain killer, not a vitamin.

— David LaddVenture Partner at Mayfield Fund

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Creating customer value starts at the top of the organization with the CEO. Moreover, based on what we have seen and learned from success stories as well as tales from the also-rans, creating customer value demands that the other C-level officers work in close concert with each other.

As with most other things in organizations, innovation must be driven by senior executives if it’s going to be taken seriously and done the right way. Company executives, as officers, hold the fiduciary responsibility to return maximum value to shareholders. Innovation, to the extent that it creates value for customers, generates returns to those shareholders. Innovation touches everything: products, services, customer engagement, intelligence gathering and the business model.

Many bloggers embrace endless innovation and everything new. The digital culture is not a monolith and those who speak loudest are buyers. Customers demand value propositions that address what they want: benefits of greatest value, optimum pricing and low adoption costs. When you can see your own innovation from the perspective of real buyers, it’s obvious that value is essential. Those three elements provide the logic to identify market-driven key performance indicators (KPIs). We contend that these kinds of metrics also present investors with fresh ways to judge value as well. After all, aren’t the judgments of real customers a superior way of making revenue projections?

Our model creates a common lens through which investors, boards, execu-tives and customers can scrutinize the company and its prospects. It’s designed for success in the open age of information and the digital culture of today’s customers and markets.

iiiBringing Your Organization and Your

Value Proposition into the Digital Culture

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The Internet has amplified the importance and implications of word-of-mouth by bringing people – and their words – together in ways that were never possible before. Still, at Turner DeVaughn, we say that the web is also capable of vastly more. For all its fanfare, social media is creating relatively little value that can be measured in the sense that we describe.

What are the implications for a company’s value proposition? For one thing, any organization wanting to be acquired at the highest possible value needs ways to measure value creation over an extended period. To do this, there is no better way than metrics derived from the value proposition itself.

In the pages that follow, we look at the “how to” of preparing your own value proposition. We consider the role of the management team and how each executive manager must take ownership of the value proposition in terms of his or her particular function.

This is a new model that is simple enough for an organization to put into action fairly quickly.

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It’s ultimately the job of the CEO to connect customer value to shareholder value. No other person has the vantage point and authority to create value throughout the organization. No other person is so visible and accountable.

Shareholder value is a critical issue that keeps chief executive officers (CEOs) awake at night, especially in the final days of each quarter when it’s routine to pull out all the stops to make the numbers. Compensation is always tied to stock performance, both base salaries and options pricing, and stock price reflects the quality of earnings. As much as CEO pay is maligned, if it is tied to shareholder value then it is good for all shareholders.

CuSTOMER VAluE

A small percentage of customers will write letters to CEOs in which they give their input about a product or service. But most customers, especially the dissat-isfied ones, will not. What they will do is take their business elsewhere. The CEO must encourage buyers to share their concerns and demand that the company take remedial action. It might be as simple as a response or a substantive change in service or product features. Customers appreciate being heard and reward companies that pay attention to them. As noted on page 18, this effort can improve return on assets by a factor of two and operating income by a factor of three.

Actionable insights are not found in every customer utterance, of course. Some people are just unhappy. Others want attention. There are also those who are paranoid or just cranks. Yet, as a whole, the collective knowledge of the market outstrips that of your team. It takes lots of data points to generate the picture of a new reality – one that may stand in stark contrast to how you see your product and its place in the world.

Chief Executive OfficerValue Creation Starts at the Top

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Aggregating the feedback and seeing trends is the first step in value creation, and that means the CEO must work closely with the CMO to make this part of the culture and not just simply another administrative process.

New intelligence continually emerges from the market. Leadership is about inspiring a corporate culture to listen and make what it learns actionable. Failed CEOs often failed to read and heed messages writ large in the market-place. They did not inspire their organizations to do what the market dictated. They remained in their comfort zones. If the CEO isn’t willing to force change, then the CEO will be changed.

In sports, head coaches and managers must win or look for new jobs. In business, the name of the game is still winning and the scoreboard is the quarterly income statement. As is the case with a new head coach, there is immediate pressure on the chief executive to perform. In business, it’s all about creating and growing shareholder value – usually in a matter of just a few fiscal quarters. Without customer value, however, there can never be sustainable share-holder value.

The starting point in connecting customer value to shareholder value is at the top. The CEO must ask the management team:

Why don’t we have a value proposition already?

Do we really know which benefits customers value most?

Are we introducing adoption costs that are too high?

Have we optimized the price point?

Does the business model leave money on the table?

Can we eliminate functions that do not deliver value?

What information will help us to understand value?

When can we quantify and validate our value proposition?

How do we measure our efforts to create value?

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These questions are for the entire team, not just those in charge of sales and marketing.

In many cases, there are deeper issues at play. Lewis Campbell took over as CEO at Textron at a time when the company was exhibiting what Chief Executive magazine called “business model fatigue.” A transformation followed because Campbell was willing to change his thinking and collaborate with the management team: “It’s really about me. I realized that I had some bad theories in my head that prevented me from being what I needed to be in the situation I found myself in. If I didn’t change, I had no chance to win.” 2

CEOs must act quickly and demonstrate command over the known facts and then show an urgent commitment to identifying the shortest route to results. Prior to seeing the failure as a people issue, the CEO must shine a light on any underlying inefficiencies and gaps in value that interfere with sales.

Most boards of directors, and the investors they represent – particularly with the pressure they’re under today – continually look at examples of successful CEOs who have made significant differences. Those CEOs understand the concept of value creation, which often introduces some new ideas into old businesses. Being able to execute is just as important.

Hewlett-Packard (HP) is a good example. In February 2005, Mark Hurd became CEO, replacing Carly Fiorina in one of high-tech’s most notorious executive transitions in recent memory. “Hurd, who had a reputation as a master of cost cutting from his days as CEO of ATM maker NCR, quickly went to work to slash expenses at HP” Business Week magazine reported. “Shortly after he was hired, the company announced it would lay off 14,500 workers – or ten percent of HP’s workforce – in order to boost profits. Under Hurd, HP has consistently exceeded earnings estimates.” 3 By 2007, Hurd was able to communicate huge results in HP’s annual report – results that went far beyond cost savings and headcount reductions. HP was creating new value for its customers: “We believe that HP has an unparalleled ability to drive simplicity, innovate and influence industry actions in a way that is good for customers, good for business and good for the planet.”

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This came after HP had already increased its top line revenues by $12 billion +13%) over the prior year.

On February 10, 2005, Hurd’s first day on the job, the stock closed at $21.60. By the end of fiscal 2007, it increased to 239% to $51.68 per share.

Investors see this as evidence that it can be done. There are practical ways, indeed, to drive value.

Every CEO is expected to do more with less, under increasingly competitive pressure to perform. Tenures are becoming shorter. The Wall Street Journal reported that 60% of today’s Fortune 500 CEOs have held their jobs for six years or less. If one can’t get a return on capital, someone else must be brought in who knows how to connect customer value to shareholder value.4

Bain & Company consultants see this pressure every day: “So, within a few months at most, incoming CEOs and general managers must identify ways to boost profitability, increase market share and overtake competitors.” Gottfredson, Schaubert and Saenz 5 boil it down to four principles:

1 / Costs and prices almost always decline.

2 / Your competitive position determines your options.

3 / Customers and profit pools don’t stand still.

4 / Simplicity gets results.

Simplicity is a constant theme, often assuming the form of organizational simplicity – flattening the hierarchies and stripping out redundant staff. But the concept of simplicity lives in the heart and soul of products and product innovation. It translates directly into what is experienced by consumers and customers. It informs what those consumers perceive as value.

HP’s Hurd recognizes that simplicity and reduction of adoption costs are fun-damental to profitable growth. Bain recommends that every CEO assess the complexity of their service offerings: “What is that degree of complexity costing you? What are the few critical ways your products stand out in the customers’

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minds?” Every CEO should rely on the chief operating officer (COO) to manage these issues.

Tough questions demand answers that allow the CEO to finally see the connection between needless complexity and south-bound earnings. One intriguing dimension of innovation is about driving out costs: finding new ways to add value by reducing complexity in the product and the organization.

INNOVATION IS AbOuT SIMPlIFYINg

Booz Allen Hamilton compiled a list of high-leverage innovators – those who saw the best returns on their R&D spending. These companies cited two factors in their success.

First, they work to align their innovation to their overall corporate strategy.

Second, they have processes in place to pay close attention to their customers in every phase of the innovation value chain – from idea generation to product development to marketing.6

Business Week noted a change in focus at the World Economic Forum in Davos, Switzerland in 2006. There was a noticeable “shift in agenda reflect[ing] the fact that CEOs and the corporations they run can no longer generate value by com-peting solely on cost and quality, so they are turning to innovation… there are an unprecedented 22 sessions under the theme of ‘Innovation, Creativity, and Design Strategy.’ There is a special series of six workshops just for CEOs. They include ‘Building a Culture of Innovation,’ ‘What Creativity Can Do For You,’ ‘A World Without Intellectual Property,’ and ‘Making Innovation Real.’ And there are larger sessions on such topics as ‘Prepping for the Creative Economy.’ ” 7

The organizers knew that CEOs are in the best position to understand relationships and tradeoffs between innovation, investments and value creation driven by customers. Only the CEO and the board can drive the company from an inside-out focus to one that is outside-in. This shift means that the CEO needs a chief marketing officer (CMO) mindful of those things considered to be the most relevant benefits by the target customer.

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The CEO drives this fundamental shift to establish processes managed by the right people. The goal is to deliver a revenue-minded value proposition not just as a value proposition but as an entire organizing principle for the enterprise. Identifying the true costs of complexity is part of making this transition – the shift from focus on features to emphasizing benefits.

Such a comprehensive transformation requires a commitment by all members of the management team. The CEO must set the agenda and negotiate the metrics that the COO will use to measure complexity and adoption costs, as well as the CMO to report what action needs to be taken to address what customers value. Getting the right information to make decisions requires a chief information officer (CIO) who understands key performance indicators. And at least 20% of the time of the CFO should be invested in mobilizing all resources at his or her disposal to align the pricing strategy and the costs of the supply chain.

AN OPTIMIzED PRICE IS gOOD FOR buYERS AND SEllERS

Pricing strategy is rarely as comprehensive as it should be. Turner DeVaughn’s research suggests why effective pricing strategy is so essential is because it’s a fundamental component of quantified value propositions. And Bain’s research reveals that “[f]ew levers have as much power to influence profitability as pric-ing does. For a typical company, a one percent increase in price boosts profits two to three times as much as a one percent increase in sales volume.” 8

In McKinsey’s experience with more than 500 pricing studies over the past two years, committed leadership on pricing strategy improves a company’s operating profit margin by between two and seven percent, often doubling historic profit margins. Put another way, the average five percent improvement in returns on sales from improved pricing creates $1.5 billion of additional value over five years for an average S&P 500 company.9

Memo to CEOs: hold your C-level executive staff accountable.

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Top performers,” said Bain researchers, “know that pricing strategies fail when nobody in the organization can report on how they are being implemented, and when there is no way to sense how customers are responding to them.” They assert that it is essential to have analytic processes to interpret the outcomes of pricing decisions – particularly changes in profitability.10

METRICS REVEAl MORE THAN PROFITS

A common analytic process requires the cooperation of the CIO, CMO and CFO. This has to be mandated by the chief executive, with total support of the COO. If the processes don’t have anything to do with shareholder value, the team won’t succeed.

The CEO sets the priorities and, during the initial period, often brings familiar and trusted figures onto the team. In the initial stages, the management team must be candid with one another about what they are confronting. Candor will set the tone for the long-term. The period of discovery allows the CEO

and COO to build a rapport with managers down the line, enabling a realistic assessment based on the hard realities of making the business a success.

During this process, the CEO and COO may also discover staff thinking and behaviors that limit performance and shareholder value. In some cases, it can be turned around. But often it requires deeper changes. Ultimately, the CEO

must set priorities and fund them in such as way that it is clear what each department or business unit must accomplish and define how to measure its contribution to value creation.

Based on a quantified and validated value proposition, a company can identify and measure KPIs. At the core of this concept is the premise that innovation and marketing are the only two sources of value. Metrics must be derived from those essential value drivers and are like lenses that continually focus on what is important.

The result is nothing less than a management revolution: the ability to connect customer value to shareholder value.

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Among all the responsibilities of a chief operating officer (COO), driving simplicity throughout the organization is the most likely to create value. In turn, customer adoption costs go down in interactions with the company and its products.

The COO title means different things to different companies. The simplest way of thinking about it is that the CEO focuses on strategy and the COO executes the tactics. Oversimplified, perhaps, but “operations” has long been shorthand for “the day-to-day business,” especially where manufacturing is central to business “operations.”

According to The Conference Board, “the role of COO is evolving, based on a company’s situation. The responsibilities of the COO position have gradually changed from oversight of a company’s line of business to becoming more contingent on senior management’s needs for the company at a specific point in time and the CEO’s corporate leadership design preferences.” 11

In reality, the COO should function as the operational eyes and ears of the CEO and report back on all matters that require attention and further consideration. It’s one of those “somebody-has-to-do-this-job” jobs because many business unit heads don’t always feel comfortable being a candid advisor to the CEO. This might require telling the boss that his or her idea is actually pretty lame. In the McKinsey Global Survey, corporate-level executives with an opinion say that bad decisions are often made while they watch silently. It’s listed that 17% of the capital invested by their companies went toward underperforming investments that should be terminated and that 16% of their investments were a mistake to have financed in the first place. Business unit heads and frontline

Chief Operating Officer Banishing Complexity

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managers say 21% of investments should not have been approved and indicate another 21% should be terminated.” 12

McKinsey’s Phil Rosenzweig advises candor. He says that “[t]he capacity for critical thinking is an important asset for any business strategist – one that allows the executive to cut through the clutter and to discard the delusions, embracing instead a more realistic understanding of business success and failure.” He advises executives to think critically; “Companies cannot achieve superior and lasting business performance simply by following a specific set of steps.” 13

It must go beyond process. The point is to get everyone energized around the same issues and initiatives that comprise the new mission.

POINTINg EVERYONE IN THE SAME DIRECTION

The COO must make the call as to whether the managers throughout the organization are supporting the new strategy, or if they are cautious and defensive. According to the McKinsey Global Survey, “[a] majority of respondents say it’s at least ‘somewhat’ important to avoid contradicting superiors. The closer to the front line the respondent, the more important he or she rates the avoidance of such conflict.” 14

Opinions are often not overtly expressed and find their way into a less-than-productive political dynamic; 61% of respondents to the McKinsey Survey say business unit and divisional heads form alliances with peers or lobby someone more senior in the organization at least “somewhat” frequently. Interestingly, frontline managers report more lobbying – some 70% say it occurs more than somewhat” frequently – than do corporate-level executives (51%). Also, respondents at public companies report a greater incidence of lobbying than do those at private ones.

Small wonder, then, why many COOs struggle to harness the organization to carry out what the CEO and board have directed. The larger the organization, the bigger the challenge – especially if it requires rapid change. Here is where the value of simplicity factors in again.

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The advice of Accenture is straightforward and goes to the heart of the chal-lenge. “To overcome the risk of derailment by management team issues, high performers create top management teams prepared to drive successful early change by assembling and empowering the right team for the right challenge. This consists of three activities: putting the right people on the team; support-ing them with the right resources; and ensuring that everyone on the team is pulling in the same direction.” 15 The answer is to get everyone on the same page as quickly as possible. COOs will typically deploy programs that have instant credibility and value because any employee that has been trained under a Continuous Improvement program or Six Sigma can leverage that experience in the job market.

Continuous improvement (also known as Kaizen16) has gained traction for several years, primarily in manufacturing environments. There are two func-tions within it:

Maintenance: Management must first establish policies, rules, directives and standard operating procedures and then work towards ensuring that every-body follows them.

Improvement: Management continuously works toward revising the current standards, once they have been mastered, and establishing higher ones.

It fosters a culture that is customer-oriented and obsessed with quality. Critics say that continuous improvement discourages innovation and encour-ages the pursuit of “perfection.” This ideal is expensive to achieve and does not necessarily contribute to customer value or the bottom line. They argue that it should not be a cultural driver for a company.

Another popular alternative, Six Sigma, originated at Motorola and has been implemented by GE, Raytheon and Xerox. According to Motorola, “it starts by understanding and managing customer needs, then aligning key business processes to achieve those requirements. By utilizing rigorous data analysis to minimize variation in those processes, the theory is that management can

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then drive rapid and sustainable improvement to business processes with cross-functional teams.”

COOs who run either Kaizen or Six Sigma likely have systems and disciplines in place consistent with the concepts we believe are central to NET value.

In particular, Six Sigma incorporates Voice of the Customer (see page 222) into its processes which can include ethnography. Robert Cardone of Merrill Lynch describes how it works: “Ethnography primarily uses observation and interviews to gain insight into when, where, why and how people use products and services. These techniques range from pure observation to complete immersion in the world of the customer, and offer a customer perspective rather than a business perspective. It is not about how a company sees and interprets customer behavior; it is about how customers see the company, and how they employ its products and services to satisfy their needs.” 17

Six Sigma recognizes customer value and encourages innovation with discipline. The model we advocate at Turner DeVaughn, the one we’ve been describing, is complementary.

Bain consultants are of the same mind. They state that “[c]ustomers are crying out for more and more innovation. Yet if you create too many offerings, costs spiral out of control; too few, and you miss out on profitable sales. The dilemma puts a premium on finding just the right balance – between product variety and operating complexity – which can boost their balance sheets, with cost reductions of as much as 35% along with up to a 40% increase in sales.” 18

AT STAkE : VAluE

Simplicity is the most difficult thing to achieve, especially as a company wants to add value to products. There is a way to visualize how simplicity contributes or doesn’t contribute to value. Just see it as your innovation fulcrum. According to Marc Schiller and Dominic Basulto “It is the point at which an additional offering by a company destroys more value than it creates.” The additional offering is actually needless complexity.

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Innovation fulcrum,” in Bain phraseology, is a way of thinking about the shift of emphasis to benefits from features. As we’ve noted, too many needless fea-tures add complexity and often compromise the benefits that customers value. Is this feature creating value?” should always be the design mantra, not “Can this feature be crammed in here, too?” Adding complexity is more often a li-ability for customers, not an asset. It can require that experts be brought in to manage internal impact, adding to headcount and payroll.

In a recent Bain survey of more than 900 global executives, 70% admit that excessive complexity raises costs and hurts profits.19

According to the Service and Support Professionals Association (SSPA), “al-most two-thirds of SSPA members said in 2006 that the products they support are highly complex; less than half of members claimed highly complex prod-ucts only three years ago.” 20

SSPA goes further to state “[w]hen we talk about highly complex products, we typically think of Cisco routers, Sun servers and Oracle enterprise applications and databases, but the impact of growing complexity is hitting the consumer world just as hard. As an example, communications companies report that they receive an average of four to five customer questions on every new cell phone because the features are becoming so complex customers can no longer figure out everything on their own.”

Consultant Gartner Group says that 1,152,839,800 cell phones were sold worldwide in 2007. This means that there were almost six billion questions asked of carriers, distributors or manufacturers during the course of the year.21

Figure that the average question takes three minutes to answer. Now do the math. That’s a lot of workdays spent as a result of needless complexity. Any wonder why there is so much outsourced call-center business worldwide?

You improve the customer experience by eliminating complexity. It reduces adoption costs and lets you charge a higher price point for the value they create. When everyone in a company understands this basic idea, it’s possible to grow more efficiently.

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That sounds good in theory, but executives and line employees often have different vantage points. Barsh, Capozzi, and Davidson asked C-level executives and professional staff about the gap between how staffers and senior managers see the world of their customers.22 Here’s part of what they found:

C-level officers often don’t see the existing staff as being up to creating value, while staff members believe that the culture inhibits progress.

Asked whether the organization has the right types of people, 40% of C-Level executives say yes. Just 22% of staff agrees with them. There is also disparity between the C-levels execs who fault the culture for inhibiting progress (about 12%). Almost one out of three staff says that it does.

Less than one out of five staff employees believe that their organizations encourage them to learn from failure.

The COO must be aware of the different ways that their C-level peers see the world, compared to people who are expected to create customer value. Use of common company-cultural language can bring people together, as can encour-aging them to network – a popular theme of many company “offsite” meetings.

TECHNOlOgY AS A MEANS TO AN END

No question that web-based collaborations, an aspect of social media, flattens organizations and empowers people – to make processes and team interaction less complex among other things. Just as employees can more easily network with one another, so too can customers, distributors, suppliers and investors become part of the company’s network. Simpler, more accessible, and more easily applied technology enables greater sharing and collaboration. This helps create something of greater value. The COO sits at the intersection of information, staff expertise (and appre-hensions), supply chain, strategy and execution. Web-based social media and related technologies and languages will be one more set of tools that can allow for greater clarity in managing operations. The ultimate goal of clarity: simplicity and minimal adoption costs for customers.

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The Chief Financial Officer (CFO) must rely upon marketers to know what the market will bear, but there is significant innovation that can be applied to optimized pricing, business models and the value chain. The CFO possesses the levers to take a leadership role in pricing.

We submit that our own NET value framework is the keystone of the business model. It provides a nearly perfect source of meaningful metrics that enables investors to look beyond quarterly earnings. Adoption costs, benefits and purchase price are the three essential elements of a value proposition and responsibility for pricing strategy is the most vital contribution the office of the CFO can make to value creation.

McKinsey consultants recommend that CFOs play an active leadership role. They state that ”[t]he companies that are most successful at implementing pricing programs across an entire enterprise are those that have set up pricing organizations that report directly to the CFO.” In best-in-class pricing organizations,” based on research by Dieter Kiewell and Eric V. Roegner “the CFO commits at least 20% of his or her time to the pricing effort and assigns dedicated responsibilities within the finance organization to manage pricing continually.” 23

The CFO is positioned to drive earnings by maintaining a balance between pur-chase price and operational costs. Applying Differentiated-Value Pricing tech-niques enables the CFO to let the market lead yet make very deliberate pricing and business model recommendations to the CEO to avoid needless pricing erosion.

PRICINg STRATEgY

Consultants at Accenture agree on the time-sensitive nature of pricing; “[a] pricing strategy can be…perishable. First, marketplace and competitive demands

Chief Financial Officer Is the Price Right?

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are changing all the time. Product lifecycles are shrinking; many products succeed or fail in a matter of months.” Greg Cudahy and George L. Coleman urge CFOs to be particularly vigilant at the launch of a new product. They acknowledge that “[i]n consumer electronics or media products and services, the lifetime profitability of an item can depend on just the first few weeks after launch; mispricing out of the gate can destroy years of work and planning.” 24 According to Roegner and his McKinsey colleagues, “[e]ighty to 90% of all poorly chosen prices are too low. Many companies want to make a quick grab for market share or return on investment, and with high prices both objectives can be harder to achieve.”

In many cases, price is determined by what competitors are doing or what it costs to produce it.

Gottfredson, Schaubert and Saenz of Bain point to the Experience Curve to illustrate the importance of pricing a product at a high enough level to weather eroding prices over time. “Inflation-adjusted prices decline over time in nearly every industry.” Accumulated experience makes a business (and the entire industry) more efficient. “You might find that the doubling of units produced in your company, your per-unit cost in constant dollars drops by 20%. In that case, your experience curve is said to be 80%.” You can compare the curve to your competitors and project where prices and costs will be in the future.

Experience curves in different industries (based on a range of studies25):

• Microprocessors declined 40% between 1980-2006

• Airlines declined 25% between 1988-2003

• Personal Computers declined 23% between 1988-2004

• Plastics declined 19% between 1987-2004

• DVDs declined 15% between 1997-2002

With a realistic view of the long-term, the CFO can prepare a price-decrease experience curve) model somewhere between 60% and 85% with a given product. (

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They have to always consider the innovation that will add value with new product releases.

Says Bain’s research: “Few levers have as much power to influence profitability as pricing does. For a typical company, a one percent increase in price boosts profits two to three times as much as a one percent increase in sales volume.” It’s probably fair to say that price matters more than just about anything else.

Although a one percent improvement in price yields bigger gains in operating profit than a similar improvement in variable costs, fixed costs, or volumes – almost eight percent on average across the S&P 1000 – companies often base prices on the anecdotal observations of a few vocal salespeople or product managers.” 25

Sales people have incentives to close business at the end of each quarter – something customers are well aware of. Of course, customers love to see prices come down. A purchasing agent’s stature is enhanced by how low they can get their vendors to go. They aren’t generally judged on finding a solution with low adoption costs and benefits that are ideal for the customer’s situation.

In your own experience, what’s the ultimate measure of a good procurement manager – the effectiveness of the solutions they procured, or how much they drove down the price?

When B2B customers play vendors off one another as a form or arbitrage and engage in these negotiations, are they testing your own perception of the value that you are offering them?

Competitors without quantified and validated value propositions do not deal from strength. They are naturally inclined to slash their prices in desperation to close the quarter’s business. Unarmed with a quantified and validated value proposition makes you no match for a customer in a position to squeeze the last dollar out of what he sees as a needlessly plump price. As a result, a tremendous amount of value is lost in a downward spiral that hurts everyone – especially at the end of the quarter – at the time when the CFO needs to see profitability and growth.

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Kiewell and his colleagues see a pattern where “[purchasing] agents increasingly demand that core suppliers assume more of the financial risk of their transactions – including payment terms, insurance, or the cost of on-site field engineers, for example. Because sales forces are not equipped to assess their full value or the financial risk associated with them, products and services often have financial elements to them that are simply given away, even at a loss.” They assert that, “[w]ith support from finance, sales organizations can factor in the risk of selling to certain clients and develop bundled offers that are appropriate to the level of client risk.” 27 This process must be managed with a realistic view of the long-term. Prices will decrease over time, despite the power of the quantified and validated value proposition. However, it should have less to do with competitive pressure, and more to do with the experience and the corresponding efficiency your company offers as well as how well aligned you are with your market(s). CFOs and CMOs need to work closely and stay on top of the issues that impact profitability.

PRICINg AND PROFITS

Jonathan Byrnes lectures at MIT about effective financial executives. He says that the “CFO needs to develop a systematic understanding of the company’s baseline profitability through profit mapping. This will reveal the precise areas of high profitability, of low profitability, and of negative profitability.” Data from the CMO on market segmentation is essential. Knowing which customers are most profitable is critical to both the CFO and CMO.

Profitability is a vital sign in business but Byrnes has observed resistance in public companies based on fear that investors may punish the company if revenues suffer. However, the all important earnings-per-share (EPS) metric has nothing to do with revenue. If you increase profits without investing additional resources over a period of quarters, investors start to see a favorable pattern. Byrnes has worked on several profit lever initiatives and found that they “in-crease profitability of marginal business at little cost, and with no revenue loss.”

The CFO has access to, and the ability to analyze, the data in order to be pursuing the most profitable customers and transactions. In their analyses, Kiewell

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and Roegne of McKinsey place an emphasis on transaction-specific data – things like discounts, rebates, payment terms, logistics, and actual customer-specific product and service costs.” Typically, a separate database needs to be created that can synthesize the information available from a number of dif-ferent systems controlled by the CFO. Its central position within a company makes the finance organization the natural owner of such a database, given that data sources may cross both functional and business unit-specific borders but feed into established financial reporting systems such as financial analytics, corporate finance, sales analytics, legal expertise and marketing analytics.28

The ability to offer customer value depends upon optimum pricing, which assumes that your business model respects the issues your customers deal with.

Today ‘what’ you make is quickly copied and sold by everyone,” says New York Times columnist Tom Friedman. “But ‘how’ you engage your customers, how’ you keep your promises, and ‘how’ you collaborate with partners – that’s not so easy to copy, and that is where companies can now really differentiate themselves.” 29

It is useful to note that Friedman was inspired by Dov Seidman’s book How. So exactly “how” should you, as the CFO in an organization competing in the digital economy and culture, differentiate yourself from the competition? Answer this question: how obsessed are you with pricing at the level that most profitable customers are willing to buy? If you devote 20% of your time to price strategy and the business model, it is not likely that the competition will be able to do as much as you fear they can. That is one way how to differentiate.

When an optimized price is supported by a quantified and validated value proposition, competitors are mightily challenged to replicate your performance, at least not in short order. If the CFO is getting the job done and the information systems are in place, decisions are being made about price and value creation that will take months for competitors to catch-up. Rather than obsessing on each other, competitors should be paying attention to customers and their choices. No one else can copy how your entire organization fixates on customer value.

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Of course, marketers need to be responsible for promotional activities and distribution channels. They always will be. Yet, the higher priority is to determine the most profitable customers and understand their needs better than any other competitor. Intelligence gathering is an essential skill that serves the entire organization.

Operating around the value proposition gives all C-level officers responsibilities that correlate with customer value. It’s our view that chief marketing officers (CMOs) should be experts on the benefits that their customers consider the most important and, thus, valuable. Which is another way of saying that the CMO must be the resident expert on the customer.

A CMO can focus on understanding the benefits a market craves only if the CEO embraces the need to build a relevant (read: flexible) value proposition and business model. This is about a willingness to accept the old adage that change is the only constant. Sometimes this change is instantaneous.

Crossing the Chasm author Geoffrey Moore has considered how executives adapt to change. He says that “[m]any executives are unconsciously competent. They don’t have a model of what they’re doing, they’re just doing it. It works great until they hit a bend in the road that they didn’t anticipate and the model breaks down. If they can figure out where they broke up, they can reorient and take the next steps forward.” 31

CEOs that operate on an intuitive level may surround themselves with people who are good at optimizing the status quo. Their choice of senior executives and the culture that they establish are key factors in their ability to deal with change.

Chief Marketing OfficerKnowing the Benefits Customers Value Most

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If marketing is not an instrument for tracking the market and its evolving needs, then a CEO has no way of really knowing what is happening or what to do about it.

The CEO’s choice of CMO almost always comes down to one of two approaches: Inside-Out. These are marketers who take the direction of the CEO without questioning the underlying logic and are not authorized to factor-in the view of the market. These marketers tend to be tacticians who do what the CEO believes marketing should do – which is based on inside-out thinking. In the 1960s musical “How to Succeed in Business without Really Trying” the company president (Mr. Biggley, played by Rudy Vallee) expressed why advertising people had disappointed him over the years: ‘They need to come up with great ideas…the ones I give them.’ Marketers who are really expected to follow exactly what the CEO wants must be careful to always remind him or her that the results that follow are the CEO’s as well. It’s almost always a lose-lose situation when the CEO takes this approach, because it is a scenario that eventually leads to failure – when change happens. Most marketing jobs fall under this category, so even competent marketers find themselves frustrated and limited by the narrow conception of what marketing can do for the CEO.

Outside-In. These marketers are continually in-tune with the market and are in the best position to inspire focused innovation around product benefits, pricing and business model. They tend to be both strategic and tactical. In the strategic role, a marketer inspires other C-level officers with a real understanding of customer needs. Everyone works together in their value creation efforts, and the marketer never takes full credit or full blame for results. In the tactical role, the CMO identifies what actions can be taken and uses research to assure that expenditures have a reasonably high chance for ROI, and that there is mutual agreement about the metrics. With both roles, success is possible when the entire management team is working together to create value, under the proactive leadership of the CEO. Therefore, the most important thing a CMO can do before taking on a job is ascertain whether the CEO can drive the organization with an outside-in bias.

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Barbara Bund is a senior lecturer at MIT’s Sloan School of Management and author of The Outside-In Corporation.32 She advises executives to “check your organization for the following healthy signs of outside-in behavior:

Employees throughout the organization have clear ideas of who our customers are and, broadly, what we do for them.

Although employees in different roles and at different organizational levels have different depths of understanding of customers, the employees’ views of customers are generally consistent with one another.

We have clear, explicit, understandable “pictures” of customers.

Those customer pictures provide clear, explicit reasons for our marketplace strategies and actions.

Our top managers have lots of contact with customers – and they know how to listen. Lots of other employees have substantial contact with customers – and they learn from their contacts.

We capture the learning about customers and incorporate it into our evolving strategies and actions.”

Outside-in thinking doesn’t mean that the CMO is the conduit between the company and the realities of the market. It takes a team, across the enterprise, to increase customer value by knowing what is really happening and how product benefits are perceived and valued.

Marn, Roegner and Zawada focus on this issue as well.33 “Too often, companies overplay the benefits of their new products, touting as revolutionary what is at best evolutionary and rarely acknowledging that they are really playing catch-up.” But it is important to make an honest internal assessment of a product’s position, since different pricing strategies are appropriate for each of the three possibilities:

Revolutionary: A product is so new that it creates its own market. Quantifying and explaining such a product’s benefits to an untested market takes skill.

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Evolutionary: Upgrades and enhancements to existing products are evo-lutionary in nature. If the new product provides too many new benefits at too low a price, a price war can ensue.

Me-too: Painstaking cost analysis and a clear set of target customers are needed to avoid catastrophe with me-too products, which bring a company into line with the rest of the market without adding new benefits.

The me-too approach in not proactive or strategic and rarely is born out of a market-based value proposition. They get in that position without having a deliberate outreach effort to know what the market in general (and customers in particular) wants.

For those who apply marketing disciplines too late, it is all too common for executives to be surprised that their product is not differentiated. It is also frustrating to learn that they have a commodity-level product that costs more to market than buyers are willing to pay.

That’s why it is so critical to apply outside-in thinking to the business as early as possible. As a result, decisions will not be made to invest in product development unless subjected to market realities and a likelihood of profitability. Successful companies are continually using market research to gauge what will float and what won’t. A product may float with one segment and sink with another. You have to know the difference.

kNOWINg WHAT FlOATS AND WITH WHOM

The customer is the primary source of insights that must be used to inform almost every business decision. Yet, many CMOs are not happy with the information they have. In a study conducted by IDC on behalf of Bearing Point, only 21.7% of executives said they were very satisfied with the insights they had about customers. 42.6% reported being somewhat satisfied.

Segmentation requires the right information – especially around the benefits certain people will pay for. It’s a critical tool to contain costs and scale one’s

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marketing efforts in a predictable way. Members of a given segment are likely to react to certain benefits differently than another segment. Knowing who they are and how they will react is the basis for a number of decisions. For example, it allows for ROI calculations to be made and decisions about whether to even target a given segment. Management needs to know that there is a sizable market segment to go after with a given value proposition, distribution strategy and promotional activities.

A common and recurring mistake made by managers when they make projections is to assume that a product can capture a large share of that segment or that the segment can be reached at a reasonable cost. CFOs need to be educated about the true potential to assure that pricing is realistic for the costs required to gain access to the segment. Realistic and detailed segmentation can contain costs and allow for narrowly defined success at an early stage.

Cooil, Aksoy and Keiningham explain that “Effective segmentation usually requires that each segment be evaluated on certain criteria such as stability, growth potential, size, accessible, responsiveness, and whether the customers in that segment, and the marketing efforts directed toward them, are consistent with company objectives and resources (i.e., whether the segment is actionable”). In their paper “Approaches to Customer Segmentation,” the authors provide various bases of segmentation that may include “geographic, demographic, psychographic and behavioral. Other variables that may be used for segmentation include situational (e.g., purchase/use occasions), and customer preferences for products or specific product attribute levels.” 34

Segmentation is critical because a company has limited resources, and must focus on how to best identify and serve its customers.”

Researchers at Kellogg School of Management at Northwestern University have identified another way of segmenting based on goal orientations. They’ve found that “[b]efore a consumer decides to purchase a product, he or she must come to believe that this product will help them achieve their goal

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which could either be a promotion or prevention goal).” Brian Sternthal and Prashant Malaviya explain how it is not always simple because maximizing reward and minimizing risk are both in play at times. “Occasionally, the same product may benefit consumers with different goal orientations. For example, mobile phones may appeal to promotion-focused young people by improving their freedom and opportunities to connect with friends. At the same time, mobile phones may also appeal to prevention-focused parents because the phones can help them keep track of their children and can be particularly useful in emergency situations.” This goes back to the value proposition, and the benefits that appeal to customers.35

bRANDS, bENEFITS AND VAluE

According to the AdAge Top 100 list of advertisers in 2006 “Procter & Gamble P&G) Company continued its six-year streak at number one, with $8.52 billion.”

However, their brands are built on far more than name recognition and awareness. Connecting branding to ROI is the only way to justify advertising expenditures that top $8 billion. Global marketing officer (GMO) Jim Stengel observed how the new approach is impacting the agencies they work with.He says that “[a] number of them have said to me jokingly, ‘You know, you’ve taken away all of our excuses.’ But the best ones are really excited by this drive to be more innovative in our planning. We do a lot of equity work once the brand is in the market. For the big brands, we look at the data every quarter. And we really see it move when a brand gets it right.” 36

For example, P&G adopted a brand tracking system in 2003 based on the framework developed by K.L. Keller, who is a professor of marketing at the Tuck School of Business at Dartmouth College. The model draws a connection between each of their brands and the benefits as perceived by consumers. P&G has fully embraced this system in more than 30 countries.

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Research by professors at Ohio State University and Louisiana State University describes the approach as “brand-benefit beliefs” which are defined as “a respondent’s belief that a brand provides a specific benefit.” In other words, the GMO is identifying benefits that are important to the market – as part of a broader effort with the CFO. Based on that knowledge, P&G is able to align its pricing and innovation with the needs of real people.

GMO Jim Stengel: “We’re pushing creativity, innovation and risk-taking at the same time we’re pushing discipline. And that one-two is very powerful.”

By focusing on the perception of benefits, P&G has an organizing principle that eliminates guess-work and makes the brand meaningful to the CFO and operations teams. Randle D. Raggio from LSU and Robert P. Leone from OSU suggest that “The major benefits to P&G are an understanding of where consumers’ brand beliefs come from, and a reliable measure of brand equity at much less cost and with fewer questions.”

When it comes to branding, performance benefits are the most meaningful for two key reasons:

1/ Keller presents a pyramid of factors that contribute to brand perception, and “performance” and “judgment” benefits are most fundamental (at the base). In other words, other less tangible things like “feelings” are secondary.

2/ Knowing how consumers rate performance benefits can give executives something to work with on an operational level (as opposed to feelings). For example with P&G, “managers can respond straightforwardly to consumers’ statements regarding the strength or absorbency of a paper product.”

Therefore, in providing a means to uncover the mental sources of consumer brand ratings for important benefits, the model also provides direction for managerial action. The analysis points out that companies like P&G can learn how consumers evaluate two benefits of paper towels and what can be done

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to change their perceptions through brand promotion or packaging. If absorbency and softness are two key benefits, fewer consumers may say that it is absorbent than soft because softness is something that can be judged on sight alone; absorbency is the kind of attribute that must be demonstrated. What this means for P&G is that managers can impact the perception of the benefit of softness by the product design (the researchers call these features attributes”) but would need to highlight the benefit of absorbency through demonstrations.

This brand-benefit research can be particularly useful for products whose features do not inherently lead a prospective buyer to understand the benefits they offer. The conclusion is that “if the poor belief were based on a general brand impression, then perhaps only the brand’s message or image would have to change, and not the physical formulation.” This framework is also useful in determining whether a certain ad campaign showed desired results in the way people perceive the benefits associated with the brand. This is especially true if samplings are collected over time.37

Consequently, the value proposition is at the core of a true brand, because the benefits that people perceive are what give the brand value. It then becomes vitally important to perform consistently, and keep the promise of the brand in delivering the desired benefits.

We have identified three expressions of branding in today’s market:

Brand-Benefits: Companies such as P&G that invest heavily in their brands understand that marketing is not simply a promotional effort but a conversation with the market to ascertain the perception of certain benefits and to what extent buyers see value in those benefits. Ideally, a trademark is simply designed and easy to recognize, but the right benefits behind it make it easy for consumers to remember and internalize – given enough advertising or outreach.

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Trademark-Attributes: There are a number of “branding agencies” that have emerged to give companies a way to create a trademark and instill various impressions, feelings and attributes into it. But any advertising ends up being about generating “awareness,” which has no value in the view of the CFO. It is difficult to sustain ad budgets for brands based only on intangible attributes when they don’t show ROI.

Me-too Logos: Some may recall a multitude of logos with swooshes or ovals during the dot-com boom. They had nothing to do with the benefits of the brands, but simply identified them as trendy. Again today, the notion of being part of social media is attractive, but the common visual language is a reflection on a glassy surface. Even when a company is seeking capital and wants to be perceived as a hot category of the moment, such an approach is dubious. Worse, it can confuse customers about benefits (if any).

The lesson for marketers? If you want to build a brand, focus on benefits. If you want the brand to generate ROI, integrate those benefits into a value proposition. And if you have a value proposition, use it to organize how the business monitors its performance through relevant metrics. That’s one of the reasons why CIOs are so important to CMOs.

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Technology is important only so far as it makes a business more efficient and in-tune with the value it is creating. Whether one’s title is Chief Information Officer CIO) or Chief Technology Officer (CTO), the priority must be on gathering, processing and disseminating information to improve the value proposition.

The web is changing the role of information chiefs (CIOs and CTOs) in organizations because it shifts the focus away from technology and towards information. Traditionally, information chiefs in organizations large and small have always had more to do with the technology that processes the information than with the vital information itself. As a result, the job is more about concepts and activity far removed from what the organization does to attract and retain its own customers. It’s more about capital planning and investment management, enterprise architecture, security, privacy, and workforce planning. Of course, the acquisition, development and integration of computer and networking systems matters a great deal.

The focus on corporate technology has been within a closed environment, initially dealing with mainframes and then evolving to client-server computing. This model has been dictated by limited network bandwidth that has always lagged processor power.

Technology pundit Nicholas Carr has examined information technology (IT) from a broader economic perspective. He argues not only that equipment is underutilized, but also that there is needless redundancy: “The replication, from company to company, of IT departments that share many of the same technical skills represents an overinvestment in labor as well. According to a 2003 survey, about 60% of the average U.S. company’s IT staffing budget goes to routine support and maintenance functions.” 38

Chief Information Officer Turning Information into Customer Value

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Is it time to rethink the way CIOs approach technology? In particular, the slow process of getting closed internal systems to function as designed has been a major stumbling block to productivity. Many companies have missed market opportunities because senior management did not have the right business intelligence at the right time. The web is offering lots of ways to eliminate that dynamic because of the shift away from technology to information. This is hardly a surprise because the right information at the right time has always been the source of competitive advantage. And, in today’s digital culture, information is coming from all directions at once. There are about 66,400,000 active web sites on the web today and BlogPulse counts between 350,000 and 450,000 blog posts every day. This is exponential growth. It’s a lot of information originating outside corporate walls.

One of the key reasons why information in general and business intelligence in particular are so important is that they aid in segmentation and provide real data to define the value of a specific customer during the lifetime of the relationship. That is essential information the CFO should know and the CMO

should be able to provide context for what to do with it. About 24% of those executives who participated in BearingPoint’s study of customer intelligence admit an inability to identify appropriate analytics for generating insight.

Here, a strong value proposition can be especially useful. The three silos of metrics (customer benefits, optimized pricing and adoption costs) form the basis for seeing the company through the lens that matters: how to connect customer value to shareholder value. This framework demands continual intelligence gathering and serves the marketing and finance teams.

The internet is changing how companies learn about – and interact with – their markets. Since its inception and appearance on the business landscape, the web has repeatedly turned industries upside down and radically changed how people do business within those industries. The newest shift has to do with enterprise computing. Underlying it is the steady growth of network bandwidth. Virtually all business can be, and is being, done over the network. This has signaled the dawning of the open information age.

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The most valuable information emerges from an open environment which has allowed companies to do much more business over the web. Everything from enterprise resource planning (ERP) to customer relationship management CRM) is now being run over the web – outside the corporate firewall.

An explosion of Web 2.0 content can be explained by low adoption costs as well as its social nature. User-generated content is like a new, frontier town – an Old West ethos without a sheriff or a zoning board. No law; no order; no rational design. Fun for some, perhaps, but where is the value for customers? Certainly, we’ve seen little of real value here, but that’s mostly because the proponents of Web 2.0 have not used it very effectively as a way to gather value-oriented intelligence.

Does this represent some kind of inflection point in the evolution of the digital culture? Does it promise the opportunity to change the way companies do business for the better and for CIOs to facilitate or even enable that shift? CIOs seem to believe so.

In fact, the open information age is inspiring CIOs to offer greater strategic value to their organizations. An IBM survey of 175 CIOs revealed that 86% saw a need to play a more significant leadership role. Leadership doesn’t mean bigger budgets. It means more impact with better – and more strategic – information.

In a BearingPoint study conducted with financial officers, 62% responded that demands for better information/business insight is a primary driver of a transformation initiative. These transformations may include approaching new markets, offering new products and services, developing new business models or simply connecting customer value to shareholder value.

Turner DeVaughn has identified two information barriers that impede this connection: ease of sharing data and information quality. The CIO will need to become an expert in each and take a leadership role in advancing them throughout their organization. Otherwise, it’s like trying to operate, or live, in brick buildings with no mortar. Among the bricks that are being held togeth-

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er with information are internal departments and operating units as well as external suppliers, partners, distributors and the voice of the customer. With the right information, it is possible to create and regenerate sustainable value. The right information must be accurate and timely. It must also be easy to share internally and externally.

SHARINg OF DATA

Integration and sharing are already happening today even if to a limited extent. It depends on the type of information and with whom it needs to be shared. As powerful as Enterprise Resource Planning (ERP) systems may be, they were designed for internal decision making – not connecting to Wall Street. As companies merge, stakeholders will demand more visibility into the health of the company and its relationships with customers necessitating a simpler way of sharing information.

There is a tremendous amount of effort going into this idea now, from web applications to languages, such as eXtensible Business Reporting Language XBRL). There is inertia in this direction among vendors, but few clients are seeing a need to connect customer value to shareholder value – yet. The first step is not technology. It’s a mandate from the CEO to understand customer value – and act upon it.

That means that more companies will import external content from many sources, such as blogs, ratings and review sites and emails that have not been seen as a source of business intelligence. That content not only must be shared, but must be evaluated based on its source. Who can and will vouch for quality? How reliable is the source? Are they who they say they are? Do they match the profile of the market you serve? Could they be competitors? It is also an issue for internal content. Could it be fabricated? Is there a bias that might distort the data? All of these should be factored-in by the CIO in sharing information with the management team.

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INFORMATION quAlITY

Social media has made it easy for anyone to develop content – often for free with low barriers to entry. This also means that more and more people can be content creators. A Pew Internet Web 2.0 report observed that the new media replaces “the authoritative heft of traditional institutions with the surging wisdom of crowds.” 39

CIOs must also become experts on the credibility and veracity of the data. Systems must not only be able to share the data, but filter it for its reliability. Just because someone said something doesn’t mean that it is true, or even that they believe it. Some people are better – more trustworthy – sources than others. That will become more and more important, especially as executives make decisions based on intelligence from many different sources.

The quality of information content is becoming an essential function of the CIO as they mash-up qualitative content into their Business Intelligence (BI) systems. CIOs will need to become expert on where information came from, and continually assess its credibility. Prat and Madnick have done some impressive modeling on “provenance,” “ontology,” and methods for computing believability.” 40 It’s becoming more of a hot topic because it impacts decision-making and the profitability of companies.

It’s useful to look at the ways that corporations are handling their own information quality issues. British Telecom (BT) started its data quality initiative in 1997. Their initiative was in response to the slow deployment of new products and services, a desire to gain a complete view of customers and efforts to reduce business & IT costs. As the company-wide initiative has been implemented, the financial savings have increased each year. By 2004, it had reached $400 million per year, compared to $100 million in 2001. And, taken over the life of the initiative, it has saved $1.1 billion.

In addition to the financial impact, Nigel Turner and Dave Evans have found that the managers throughout BT also responded to the impact on regulato-ry and legal matters and brand reputation that it has enhanced. They found

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that data quality problems were “holistic and pervasive” and a one-size-fits-all approach does not work. It required a team effort that considered everything from people and systems, to processes and technology. Turner and Evans realized that complexity associated with information cannot be reduced to zero, but it can be improved as part of a continuous process. They also saw the impact online in the exchange of information or transactions between web sites that themselves serve as exchanges or brokers for goods and services between businesses. By analyzing the impact on web transactions, their group was able to build a business case for improved data quality.41

For companies that segment their markets and utilize Differentiated-Value Pricing, data quality is essential to web offerings that are automated. Knowing who you are communicating with and what really matters to them – which benefits are most valuable to them – is pre-requisite to success.

It’s also the basis for connecting customer value to shareholder value. Moreover, it turns out that data quality contributes to simplifying the organization and containing costs. It also ensures that management is better informed.

The CIO will be busy in the years to come using information to connect things that have been isolated. That requires the ability to trust the accuracy of the data and share it. BT understood that efficiency and cost savings were important selling factors for the initiative, but accurate data has a larger role to play in the way the company goes to market with new products, faces its customers and builds its brand. In other words, it’s mixed in with all things marketing in the digital culture.

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Leading companies are obsessed with a focus on their customers, according to Fo-rum Corporation, a change-management consultancy in Massachusetts.42 The firm’s web site describes key areas that impact growth and profitability. Leaders deeply believe that focusing on the customer experience will deliver profits. All employees have a line of sight that extends from what they do all the way to the customer; they know what behaviors the customer values, and they know how to demonstrate them. The business is managed to focus on the customer. The companies’ management teams base every decision on whether it will make a difference to the customer. As a result, customer insights are zealously acquired. There are entire industries that have emerged to acquire that knowledge. During the time that we worked with CEO Craig Conway and founder Dave Duffield at PeopleSoft, they purchased Vantive, a specialist in customer relationship man- agement (CRM) software. Within the enterprise resource planning space, they realized that CRM was the place to be. It’s where customer data resides and where enterprises have come to believe that they can create significant value.

CuSTOMER RElATIONSHIPS

By 2010, organizations around the world will likely spend $11 billion annually on CRM software. CIOs and CMOs collaborate on optimizing use of this software that makes it easier to manage the sales process at a corporate level and track individual customer relationships. Managers use the technology to track the efforts of sales people and assign a value to new leads and across the lifetime of the customer. They enable companies to have a better idea of when emails need to go out and phone calls need to be made. CRM is a great way to track details. The question is whether it allows managers to see past the trees and realize that there is a forest. Trees are customers; the forest is your market.

Vendors Focused on Customer ValueThe Difference Between

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The big gorilla in CRM, Oracle, is cited by Gartner and Forrester as having an estimated 4.6 million “live” users and 4,000 customers worldwide. They have made a number of acquisitions – including PeopleSoft – to get the edge over SAP. It’s obvious that both companies are aware of the trend toward social networking in CRM. At SAP’s Influencer Summit in late 2007, it introduced upgrades to its SAP CRM 2007 software that include support for social media, designed to improve interaction between end users and partners.43

Oracle’s technology-centric framework doesn’t necessarily aid management in understanding what customers’ value. Oracle was thinking about technology and crushing the competition when it acquired Siebel Systems, not how to see customers more clearly. Shortly after the acquisition, Forrester’s Liz Herbert observed “With the purchase of Siebel and its growing OnDemand business, Oracle enters the lucrative CRM software-as-a-service (SaaS) market and can now make a play to take out Salesforce.com.” 44

Marc Benioff and his company Salesforce.com, of course, had (and has) other plans. Salesforce.com made dramatic strides and built massive momentum based on its business model: pay-as-you-go and only use what you think you need. Today, companies like Sugar CRM take the position that open source is even better. This remains to be seen and is probably irrelevant to customer value.

CRM can and must evolve to accommodate new content, insights and oppor-tunities. Rather than focusing on technical issues like SaaS or open source, CRM companies should expand their view of the customer and explore how to integrate their technology with market intelligence software. Forrester analyst William Band sees the evolution as not based on technology, but how customer information is used, stating “CRM professionals must find innovative ways to engage with emerging social consumers enrich the customer experience through community-based interactions, and architect solutions that are flexible and foster strong intra-organization and customer collaboration.” Indeed, deploying CRM doesn’t go far enough to incorporate a broader understanding of one’s market. They don’t go far enough to shape and inform a company’s value proposition.

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THE lINk bETWEEN THE WEb AND CRM APPlICATIONS

Many companies are using content on their web sites to entice prospective customers to download it. In the process, prospects volunteer information that sales people can use as a fresh source of leads. Return visits and log-ins to the site are also tracked in CRM applications. The link between the two is well established and a good way to start the process of integration. This integration requires a team effort of CMO and CIO to assure that the web is used not just to obtain leads, but a source of intelligence and real relationships.

IBM’s Institute for Business Value sees an end to advertising as we know it. They believe that “[a]gencies are developing new approaches to put consumers at the center of marketing programs. Niche-focused consumer research panels are increasingly used to test concepts and develop ongoing dialogues with target segments. Efforts to target online influencers or ‘magnets’ are underway to fuel peer distribution of messages. Micro-versioning delivery concepts are being developed by combining consumer segmentation and analytics with low-cost creative development processes and dynamic ad-serving capabilities.” 47

An expert on banners says that it’s no secret that the effectiveness of banner advertising is on the decline. David Greene, founder of San Francisco-based Creative Spark says that “there are many so called ‘solutions’ for increasing response rates, including customization, increased interactivity, targeted placement/messaging, etc. Yet, none of these are really solutions; they are simply tools for the online marketer to employ in a larger solution. The only true way to increase banner effectiveness is to view/assess their role as part of an interconnected series of actions in the value chain.”

He observes the common tendency to measure the effectiveness of a banner by the number of transactions it generates. The problem is that this places the criteria for success on elements of the value chain in which the banner was never involved. It cannot be used as a metric.

This is not to say that banners cannot add more to the value chain than simple volume of clicks. We had a client with an in-depth sales process and found that by moving the value proposition earlier in the cycle we were able to increase the

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conversion rates on the landing page. We placed an interactive calculation tool in the banner, and although the click through rate on the banner was significantly decreased, the conversion rate on the landing page multiplied by a factor of 10.”

In this case, the value proposition was central to effective brand marketing, but it also required new thinking about measuring success. A higher click-through rate doesn’t necessarily translate into a more effective campaign. Once the right people find a page that is highly relevant to them, they are more likely to buy.

Many companies expect people to complete complex transactions online with-out enough information. Presenting the value proposition early in the experi-ence of a web site might encourage buyers to feel more comfortable taking the first step. It boils down to knowing what the prospective customers value. The problem is that this is not something that most interactive marketers, graphic designers, copywriters, media buyers, programmers or other service providers are privy to. The CMO must disseminate that knowledge to trusted partners and demand that creative ideas are based on it. It’s especially critical to scru-tinize ideas based on their ability to tap into and communicate the value that a brand is creating. Many new web applications and service providers have emerged with such innovative ideas that it is easy to get lost in their cleverness, rather than their underlying value proposition.

Even number-one brand Coke has explored alternatives that haven’t always worked. AdWeek points to various errors Coke has made in weaning itself off traditional advertising and finding the most effective ways to build its brand online: “Coke Zero blog was discovered to be a fake (generated not by consum-ers, but in-house), while the remake of Coke.com into a YouTube-like site for consumer-generated content (dubbed The Coke Show), launched in July 2006, initially provoked brickbats from outsiders and failed to generate much in the way of submissions or traffic.” 48

Just because a respected brand does something doesn’t mean that you should too. And just because users generate content, doesn’t mean that it has any value to your company. If the content from users doesn’t generate insights or sales, then it isn’t an asset.

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MARkET INTEllIgENCE

Voice of the Customer (VoC) is a recently-coined term. The vendors behind VoC technology argue that listening to one’s market will improve loyalty and drive up sales. We won’t argue. Still, these solutions remain components of a whole system that is only emerging, rarely integrated with CRM applications.

We will describe the connection between customer value and shareholder value along with establishing a system to make this connection. This is where you can begin your process to start quantifying and validating your value proposition. At the heart of the process is your own, new and deeper under- standing of what your customers place value upon. What is it that’s most important to them? On what will they spend the most money to attain?

As clients seek our guidance, we want to put together the best solutions to enable them to maximize value. The underlying challenge is for customers to find vendors who can contribute to value. Many vendors pitch a variation on stories that have created buyers’ remorse for so many investors. It’s time to cut through that and seek real innovation.

MORE WEb 2.0 THAN VAluE 2.0

Social networking is a hot category these days, in the successful wake of MySpace and FaceBook. A number of new technology vendors have also realized that social media could be used to offer businesses a new way of getting into the minds of their customers – to know what they know and find out what they think of a product. Customers are already talking about products and services, and sharing their opinions online, so why not harness the natural power of the market?

The thinking is based on the premise that individual customers matter and giving them a way to express their voice can increase sales. According to research firms comScore and The Kelsey Group “[s]hoppers are willing to pay 20% more for services receiving an ‘excellent’ rating from fellow consumers, than for the same

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service receiving a ‘good’ rating.” 49 The firms surveyed 2,000 internet users in October 2007 about the influence of peer reviews on purchasing decisions. There is plenty of evidence that customers want to be heard. Many new ven-dors are emerging to amplify that voice:

InsideView (http://www.insideview.com) is a CRM application mixed with a social media tool like LinkedIn – and it’s on-demand (in the SaaS model). According to InsideView, “[t]raditional business information services don’t do anywhere near enough to help sales professionals sort through potential deals and dealmakers.” They call their solution “socialprise” software and it’s clearly most useful for salespeople. This is a great example of a mash-up – combining two things together that were disconnected before. InsideView argues that [m]aintaining these ‘parallel universes’ of social media for personal relationship information and of business information services for news, data and research just doesn’t work for today’s sales professional anymore.”

Networked Insights (http://www.networkedinsights.com) says that it “represents the shift from market research to customer generated insights.” The company offers the ability to put anonymous chat right on a company’s web site, which is a way to get buyers comfortable with online social interactions. It may also have the drawback of allowing people to say anything – even if it is destructive. Yet, for those who can play a useful role, they can get involved in their Customer Interaction Network, which is formal environment for conversations. In turn, this enables Networked Insights to monitor and measure what is said within a company’s own site or even on third party sites.

BazaarVoice™ (http://www.bazaarvoice.com) lets customers evaluate a product right on the seller’s web site, but mentions nothing of the value proposition. For example, Rating & Reviews™ brings customer reviews directly to your product pages, including a five star rating system. Ask & Answer™ addresses questions that might stop the purchase process, or send your customer to another site for answers. It keeps customers on your site – on the product page, in the middle of the purchase process – with answers that can help them buy. Stories™ is another way of building a community focused on the “why” or

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how” that exists behind the “what.” After she bought the dress, how was the wedding? Once they decided on the cruise, how was the trip?

Opinion Lab™ (http://www.opinionlab.com) offers tools that provide web visitors with a means to provide feedback on the content on a given web page, document or perception of service – but companies keep the comments to themselves. For example, Online Opinion® is a hosted solution that enables web teams to optimize user experience by continuously analyzing page-specific VoC data. DocuRate enables producers of electronic documents to gather and analyze feedback relating to a document’s accuracy or usefulness. O-Mail addresses these concerns by extending the Online Opinion methodology to capture and report user feedback from within an HTML email. DialogCentral is a free system to acquire the page-by-page visitor insight you need to continuously improve your entire web site. However, none of these tools focus on the value proposition.

BzzAgent™ (http://www.bzzagent.com) does not sit on a company’s web site, but is its own independent community and web site. As of April 2008, they re-port over 400,000 volunteer agents, which is growing by 2,000-4,000 mem-bers per week. They describe it as a “platform that would allow people to expe-rience new products and services, share their honest opinions about them with people they knew and report those activities and opinions so marketers could directly see the results.” A company can participate in an active conversation by adding their own comments to posted opinions. BzzAgent’s Frogpond™ cap-tures demographic and psychographic profiles of users who visit, review and refer your site – which is a great feature. This means that it can aid in market segmentation. It includes analytics, from page views, unique visitors, referrals, poll results, and Net Promoter® Score (see page 254).

Technologies are out there and some are finding success. But, overall, they miss the bigger picture. They all fail to focus on the value proposition first and then apply technology to measure and refine it. Based on this approach, organiza-tions can better accommodate changing markets.

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CONVERSATIONS AbOuT EVERYTHINg – ExCEPT VAluE

Sun Microsystems’ web site proclaims that “everyone and everything participating on the network means that when people are networked, they share, they interact, and solve problems.” Sun lives by their vision through Developer Forums and Communities, which both incorporate user-generat-ed content. There are ten communities on their site: developers, Java, sys-tems administrators, newsletters, educators, investors, partners, press, Sun Advisory Panel and customers.

This content – by its nature – informs Sun on what is important among different audiences, and appears to shape their strategic decision-making. Sun also solicits feedback using OpinionLab technology. A customer can cross reference success stories, which are really useful in seeing what they were able to do with Sun technology. Unfortunately, Sun never comes out and describes the value proposition for each product, so customers’ comments tend to address peripheral issues.

Regardless of the size of a business, a company should place the highest prior-ity on its value proposition. Having a forum or community on the web site is no substitute.

WinePod is portable fermentation device from a funded start-up called ProVina. It has a community to help buyers figure out different ways to make wine at home. As of May 2008, 296 users had contributed to 4,886 threads and 8,161

posts. These community forums are popular, but could be more effective if focused on value propositions. 71% of customers want to know but don’t know how to go about getting the information they need.

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Turner DeVaughn Network (TDN) advises companies to really understand your market. Use the web in a smart way to continually make your value proposition relevant for individual buyers, that is, your custom-ers. This might involve worksheets or ROI calculators that factor-in adoption costs.How buyers fill-in these forms will tell you a lot about their needs. It will also give you the ability to segment them and point them in the direction of online posts from customers with similar needs. These Dialogues are focused on the value that each market segment gained from your brand. It validates the value you offer buyers.

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VAluE 2.0 IS ONlY VISIblE TO THOSE WHO CAN AlSO SEE VAluE 1.0

We typically get blank stares from vendors we have contacted about embedding value propositions into their information systems. Those who produce forums and customer-feedback tools have a solution in search of a specific problem – and the value proposition is not it.

Our clients are impatient, so we went ahead and developed a beta-test of a scalable forum designed to focus conversations around customer value. DialogueTDN® is a new web-based tool that has emerged and evolved based on volumes of input from companies that want to develop market-based value propositions. It addresses some fundamental questions that emerged during the last several years:

Why not quantify and validate the value proposition in context with the market, using Web 2.0 capabilities? Why not select questions, comments or testimonials that are most representative of the market and post them online for other customers to see?

Why shouldn’t companies respond in a public forum?

Why should companies be overwhelmed by a barrage of emails each month – and fail to respond?

Why not invite everyone who asks a similar question to visit a dedicated dialogue area about that topic and contribute to the conversation?

Why not let customers convince other prospects to buy?

Why not increase the relevance of content to grow web traffic and convert prospects to customers?

Our research and experience with companies that have a commitment to customer value reveals that leaders – and those on the road to leadership – embrace what they can learn from their market. Followers, on the other hand, don’t want to have to worry about a value proposition.

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DialogueTDN is the capstone of an evolution within companies that have embraced customer value. We want to provide the essential framework. • It’s essential to know what benefits customers value.

• That knowledge must inform a Differentiated-Value Pricing strategy and business model.

• Adoption costs for the product (or service) must be reduced to the lowest possible level.

These three elements are central to begin connecting customer value to shareholder value.

HOW TO lEARN WHAT CuSTOMERS VAluE

When customers take the time to contact you, many of their most useful insights are expressed through unsolicited emails that often go ignored, rather than being repurposed as part of a collective conversation. Many are customer service- oriented, but some provide insights relevant to the value proposition on issues such as features, adoption costs, benefits, pricing and even testimonials. A number of service providers we describe on the following pages pinpoint content that matches the value proposition criteria. Based on filtered content, specific quotes can be selected for a Dialogue, either to ask a question or start a thread. If the company can respond to a query in a Dialogue environment, it can also send an email message to the author of the quote, informing them that it has been posted, ensuring that they are comfortable with that, and then registering them to participate in new Dialogues. This log-in should be integrated with a company’s CRM software.

Everyone who is registered will be encouraged to share threads with friends, who also can register and be integrated with the CRM database. Those shared threads can also be tracked. Other people with similar email comments can be invited to read relevant posts in a Dialogue environment and register which allows a company to track which threads are relevant to each person and aid in further segmentation.

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New posts that relate to an area of interest can be emailed to those who have expressed an interest and opted-in. Ultimately, the value proposition is elevated, while the traffic to the site becomes more relevant. It encourages a seller to reinforce good habits: market outreach and creating customer value.

Bottom line: it’s a new model for content on a web site. Traffic is generated to the site because new and relevant content is always being added. People find this kind of content in a number of ways, such as through web searches. Col-leagues also send emails to one another with links to specific pages or dialogues.

Rather than selling the corporate message in a way that doesn’t change much over time, it offers more honest content other buyers will be likely to believe because it’s about what they value. The truth is not always easy for companies to hear, but it does provide a stimulus to evolve and assure that a product is always offering customer value.

Your value proposition differentiates your product or web site and influences the value chain and internal processes.

Face it. Your customer probably knows your products better than you do. Not so much how the products are made but definitely in terms of how they’re used. Customers know what’s most frustrating about your products. They know what’s mislabeled. They have favorite product features or attributes that enable them to achieve their goals. Rarely do they appreciate changes you’ve made for the sake of change or competitive pressure. They can give a more accurate idea of reality, in terms of your product and your business, than anyone can.

We have found that it is not enough simply to invite people to share their comments about your products and services on your site, because it’s a foreign idea – much like Opinion Lab or BazaarVoice are unfamiliar. Lots of people just send emails to companies or write blog posts. It’s about time that content be integrated into a Dialogue on your site to quantify and validate your value proposition.

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CONTENT FROM blOgS & bEYOND

Experts author the higher-profile blogs, while other bloggers may have a perspective based on experiences as customers, employees or investors. Some people just post comments or like to rant. Airliners.com has an Aviation Forum for travelers, pilots and mechanics to vent: 79,694 registered users to be precise. Most airlines don’t seem very interested in what customers have to say, of course, but there are many ways for them to listen.

Free Tracking Services and Sites. There are ways to track blogs today, of course, without having to pay a service provider. They don’t exactly offer data mining in the true sense, but they have aided people in accessing content and in finding a multiplicity of opinions. BlogPulse includes a trend search, conversation tracker and profiles. Technorati offers a watchlist based on key words or URLs. Digg lets you say that you like (dig?) a blog post and the more people who like it, the higher its Digg ranking. It also looks at information through the lens of the collective community, encouraging conversations. Digg comes closest to filtering for spam and splog (spam-blog content). These are all free services. Google Alerts claims to be the most comprehensive tracking service available, but charges for a personal version at $4.95 per month up to a Platinum version at $39.95 per month.

Paid Tracking Services and Sites. A number of commercial services charge a fee to provide deep processing, analysis and reporting, either in consultative or more self-service applications. They deliver more accurate and actionable information to businesses, especially where the volume of online buzz is significant. They are based on the disciplines of data mining.

According to Bill Palace, data mining is “primarily used today by brands with a strong consumer focus – retail, financial, communication, and marketing organizations.50 It enables these companies to determine relationships among ‘internal’ factors such as price, product positioning, or staff skills, and external’ factors such as economic indicators, competition, and customer ‘

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demographics. And, it enables them to determine the impact on sales, customer satisfaction, and corporate profits. Finally, it enables them to ‘drill down’ into summary information to view detail transactional data. For example, Blockbuster Entertainment mines its video rental history database to recommend rentals to individual customers. American Express can suggest products to its cardholders based on analysis of their monthly expenditures.

Are we at an inflection point? Traditionally, most of the data that companies have mined has been sourced from the inside – internal content. Increasingly, sophisticated businesses are mining external sources. These can include customer emails, surveys or ratings and review sites as well as blogs.

It’s becoming more common to see an aggregation of the “wisdom of customer crowds.” It’s not so common to look at both micro and macro views, in context. We advise looking not only at individual input, but an aggregation of the market as a whole.

In particular, new data mining technology gathers what people say in emails, blogs, surveys, etc., which provide more insights. Data mining gathers a broad range of customer comments, which are often complaints, but with the right guidance these can pinpoint comments related to product features, benefits, pricing, adoption costs and find success stories. Such content, the voice of the customer, can be repurposed for market outreach as well as for internal use. It can also inform your value proposition – by quantifying and validating it. It has to go beyond a few conversations about product features.

In the 1990s, when upstart Network Appliance was challenging the bigger players in the internet infrastructure marketplace, its sales people would incessantly volunteer ad hoc feedback about product features. A few years earlier, when Network Equipment Technologies was the challenger in wide-area computer networking, its field force did the same thing. It’s the nature of the beast, of course. One of the comments heard at the user-group meetings of both companies, years apart, coming from veteran sales people was the same: Customers want more and more features and functionality, and according to “

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the field, they want it for nothing.” So, ad hoc feedback from the field, as useful as it always is, must be put into some statistical perspective. Today, the tools are available, but you have to wonder how many companies still mis-prioritize their own product features based on how loudly each comment is coming from the field – and from whom it’s coming.

Some data mining businesses allow companies to gather a sampling that is more statistically relevant, but they have to be guided to focus on elements of the value proposition. The following vendors illustrate the relevance of having enough data to know your own category and, more importantly, know what customers are saying about your product. Andiamo Systems tends to focus on smaller companies with less data about themselves, so it limits what is possible.

Andiamo Systems (http://www.andiamosystems.com) mines user-generated blogs, forums, review sites, message boards, social networks as well as main-stream media, such as pr newswires, news and interest web sites. Andiamo suggests that its offerings are comparable to an on-demand focus group. But this analogy falls short when it comes to segmenting different markets or sub-markets. In other words, without a large volume of blog posts, there may not be enough credible voices who match the profile of the target market to make it comparable to a true focus group.

Focus groups are often hand-selected based on criteria that a marketing executive decides upon, from job title or income level to gender or geographic region. With the randomness of social media, it’s a challenge, to say the least, to know who is saying what and then segmenting them all.

Andiamo is working on a database of bloggers in order to get a better sense of the quality of their information. It also grades each blogger on a 100-point scale, based on an algorithm that includes reach (audience size) and authority of the site. Andiamo uses a combination of technology and people to sift through the information. Part of what it does in the process is not so much about gaining insights into the needs of markets but also determining which bloggers are most influential.

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They use their own proprietary technology plus human editorial review. The model reflects more of a boutique approach than other service providers because human review is expensive and time-consuming. Given that clients only pay based on volume, it appears to be reasonable – as long as you know what to expect.

By tapping into the power of the blogosphere, Andiamo enables its use as a promotional and analytical vehicle. Blogs are ultimately random. For smaller companies that don’t get a lot of exposure, Andiamo expands the promotional possibilities.

Our own experience with bloggers tells us that promotion can aid in gathering the demographics of a target market. Turner DeVaughn orchestrated an announcement for the beta test of the first quantum computer in the world in 2007 for D-Wave Systems, a Vancouver-based start-up backed by the likes of Draper Fisher Jurvetson and the Canadian government. As soon as an influential journalist/blogger Peter Judge broke the story, almost 1,200 other bloggers found a new angle to talk about. Traffic to D-Wave’s site sky-rocketed, in anticipation of events in British Columbia and California.

We offered something in return for their attention. D-Wave invited visitors to sign-up to access premium content about the technology, and in the first month over 2,200 people took them up on it. This allowed the company to collect some basic demographic data and ask them to participate in a survey. We even thought of an application wiki to encourage them to tell us what they wanted from the product. Small companies have to think like big ones if they want to know – and grow – their markets.

Big companies deal with different problems. But both large and small can tap into what people are already saying in the creative commons to gather talking points for an online Dialogue.

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Overtone (http://www.overtone-inc.com) serves companies grappling everyday with high volumes of data. They include Microsoft, e-Harmony, Wal-Mart and Yahoo. Some of its clients receive over six million direct comments per year – far too many for staff to keep up with. Much is said about these companies on blogs and social media also. No company can justify investing human capital in the analysis of such a volume of content everyday. A real-time text analysis engine is sufficient to get a reasonably accurate and timely picture of customer feedback. Rather than using the data for promotional purposes, Overtone focuses on true intelligence gathering.

Overtone delivers an on-demand listening system, Open Mic™, that continuously captures and analyzes “free form comments,” including discussion threads, blogs, review sites, email, surveys, feedback forms on web sites, text messages and chat sessions. Based on these sources, it offers insight analytics, behavioral analytics and website analytics, as well as tools for dynamic surveys and responses.

In a survey of 160 executives by CustomerThink, more a third of them (36 percent) cited improved customer experience or loyalty as the leading reason why they would pay attention to unstructured data from customers. “Increased revenue” was second at 17 percent. Not surprisingly, Overtone’s services are being applied to brand monitoring, customer experience management, product management, early warning alerts, customer service, and Net Promoter Scores (see page 254). Product managers often receive ad hoc feedback from customers about product suggestions. Overtone’s analysis helps prioritize upgrades or changes that can cut adoption costs for users.

Overtone creates a two-way connection from customers to R&D staff. Feedback pours in as soon as customers start using a product. This enables streamlined decision-making processes, resulting in faster release cycles. It also enables the kind of reaction to customer needs and concerns that Garden Fresh Restaurant Corporation was confronted with in a crisis.

Buffet-style restaurants Souplantation & Sweet Tomatoes® are two brands operated by Garden Fresh at 104 locations throughout the United States. They receive feedback in many different forms – around 10,000 unstructured comments

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each month. In 2005, Garden Fresh asked Overtone to look for patterns in the mass of data. Using the dashboards employees can quickly identify common issues such as a desire for a particular kind of soup at the salad bar or a complaint about noise in certain parts of the restaurant. If they want to hear what individual customers are saying, Garden Fresh managers can drill down to review customer comments. Jill Trecker, manager of guest loyalty, says that “menu decisions were solidified by the information we obtained from Overtone.”

Having a mechanism in place in advance enabled Garden Fresh to deal with the spinach scare in 2006 – even though it had nothing to do with the panic. Three people died and at least 205 were sickened by spinach tainted with E. coli bacteria, sending sales of leafy greens plummeting by one-third.

Garden Fresh listened to consumers and changed the choices at the buffets and salad bars to offer what they felt comfortable and safe with. This enabled the chain to weather the storm. “If you solicit feedback, and don’t respond, you are wasting people’s time. In our business, where we have very loyal customers and so much guest feedback, we not only capture the data, but sort it to reveal the top issues guests are talking about. This fosters customer loyalty and makes people more excited to come in and dine with us,” said Trecker.

DialogueTDN is way to take full advantage of this feedback, by featuring comments relevant to the value proposition. It can be integrated into a CRM system and an email can be sent out to customers with similar concerns, driving more traffic to the site. This makes Overtone part of a whole system.

Base pricing for direct feedback (onsite) begins at $8,000 per month while base pricing for indirect feedback (social media) begins at $12,000 per month. Overtone enables a company to continuously collect, categorize, analyze, and act on customer comments. The company works with CMOs to determine which metrics are most relevant to revealing the value being created by listening to the voice of the customer. It also helps determine the categories and analysis needed to identify gaps between brand and product promise, and customer perception. The fees can be justified by companies facing large volumes of data (typically found within social media) and a need to focus on relevant insights.

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What’s missing from Overtone is sharper focus on the value proposition, and the metrics that are derived from it.

While the premise of Andiamo and Overtone is similar, there are significant differences. Andiamo uses what it learns to enhance brand promotion, but it rarely has enough information on which to base significant intelligence. Over-tone gathers true intelligence, but few clients know how to translate it into customer value.

Megaputer (http://www.megaputer.com) analyzes emails, web pages, memos, call center transcripts, survey responses, claims notes, legal cases, patent descriptions, research articles, and incident reports and is more like Overtone than Andiamo. Various sources of content enable analysts to discover patterns, trends and anomalies, predict outcomes of future situations, and make better business decisions.

CEO Sergei Ananyan described his business: “[m]ined data can provide insights into the concerns that customers and employees have. For example, EDS sees issues within its own ranks and can take corrective action much more rapidly.” That’s the same EDS founded by Ross Perot.

Megaputer also works on a confidential basis with a number of companies that mine social networking environments such as ratings and review sites. One client is an online retailer of brands on its site. It allows customers to talk to each another and rate a product. Megaputer’s mining technology enables the retailer to identify problems that are expressed consistently and to display them on a dashboard of all brands.

One brand may be described by an entire group as “overpriced” and “not a good value.” You can see a web of words that connect with all the different brands, which helps visualize the impact of customer value in action. Direct correlations enable the company to go back to its supplier with hard data, often showing a drop in sales when prospective customers elect not to purchase the product because of the comments of other customers. This hard data can be used by the supplier’s management team to consider improving their own value proposition – reducing adoption costs or improving quality.

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A MOuNTAIN OF METRICS

Customers are already talking about issues associated with the value they seek. Does your company have a way of listening and really understanding what is most relevant? The focus on the value proposition can transform data mining into a utility that makes an even more significant contribution. It will be more valuable if the objectives are clear and clients who use these services know what to do with all the different types of content available to them. Most do not, but are able to see enough benefits to justify the expense.

Properly applied, content can become an asset as powerful as customers them-selves. DialogueTDN leverages specific content to quantify and validate a value proposition. It also allows that content to be used to drive more relevant traffic to one’s web site. However, it requires that CRM, VoC, data mining, Dialogue and performance measurements systems work in tandem. No single application or company offers a whole system in understanding and measuring customer value. Data, dashboards and insights are only components that need to be brought together with other technologies. Integration is key, but one size does not fit all. The selection of different components should be based on the circumstances of each company.

Those circumstances should lead senior executives to carefully consider which metrics are most relevant to their situation.

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As you refine your ability to understand and become more instinctively attuned to your market(s) of customers, a relevant value proposition becomes a focused means to increase profitability and reducing expenses. In this chapter, we’ll show you how the right value proposition can do something else: reveal your key performance indicators (KPIs) to enable a more complete picture of the value your business is generating. Your investors will love it.

The three elements of the value proposition essential to monitoring the health of the business that should be used to identify KPIs include:

1 / Measuring benefits that customers value

2 / Measuring the degree to which the price is optimized

3 / Measuring product complexity (and adoption costs)

The entire management team needs to be looking at a common set of metrics derived from the value proposition. All team members should see how they impact one another. The authors of the book Managing Customers as Investments assert that “an emphasis on providing value to customers by satisfying their needs with little focus on cost” is not acceptable.51 Sunil Gupta and Donald Lehmann argue that “traditional marketing’s focus on customer satisfaction and market share may be counterproductive at times.”

Gupta and Lehmann present a model for customer value, suggesting that a company consider both the value the firm supplies to the customer and the value the customer offers to the firm. This approach recognizes that providing value to a customer requires marketing investment and that the firm must recover this investment. In other words, this approach combines the traditional market- ing view, where the customer is king, with the finance view, where cash is king.”

Your Key Performance IndicatorsAssigning Meaningful Metrics

to Your Value Proposition

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Therefore, the lingua franca (common metrics) for marketing and finance is concentrated on customer segmentation. It’s about identifying the most profit-able pockets of customers. Yet, CFOs are rarely as focused on tracking market metrics as they should be. In a survey conducted with CFOs by Bearing Point, only 34% agreed that tracking market metrics is very important. 40% say that it is somewhat important. That means that 26% of CFOs don’t really place a priority on market metrics and are not equipped to really understand what marketing expenditures are capable of achieving.

CMOS AND CFOS: uNEASY TEAMMATES

Business Week described a new dynamic. The CFO and finance team are demanding data to prove that a CMO’s strategy is valid. One of the first things Cammie Dunaway did upon taking the CMO job at Yahoo in 2003 was to hire a consultant to track return-on-investment for her marketing department.” Dunaway then worked closely with CFO Sue Decker to handle the analysis and participate in the process.

Stephen Turner worked extensively with Yahoo for seven of its growth years, including collaborations with Sue Decker (then CFO) and the rest of the management team(s) under both CEO Tim Koogle and then CEO Terry Semel. Decker took on responsibilities that many CFOs stay away from. She was actively developing partnerships, thinking about smart acquisitions, such as Overture, and putting systems in place to really see what was going on with operations. She knew that the CFO is in a position to see a great deal and impact it in a meaningful way with the right information.

The team effort between Dunaway and Decker was good for both. Decker is now president at Yahoo and Dunaway is CMO at Nintendo. They needed each other’s skills, viewpoints and experience. Marketing grew its value to the orga-nization but only so far as the finance organization could measure results.

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The gap neither addressed, however, was the innovation essential to consumers. During Terry Semel’s tenure, the focus was on the resources Yahoo already had in creating synergies and integrating products to offer more value. There was a lot to work with. In looking back to the early days, under the leadership of Tim Koogle, Yahoo may have actually over-innovated. Its growth was dramatic but not sustainable. It had 44 different business areas and sub-areas by the time Terry Semel assumed the helm.

Semel brought an immediate focus on shareholder value and aligned efforts within six vertical businesses in 2001. The results over the next five years, while impressive, never achieved for the company the value it had reached at its peak in 2000. Along the way, marketing’s real responsibility to focus on the benefits customers valued most was apparently overlooked. As a result, the engineering and innovation teams that needed the discipline and constraint informed by customer needs were out of touch with the new realities.

In the meantime, Google was learning that users wanted simplicity and accurate results, but also understood that it made money by giving advertisers direct control over their spending. That control included many ways to embed content into search results. Google “innovated around” the most desired benefits and expanded sophisticated mechanisms to give people more of what they wanted.

Google innovated based on the desires of its market. And whatever it couldn’t build fast enough, it quickly purchased. Yahoo was left behind because it was not as in tune with the benefits the market valued most and it did not understand how the technology was evolving to solve problems in new ways. Google understood the importance of measurement and analytics, which have become an obsession with many agencies and the CMOs that hire them.

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IDENTIFYINg AND DEPlOYINg METRICS

The process of identifying the most relevant metrics is not easy – given how many there are to select from. Regardless of what you measure, the key performance indicators (KPIs) should fall within the three core elements of the value proposition. Some must be kept close to the vest (for internal consumption) and others can and should be shared with customers, suppliers, media and investors.

Executives should be prepared to publicly reveal a number of KPIs, except, of course, those that represent vulnerability, compromise competitive advantage or confuse customers or investors.

Investors may take your lead and ask your competitors to make the same KPIs available. If everyone shares the data in consistent XBRL taxonomies, this will enable analysts to really understand what makes you tick competitively – relative to your industry. Investors appreciate this kind of transparency.

Certain executives may lobby to remove certain KPIs altogether – especially if they imply a new way of measuring managerial performance that exposes their weaknesses. Therefore, it might make sense for many of the metrics under consideration to be monitored privately for a period of time the CEO (and the team) is comfortable with.

In the early years of Apple Computer, analysts such as Esther Dyson, Ben Rosen and David Lawrence, among others, would inevitably try to break the code and craft performance indicators for the then new company. It would have been helpful if Apple had given them the official KPIs. Assuming the analysts in question would have applied them, it would have made a statement of credibility that Apple sorely needed at the time. When personal computers were a new thing, people didn’t know whether to judge them as household appliances, consumer electronics, or business equipment. As a result, relevant industry measures were always in question.

The point is that you want to see the trends and know that there are internal controls in place to impact behavior and performance in the desired direction.

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One of our clients, CEO Herb Martin of D-Wave Systems and a veteran of numerous successful startups in Silicon Valley, has warned his teams of this over many years. He says “[y]ou’re in great jeopardy if you don’t know why you’re successful. It’s far more hazardous than knowing why you’re failing.”

Having metrics in place can pinpoint issues that were not previously identified, but this will never make it easy to change destructive or wasteful habits. For companies with multiple products, using multiple value propositions to identify KPIs can be a complex task, especially if the products are part of a portfolio that has developed as a result of mergers or acquisitions. Many publicly-held companies are careful to report according to specific business units and it may not be a simple task to neatly fit a product into one.

If you agree with our assertion that the job of the COO is to simplify the orga-nization (see page 187), then this is a situation that must be rectified as a matter of priority.

It doesn’t mean a mash-up of all products. It means that you can and should find commonalities. See Metric 119 in the Appendix for a way to measure com-plexity of the entire KPI planning process.

Another way to simplify is to use one common organizing principle (taxono-my) and mark-up language to share all the data internally and externally – for compliance and reporting purposes. Many more companies are now report-ing shareholder value using eXtensible Business Reporting Language (XBRL). Some publicly traded companies in countries such as China and Korea have begun to report their financials using XBRL. In the U.S., several dozen firms have experimented with it in a voluntary program by the Securities and Exchange Commission (SEC).52

It’s going to take time to work out the classification systems, but XBRL will become the common language that allows for ease of sharing metrics, provid-ing a window into the inner-workings of companies.

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Jeremy Roche, CEO of CODA plc suggests that XBRL won’t gain mass market acceptance until there is a single definition linkbase that everyone can agree upon. “XBRL can really be anything. For the SEC to say that companies should use it is like saying people should speak a language. By not specifying English, some people may speak Japanese, others may speak German. The SEC really needs to be precise and stand by a single decision.” Roche knows what he is talking about. CODA serves over 2,600 major companies worldwide, including IKEA, AXA and Icelandair. It is the second largest financial management soft-ware company in the European Union, after SAP. He feels that no organization in the world other than the SEC has the clout to mandate specific taxonomies.

Roche asserts that “XBRL can easily be incorporated into our systems once it has a clear focus. Right now, it is not worth the investment until we get the word from the SEC.” This is the lynchpin for connecting customer value to shareholder value, so it’s critical for the CIO to stay on top of this and keep the CFO and the rest of the management team informed. In the near future, KPIs within a sector, industry or set of peers will be delivered via XBRL.

Although new SEC rules went into effect in April 2009, there is a vast amount of work required to make reporting relevant to investors. The CIO can worry about how metrics are shared, while each member of the management team needs to own the KPIs that are relevant to their areas of responsibility.

THE MENu OF METRICS (DRAWN FROM 189 IN THE APPENDIx)

Turner DeVaughn’s value proposition model has three components with a number of potential supporting metrics. Start with these as you determine how to quantify your value proposition and see if you can identify others that are more accurate for your situation:

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adoPtion coStS

AdopTioN cosTs rELATiVE

To pricE poiNT

AdopTioN cosTs (EcoNomic

impAcT of LEArNiNg cUrVE)

LEArNiNg cUrVE

metricS from coo

pErcENTAgE of coo’s TimE

oN spENT oN simpLifyiNg

ThE prodUcT

pErcENTAgE of coo’s TimE

spENT oN simpLifyiNg ThE

orgANizATioN

mETric To dEscribE LEVEL

of compLExiTy

(ANd iTs EcoNomic impAcT)

Pricing

pricE rELATiVE To

EcoNomic VALUE of

primAry bENEfiT

cUrrENT pricE poiNT

rELATiVE To yoUr

ExpEriENcE cUrVE

yoUr ExpEriENcE cUrVE

metricS from cfo

pErcENTAgE of cfo’s TimE

spENT oN priciNg

ExpEriENcE cUrVE rELATiVE

To oNE’s pricE poiNT

fixEd cosTs rELATiVE To

pricE poiNT

EcoNomic profiT

EbiTdA

cUStomer valUe

by mEAsUriNg whAT mATTErs, mANAgEmENT cAN EVoLVE A

rELEVANT VALUE proposiTioN As ThE NEEds of cUsTomErs chANgE

SHareHolder valUe

iNVEsTors hAVE A NEw LENs To Look AT compANiEs bAsEd oN ThE

ThrEE ELEmENTs of ThE VALUE proposiTioN

benefitS

EcoNomic VALUE of

primAry bENEfiT

dEgrEE To which ThE

prodUcT dELiVErs ThE

primAry bENEfiT

domiNANcE of primAry

bENEfiT

metricS from cmo

pErcENTAgE of cmo’s TimE

spENT oN gAThEriNg

mArkET iNTELLigENcE

cUsTomEr rEfErrALs

NEw cUsTomErs -

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rETENTioN rATE

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CMO METRIC 8 OF 189 :DOMINANCE OF PRIMARY bENEFIT

When a company introduces and promotes a product, people begin to form an idea of what it will do for them. The simpler the product, the easier it is for them to understand how it will help them do what they wanted to do (achieve their goals) and /or avoid something unpleasant, feared, etc. The more complex the product, the more difficult it is for them to get it.

By measuring whether customers can grasp one primary benefit, you begin to get a feel for how fast the buzz can and will spread. For example, if a key benefit of a certain brand of cranberry juice is perceived as “prevents kidney stones,” that benefit addresses a fear. It could also be seen to “treat urinary tract infections,” which is a goal. This metric will take the form of a percentage. It might be that 40% of customers say that it treats infections, while 28% may say that it prevents problems from occurring in the first place. So 40% is the KPI to look at. The higher the number, the better.

Most people remember one benefit and developing a deep understanding of what is relevant and valuable to customers is what marketing is really about. Marketing is successful if a single benefit becomes associated with a product (or brand) and is universally seen that way.

Another related metric is to look at how many benefits are associated with a product. Many unrelated benefits without a dominant, anchoring one are worrisome.

Because your product must deliver on the dominant benefit, so it is an issue of reality, not just an issue of semantics and promotional language.

Benefits are Supported by Metrics about Customers

The CMO Gathers Market Intelligence

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CMO METRIC 7 OF 189 :DEgREE TO WHICH THE PRODuCT ACTuAllY DElIVERS

THE DOMINANT bENEFIT

This metric is a simple percentage based on the perception of customers who use it. What percentage of them received the benefit they expected? If your product represents a whole system or is part of a whole system that addressed the problem completely, this metric could be as high as 100%. The number is not based on guess-work of what you hope to be true. It must be based on market-tested data. A glass of orange juice can offer all of the recommended daily allowance of citric acid. If your market perceives the benefit of orange juice as contributing to a healthy immune system, you will probably get a very low rating because orange juice is only one aspect of a lifestyle that contributes to a healthy immune system. On the other hand, if the benefit is framed more narrowly there is a greater likelihood that the score will be higher. For example, orange juice might be seen as the best way to get your daily allowance of citric acid. It is essential that the dominant benefit be simply and clearly described in such a way that the product can be said to deliver as close to 100% of what it promises as possible. It’s easier to keep smaller promises.

CMO METRIC 2 OF 189 :ECONOMIC VAluE OF DOMINANT bENEFIT

If your dominant benefit can be translated into a dollar value, then you have one critical metric essential to quantify your value proposition. The market intel-ligence you gather will deliver hard data about the customers to whom your product appeals. You might be reducing the perceived risk of a bad outcome, increasing a person’s status or saving their time. If the benefit leads to being able to save 10 hours of work per week, then you have the basis for the value you are creating. You can multiply that by an average hourly rate for your target cus-tomer. For example, if $28 per hour is the average, 10 saved hours multiplied by $28 equals $280 of economic value is created each week. This amounts to $14,000 per year.

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CMO METRIC 8-14 OF 189 :TRANSACTIONAl METRICS

Perception of a dominant benefit and the ability of the product to deliver it is the foundation of your value proposition. Seeing how those metrics translate into action is where value is created and measured. Remember that transactions speak louder than words – or research. What customers actually do with the product is the ultimate measure of how they perceive the benefits available to them.

Jeanne Bliss served in management roles with Lands’ End, Coldwell Banker, Allstate, Microsoft and Mazda. She observes that companies around the globe do care about their customers. However, without up-to-date information for trending profitable versus non-profitable customers and issues driving the best customers away, CMOs and their organizations are unable to manage customers as assets. As internal leaders of each silo report and recommend customer actions separately, CEOs react to the random issues landing at their feet, rather than focusing on the key issues eroding customer loyalty and customer profitability.

She is now CEO of CustomerBLISS, and offers five inner-related metrics that reveal core customer value in the following excerpt. We think that this is where the proverbial rubber meets the road.

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Organic customer growth drives long-term profitability. So why isn’t it as important as quarterly sales goals? What’s actively asked for, measured and rewarded doesn’t always line up with what’s good for customers. So the easily understood and well-defined quarterly sales goals win out and stay top-of-mind.

For example: a business-to-business company was counting the number of customer accounts but not the quality of incoming accounts. The sales team was led by an ex-fighter pilot who sent off the sales force on what they actually called “speed kills.” They were fired up to get as many customers as they could, as fast as they could. But they weren’t keeping track of the difference in the value of business each new customer would bring. To them, one unit was one unit. Each “speed kill” carried the same weight on the tote board used to measure success. The sales team exceeded their goal for new customer accounts that year, but sales became a drag on profits which actually declined. Why? They didn’t focus on the profitability of customer accounts, just the number of them. It was all about quantity, not quality. And no one actively identified, prioritized and eliminated issues driving profitable customers out the door.

WHAT EVERY CEO SHOulD WANT TO kNOW

I call these “Guerrilla Metrics” in my book, Chief Customer Officer: Getting Past Lip Service to Passionate Action. They are “guerrilla” because often a campaign is necessary to propel the organization into understanding the customer end-game and supply leaders with a platform to stand behind and reinforce. They establish a language for CEOs in how they ask about customers, placing the customer front and center on their agenda. They work because they clear

eXPert inSigHt by Jeanne bliSS

The Five Answers Every CEO Needs from Customers

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through the clutter usually encountered in the drive for customer experience and profitability:

• Inconsistencies in defining, reporting, and managing the state of relationships with customers.

• Focusing on survey administration and negotiating survey scores rather than driving action and accountability. Guerrilla Metrics give leadership five questions for commanding customer accountability inside their organizations:

CMO METRIC 10 OF 189 :WHAT ARE OuR NEW CuSTOMERS; VOluME AND VAluE?

Ask about the volume and value of your incoming customers as often as you ask about sales goals. You may find that you are tracking incoming customers across a multitude of company areas – with conflicting definitions of what it means to be a new customer. The wild card here is if you have achieved alignment in how customers are classified inside your system. The part that’s not likely tracked is the quality of incoming customers. This is especially important as the market becomes more saturated and new, profitable customers are harder to come by.

CMO METRIC 11 OF 189 :WHAT ARE OuR lOST CuSTOMERS; VOluME AND VAluE AND REASONS?

Pair this question about lost customers with the one above about new customers. The volume and value of lost customers needs to be paired with the new customer information to lay out the true situation for your company. You must reconcile “Customers In” with “Customers Out” to know how well you are doing with managing customers as an asset of your company. In addition to knowing which customers left, you need to know the reasons why they don’t care to do business with you anymore so you can drive change across the business. Without this information, the organization misses a massive opportunity to galvanize people into taking action.

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CMO METRIC 12 OF 189 :WHAT CuSTOMERS RENEWED, AT WHAT RATE AND WHY?

For this to have relevance for your company, you’ll need to define customer be-haviors that constitute renewal or the commitment to continue doing business with you, according to your business model. The key is to understand patterns which indicate loyalty based on continuous purchase habits. You must ask for reasons why customers are staying with you to ensure that you personally know what you are delivering to customers that they value – and to ensure that you are well aware when these reasons shift or begin to erode. The “with reasons” part of these metrics are key to taking a leadership role in demanding focused actions to drive customer profitability rather than reacting to random pitches that come across your desk.

CMO METRIC 13 OF 189 :WHAT IS OuR REVENuE AND PROFITAbIlITY bY CuSTOMER gROuP?

Getting to this classification of customers is not a trivial project. You need to understand the movement of customers from one profitability group to another so you can strategically lead the customer agenda. Your goal should be driving efforts that cause your costliest customer groups to decline and those most profitable to grow. If you are not demanding that the business be tracked this way and if you do not ask for accountability around these metrics in the regular language of meetings, it won’t happen. Getting this data in line to achieve a regular pattern of accountability around customer profitability patterns will take some time, but stay the course. It will optimize your ability to manage customers as an asset of your business.

CMO METRIC 14 OF 189 :WHAT IS OuR REFERRAl RATE bY CuSTOMER SEgMENT?

If your customers are willing to stick their necks out vouching for you, they have become your marketers. You need to keep these customers while grow-ing them and developing other customers like them. You need to know how far you are down this path of building a customer base that would refer you.

eXPert inSigHt by Jeanne bliSS

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Because if you can track the rate of referrals in general and by customer group, you’ll know the strength of your ongoing revenue stream before you even spend another dollar on marketing. Companies completely focused on customer profitability will learn how referral rates differ by customer group and the reasons for not referring. They will rigorously apply this learning to constantly adjust and improve. (see page 255 about Net Promoter Scoring).

uSE METRICS TO DRIVE YOuR CuSTOMER ACCOuNTAbIlITY PlATFORM

To make these metrics stick, and to use them to steer the actions of your busi-ness, take them out of the hordes of reports and paperwork and put them front and center as part of your personal mantra. There is nothing like public accountability to take the mystery out of what’s important to you and to start a friendly horse race among peers that motivates performance.

Consider establishing a Customer Accountability Room, where a regularly scheduled spotlight is shone on these metrics and their improvement. Use it to kick-start your metrics into action:

1 / Lay out the Guerrilla Metrics to your leaders and begin asking for them within one week.

2 / Give a drop-dead date for when you want to know the baseline metrics.

3 / Build a customer accountability room, visually mapping each metric and its performance.

4 / Within the first month, take your first walk-through in the customer room with your leaders. For each metric, require accountability for “Why is this occurring?” “Who will resolve it”? and “When?”

5 / Repeat the walk-through quarterly, or up to once a month. People will step up. Change will occur.

uSE METRICS TO POWER THE CuSTOMER INTO bOARD MEETINgS

You can use Customer KPIs to redefine business success with your board based on how well you are performing in keeping priority customers and driving

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their growth. According to a November 2004 Harvard Business Review article entitled “Bringing Customers into the Boardroom,” customer management issues being elevated to the board level are on the decline. Among the large U.S. companies surveyed for that article, over a third of them said that their boards spent less than ten percent of their time on customer-related or marketing issues. You need to be clear with your board that managing the value and trend of profitable customers is not negotiable.

You can use Guerrilla Metrics as a tool to define, quantify and connect the dots for them on why customers must be discussed and managed as a key asset of your corporation. These metrics will give the perspective you need so you can elevate high-priority customer issues and get your board to sanction the investments required to keep them.

AbOuT THE ExPERT

Jeanne Bliss is the author of Chief Customer Officer: Getting Past Lip Service to Passionate Action, which is based on her 25-years’ reporting to company presidents and tasked to drive customer focus and customer profitability. She runs CustomerBLISS helping leaders connect their company for customer growth. Go to http://www.customerbliss.com/ to get the Reality Check Audit you need to measure how far you are in reaching your customer goals.

Harvard Business School’s web site has Excel-based tools that allows a CMO to calculate the customer lifetime value. DeFriese and Ellis offer two models, one that is simple and another with greater nuance and complexity. The simpler model includes metrics like time between purchases, average purchase value and cost of attracting a customer. According to the site “The models assume that customer acquisition is done through a spending program that could include advertisements, special discount coupons or giving out free samples.” Assumptions must be made about how much it costs to reach each potential buyer as well as what percentage of buyers reached will make an initial purchase. If there are additional costs (such as a rebate) that only apply to actual customers, those are also calculated. This provides a total cost per acquired customer.53

eXPert inSigHt by Jeanne bliSS

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BearingPoint offers another model that includes acquisition costs, profit and attrition management. They argue that “the key to a really precise model actually lies in the development of a complete, on-demand customer intelligence solution. Combining each of these components with real-time data and decisioning will enable organizations across all industries not only to identify the most cost-effective ways to attract and retain new customers, but will enable them to determine the lifetime value of a customer. By understanding the value of a customer at every stage of the life cycle, organizations can provide better customer service by efficiently devoting the proper resources to each customer at the appropriate time.” 54

CMO METRIC 20 OF 189 :HOW WIllINg ARE ExISTINg CuSTOMERS TO RECOMMEND YOu

WITHIN THEIR SOCIAl NETWORk?

No question, your customers’ eagerness to put in a good word for you smooths and shortens your road to the mass market. It’s the premise that makes Dialogue TDN so compelling. But of course, it’s hardly a new idea. Net Promoter® (http://www.satmetrix.com/netpromoter/score.htm) has innovated a simple metric that enables you to categorize customers into three groups based on their willingness to recommend your company or product to a friend or colleague:

1 / Promoters (score 9–10) are loyal enthusiasts who will keep buying and refer others, fueling growth.

2 / Passives (score 7–8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.

3 / Detractors (score 0–6), as the name suggests, are unhappy customers who can damage your brand and impede growth through negative word-of-mouth.

The metric also factors-in the relationship between the company and customer. Although customer service is not an ingredient in the value proposition, it’s huge to how customers see the businesses they work with and their take on the future of those companies.

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Satmetrix is the company behind the Net Promoter Score. Its about improving customer loyalty and improving customer loyalty requires “operationalizing” customer feedback across the enterprise. Most companies gather customer feedback in one form or another, yet few are able to see financial results from that effort. Their focus is to get the right feedback from the right people at the right time, distribute the actionable insights to employees so they can take action and change the results, build an enterprise view of relationships and interactions that impact overall customer loyalty and link loyalty data to financial and operational metrics to evaluate its impact on the business.

To calculate your company’s Net Promoter Score (NPS), take the percentage of customers who are promoters (those who are highly likely to recommend your company or products), and subtract the percentage who are detractors (those who are less likely to recommend your company or products). The equation below is how to calculate a company’s NPS:

% of Promoters minus % of Detractors equals Net Promoter Score (NPS)

CMO METRIC 1 OF 189 :PERCENTAgE OF CMO’S TIME SPENT ON gATHERINg INTEllIgENCE

The venerable marketing mix focuses on the product, price, placement and promotion. Eighty percent of the CMO’s time should be organized around the 4Ps: Pricing requires close collaboration with the CFO; Product (simplicity) also requires close collaboration with the COO, R&D and technology teams; Placement, or distribution, and Promotion most often require internal (sales) and external collaborations. All of these collaborations can be time consuming, making it easy to lose sight of a critical responsibility: gathering customer intelligence.

It is up to the CEO and the board of directors to negotiate a metric applicable to circumstances but our rule of thumb is this: If the other 20% of the CMO’s time is not spent on taking the leadership role in understanding the benefits that customers value, then the entire organization lacks sufficient knowledge to keep their value proposition relevant.

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COO METRIC 125 OF 189 : METRIC TO DESCRIbE lEVEl OF COMPlExITY

Just as there are innumerable products and services, there is a multitude of ways to assess their complexity (i.e., average number of questions per customer call or email). Look closely at your circumstances to assess what makes the most sense for your business. One simple measure: how many questions do customers ask (check the call-center records) as they learn to adopt the product? The more questions, the more money it’s costing you in support services to explain what to do. The more questions, the less likely a customer will be to refer new buyers to the product. The more questions, the more downward pressure there will be on pricing.

Regardless of the metric you select, select at least one that reveals how complex your product really is – from the buyer’s perspective.

COO METRIC 123 OF 189 :lEARNINg CuRVE (AVERAgE AMOuNT OF TIME IT TAkES

A CuSTOMER TO lEARN TO uSE THE PRODuCT)

The world of users is diverse to say the least. Some are power users and know every feature and function. Others use a product less frequently. You can get complex metrics by looking at the range but you might want to keep it simple by looking at the average.

How long does it take an average user – representative of the early and late ma-jority – to be competent enough to get the dominant benefit out of the product?

Adding Needless Features Means Higher Adoption Costs

The COO Reduces Complexity

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With this metric in hand, you can also look at the same metric for competitors. How often is that a part of a pitch? We can’t overemphasize the importance of this metric.

COO METRIC 120 OF 189 : ADOPTION COSTS

(ECONOMIC IMPACT OF lEARNINg CuRVE)

So how long does it take the average customer to learn how to use the product? With the proper research, you can also ascertain an average hourly rate for their time. For example, if you learn that it takes the average user three hours to learn how to use the product, and you can assign an hourly rate of $28, then the economic impact is 3 multiplied by $28 equals $84. If that is the case, the benefit’s promises must exceed $84 of value. By boiling down the complexity of your product or service to a dollar figure, it is much easier to manage complexity. Once you learn that the economic impact is $84, you may want to set a goal of reducing it by 20% per year. Simplifying the product is essential to long-term success. A simple product is usually a successful one.

COO METRIC 121 OF 189 :ADOPTION COSTS RElATIVE TO PRICE POINT

If the learning curve of your product has an economic impact of $84 and your market is willing to pay $14,000 to gain a savings of $14,000 for a year’s worth of time savings, then you are golden. The amount of $84 represents .006% of the purchase price.

If, on the other hand, your market is willing to pay $50 and the economic impact of the learning curve is $84, you can see the problem. The learning curve is 168% of the purchase price.

The lower your adoption costs relative to the purchase price, the better.

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COO METRIC 119 OF 189 :PERCENTAgE OF COO’S TIME SPENT SIMPlIFYINg THE ORgANIzATION

We have two metrics related to the time of the COO in simplification. This first one is about the organization. The fact is it doesn’t matter to your customers how you structure your organization as long as they can get what they want. But the more complex the organization, the more likely employees will not know what other people do, and the less likely they will be able to aid the customer in solving a problem. All of this translates into needless costs.

It is especially important to simplify after a merger or acquisition. The COO should negotiate with the board and CEO on the ideal amount of time. It should be represented as a percentage.

COO METRIC 118 OF 189 :PERCENTAgE OF COO’S TIME SPENT SIMPlIFYINg THE PRODuCT(S)

How many products the company has impacts the time a COO can realistically spend on each. It might be that a COO focuses exclusively on one product for a period of time – perhaps 90 days at a time. Again, this metric should be negotiable with the Board and CEO – but it’s a priority.

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CFO METRIC 144 OF 189 :PRICE POINT RElATIVE TO THE ECONOMIC VAluE OF

THE DOMINANT bENEFIT

Your price point should be evaluated against the economic value of the dominant benefit. It should be less than the economic value of the dominant benefit. This is true value.

You can measure it as a percentage. For example, if the economic benefit for a year is $14,000 per person, and your price point is $7,000, then your metric is 50%.

If the price point is $10,500, then the metric is 75% of the economic benefit. Knowing the relationship is key.

A conjoint analysis is required to define the floor and ceiling of the market’s willingness to pay. Where is your price along that continuum? Metrics can be assigned to that continuum and the price point you settle upon. The point is that you want to show that you are optimizing your price – not leaving money on the table because price is too low and not losing business because price is too high.

CFO METRIC 151 OF 189 :YOuR ExPERIENCE CuRVE

As discussed on page 194, the Experience Curve reflects downward pricing pressure in almost every industry as businesses become more efficient at what they do. It may be projected to fall 25% over a five year lifecycle. If you introduce

Pricing: the financial component The CFO is responsible for

optimized pricing

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your product at a price point that is too low, it will be very difficult to increase the price without introducing additional value. And introducing additional value is difficult without adding complexity and adoption costs.

CFO METRIC 152 OF 189 :YOuR CuRRENT PRICE POINT RElATIVE TO YOuR ExPERIENCE CuRVE

It may have already fallen ten percent from the peak price at introduction, after two years on the market, so you can communicate that it is on track with a five percent decrease per year.

Periodic conjoint analysis will determine whether customers are placing down-ward pressure on prices – by looking at the percentage that the price is dropping.

This enables you to look at whether the competition is reducing their price point at the same rate. They may be operating on a cost-plus model – and probably are not offering comparable value. If the competition is creating downward pressure, a quantified value proposition will allow you to slow the rate of decline – especially if the conjoint analysis reveals that there is no pressure from customers.

Each of these can be measured and managed as part of an overall strategy.

CFO METRIC 156 OF 189 :FIxED COSTS RElATIVE TO PRICE POINT

There are a number of possible metrics that can be used to measure costs relative to the price point. It is useful to look at costs to make sure that the pricing model really isn’t just cost-plus. It is also useful to have a way to see and to know the flexibility of your cost structure. The CFO should have the ability to shift the cost structure as market conditions shift. The lower the percentage of fixed costs (relative to the price point) the better.

If the CFO has the visibility to see the downward pricing trend, it is easier to plan. Pricing Metric II aids in planning. Other pressures may arise without

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warning – anything from terrorist attacks to supplier disruptions. Distributors may impose unexpected costs as Wal-Mart did with its suppliers.

If you do chose to report this metric, it will reflect how prepared your company is to respond to market conditions and customer demand.

CFO METRIC 142 OF 189 :PERCENTAgE OF CFO’S TIME SPENT ON PRICINg

CFOs typically devote less than three percent of their time on pricing. McKinsey recommends 20% of CFO time be invested in pricing. By tracking the time, it reveals more than budgets reveal. Time is the measure of how much of a priority pricing really is to both the CFO and the CEO. And the CFO can use this metric to keep the rest of the management team focused on the priorities.

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CONCluSION: METRICS ARE A MuST FOR CREATINg A VAluE MODEl

The three most important metrics presented in the preceding pages enable you to quantify your value proposition:

1 / CFO METRIC 2 OF 189 : Economic Value of the Dominant Benefit

2 / CFO METRIC 121 OF 189 : Adoption Costs relative to the Price Point

3 / CFO METRIC 144 OF 189 : Price Point relative to the Economic Value of the Dominant Benefit

By looking at the various relationships of these three metrics, you can determine:

• Whether the costs (purchase price plus adoption costs) are too high

• If the dominant benefit alone is the basis for your pricing model

• If you are creating or reducing adoption costs

• The practicalities of increasing the price point

You’re now prepared to move beyond theoretical models and into practical application.

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Each customer probably realizes different levels of value out of your product. Measure those differences through case studies. These proof points of your value proposition should be structured to track these metrics. By engaging with customers who have practical experience with your product, you can also learn how different scenarios impact adoption costs. If you don’t use real data to measure customer value, you don’t have the basis for a practical calculator to reveal your value proposition.

A number of companies have sales-driven calculators on their web sites. In other words, we mean that they accentuate the positive. SAP has one just for mid-sized businesses: http://www.sapcom/valuecalculator/smb/SAP_Growing- Businesses_Calculator_content.epx. It has models for nineteen industries. For example, consumer products companies are asked to provide their annual revenue, expected top line growth, cost of capital, profit margin, the nature of the solution they want and the maturity level of their processes and system.

SAP uses the Alinean ROI Dashboard Model. It factors-in net tangible benefits, intangible benefits and risk based on a database of 27,000 businesses worldwide. This is a good conversation starter to see how any company in your industry will experience a financial return based on the data input. Every company with complex components or systems should consider having something like this on their web site.

Buyers can do a quick calculation, and if the ROI looks promising, they should be able to continue to input data in a more complete model. Issues of immedi-ate concern to buyers include price point and their own adoption costs. Out-of-the-box ROI calculators typically don’t factor-in gray areas or things that might interfere with the sale. Price is one of the last things companies want to reveal.

Why is customization based on your value model essential? Because it factors- in your price point and business model. A value model is the way the value proposition can be expressed in a formula or process. Successful businesses we have analyzed and worked with understand how they fit into the value chain. Your own business can make a significant and measurable contribution if you

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pay close attention to your customer’s value proposition. You have a winner if your product enables your customers to sell theirs more effectively.

This is where a second set of metrics comes in: the priorities of the management team in aligning your value proposition with your market:

1 / CMO METRIC 1 OF 189 : Percentage of CMO’s time spent on gathering customer intelligence

2 / CFO METRIC 142 OF 189 : Percentage of CFO’s time spent on pricing

3 / COO METRIC 118 AND 119 OF 189 : Percentage of COO’s time spent on simplifying the product and organization

It’s hard to manage what you don’t, or won’t, measure. These three categories of metrics enable you to connect customer value to shareholder value. The Appendix offers a comprehensive list of metrics that support the value proposition. They are sourced from various experts but most prominently here by Marketing Metrics: 50+ Metrics Every Executive Should Master published in 2006 by The Wharton School. Because every business presents its own ingredients, the metrics applied to measure performance must be relevant to the circumstances. But remember, we’re listing all of these metrics as a reference and source of inspiration. Pick the ones that seem most relevant and valuable to you.

To win, every business needs its own value proposition and ways to measure its impact on the market. It’s time for you to create yours now.

ExECuTIVE SuMMARY: PART III

The CEO is responsible for structuring the organization to create value and eliminate all non-productive functions. Each management team member has individual responsibilities to contribute to the value proposition. The COO must focus on reducing adoption costs. The CFO should spend 20% of his or her time on optimizing the pricing strategy. The CMO is responsible for knowing which benefits customers value most. Finally, CIOs serve as the conduit through which the right information gets to the right people at the right time.

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The right information originates in the market. Too often, unfortunately, Voice-of-the-Customer (VoC) intelligence rarely finds its way into the value proposition. Many of the newer social media applications and web sites will make it easier to tap into the wisdom of crowds – especially those who know your products and services better than you do. This content can be processed in a number of ways. It can be used for internal decision-making. It can also be used to feed a dialogue on your own web site with content that encourages buyers to better understand the value you offer.

The digital culture demands transparency and authenticity from marketers and businesses of all size. Within those organizations, being able to demonstrate ROI is more important than ever, especially in challenging economic times. These trends are driving companies to measure their performance in a way that connects customer value to shareholder value. The value proposition’s three elements (benefits, pricing and adoption costs) serve as a powerful organizing principle to identify key performance indicators (KPIs). These metrics, which vary by company and industry, will provide superior insights into the value a company creates for customers and, ultimately, for shareholders.

END NOTES: PART III

1 / Alan Murray, “Backlash against CEOs could go too far,” The Wall Street Journal, June 15, 2005.

2 / J.P Donlon, “CEO Transform Thyself,” Chief Executive, September 1, 2006.

3 / Rob Kelley, “HP: Printing up big profits, Stock Spotlight: Just past a year at the helm, HP’s CEO Mark Hurd has put the company back on track. Is the stock still a buy?” CNNMoney.com, August 14 2006.

4 / Alan Murray, “Backlash against CEOs could go too far,” The Wall Street Journal, June 15, 2005.

5 / Mark Gottfredson, Steve Schaubert and Hernan Saenz, “The new leader’s guide to diagnosing the business,” Harvard Business Review, February 2008.

6 / Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” in Strategy + Business, published by Booz Allen Hamilton, Winter 2007.

7 / Bruce Nussbaum, “Davos Will Be Different: Innovation is the new byword, and India has grabbed top billing from China,” Business Week, January 23, 2006.

8 / Bain & Co., http://www.bain.com.

9 / Dieter Kiewell and Eric V. Roegner, “The CFO guide to better pricing: Cutting costs might get more attention, but improving pricing discipline can add more to the bottom line. Here’s how CFOs can lead the way,” The McKinsey Quarterly, October 2002.

10/ Greg Cudahy and George L. Coleman, “The price is right . . . isn’t it?” Outlook 2007, the journal of high- performance business, published by Accenture.

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11/ David Harper, Robert J. Kramer, “The changing role of the COO: is the chief operating officer headed for transformation or extinction?” The Conference Board New York, October 2007.

12/ “How companies spend their money: A McKinsey Global Survey,” The McKinsey Quarterly, June 2007.

13/ The McKinsey Quarterly, February 2007.

14/ See #12.

15/ Tim Breene, Walter E. Shill and Paul F. Nunes, “Changing ahead of the curve,” Outlook 2007, the journal of high performance business, published by Accenture, January.

16/ Vadim Kotelnikov, “Kaizen: The japanese strategy of continuous improvement,” 1000ventures.com.

17/ Robert Cardone, “Corporate ethnography: A way to gather VoC,” Six Sigma.

18/ Mark Gottfredson and Mike Booker, “Finding your innovation fulcrum,” The Wall Street Journal, December 20, 2005.

19/ ibid.

20/ John Ragsdale, “In-Home consumer services: “Hottest in-Home options and influencers,” SSPA News, February 2007.

21/ Phone Arena Team, “Record 1 billion cell phones sold in 2007,” PhoneArena.com, February 29, 2008.

22/ Joanna Barsh, Marla M. Capozzi, and Jonathan Davidson, “Leadership and innovation,” The McKinsey Quarterly, 23 March 2008.

23/ Dieter Kiewell and Eric V. Roegner, “The CFO guide to better pricing: Cutting costs might get more attention, but improving pricing discipline can add more to the bottom line. Here’s how CFOs can lead the way,” The McKinsey Quarterly, October 2002.

24/ Greg Cudahy and George L. Coleman, “The price is right . . . isn’t it?” Outlook 2007, the journal of high-performance business, published by Accenture.

25/ Mark Gottfredson, Steve Schaubert and Hernan Saenz, “The new leader’s guide to diagnosing the business,” Harvard Business Review, February 2008.

26/ Cristopher C. Eugster, Jatin N. Kakkar, and Eric V. Roegner, “Bringing discipline to pricing: Different local market environments create quite different opportunities for pricing. You must understand these environments to set prices optimally,” The McKinsey Quarterly, February 2000.

27/ See #22.

28/ ibid.

29/ Thomas Friedman, “Whole world is watching: When everyone is a publisher, we’re all public figures - and much more transparent,” The New York Times, June 30, 2007.

30/ Nina Afshar, Research Fellow & Senior Manager, Management Consulting practice, “The Chief Finance Office—A Balancing Act, 2006” BearingPoint Insights for Results, with research conducted by IDC https://www.bearingpoint.com/Documents/StaticFiles/C3854_idc_cfo_study.pdf

31/ “ONLINE EXTRA: Q&A with Tech-Marketing Guru Geoffrey Moore, An Old Economy company that embraces the New Economy is...an incredibly powerful animal,” Business Week, October 23, 2000.

32/ Barbara E. Bund, The Outside-In Corporation, McGraw-Hill, 2005.

33/ Michael V. Marn, Eric V. Roegner, and Craig C. Zawada, “Pricing new products: Companies habitually charge less than they could for new offerings. It’s a terrible habit,” The McKinsey Quarterly, August 2003.

34/ Bruce Cooil, Lerzan Aksoy and Timothy L. Keiningham, “Approaches to customer segmentation,” Vanderbilt University, Owen Graduate School of Management, July 24, 2006.

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35/ Based on the research of Brian Sternthal and Prashant Malaviya, “Advertising alignment: Using consumer goal orientation to determine advertising format,” Kellogg Insight, Northwestern University, May 2007.

36/ Rob O’Regan and Constantine von Hoffman, “Interview: Jim Stengel, Procter & Gamble,” Magnosticm: Marketing and Media in the Age of Great Cynicism, Advertising Age, September 2005.

37/ Raggio, Randle D. and Leone, Robert P., “Producing a measure of brand equity by decomposing brand-benefit beliefs into brand and attribute sources,” March 6, 2006.

38/ “The End of Corporate Computing,” blog By Nicholas G. Carr. http://www.nicholasgcarr.com/articlesmt/archives/endofcorporatecomputing.shtml

39/ Mary Madden and Susannah Fox, “Riding the waves of Web 2.0: More than a buzzword, but still not easily defined,” Pew Internet Project, October 5, 2006.

40/ Nicolas Prat, Stuart E. Madnick , “Evaluating and aggregating data believability across quality sub-dimensions and data lineage,” MIT Sloan School of Management Working Paper 4670-07, 12/01/2007.

41/ Nigel Turner and Dave Evans, “Data quality? Don’t waste your time,” 12th International Conference on Information Quality, 2007

42/ Jane Markham Weinstein, Tom Atkinson, “Growing your company through customer focus: What does it take?” Field Notes, Forum Corporation.

43/ “SAP adds Web 2.0 support to CRM offering: Improved user interface, simplified configuration also part of update unveiled today, Computerworld, December 04, 2007.

44/ Liz Herbert, “Oracle adds hosted CRM to its portfolio but near-term ghallenges will give competitors an edge,” Forrester Research, October 31, 2005.

45/ William Band, “Use Our CRM FastForward Self-Assessment To Achieve Quick Wins,” Forrester’s Best Practices Framework For CRM, Forrester Research, August 24, 2007.

46/ “The Next-Generation of Customer Intelligence: Real-Time Value from On-Demand Decisioning,” Insights for Results, Bearing Point, with research conducted by IDC, 2006 http://www.bearingpoint.com/Documents/StaticFiles/c3611_cus_intel_study.pdf

47/ Saul J. Berman, Bill Battino, Louisa Shipnuck and Andreas Neus, “The end of advertising as we know it,” IBM Institute for Business Value, 2007.

48/ Brian Morrissey, “Coca-Cola hunts for social-net formula: The company’s online marketing highs and lows show an old brand learning new tricks,” AdWeek, April 7, 2008.

49/ Online Press Release “Online consumer-generated reviews have significant impact on offline purchase behavior,” comScore, November 29, 2007.

50/ Bill Palace, “Data Mining,” Technology Note prepared for Management 274A Anderson Graduate School of Management at UCLA, Spring 1996.

51/ Sunil Gupta and Donald Lehmann, “Managing customers as investments: The strategic value of customers in the long run,” Wharton School Publishing, 2005.

52/ Hongwei Zhu, Stuart E. Madnick, “Semantic integration approach to efficient business data supply chain: Integration approach to interoperable XBRL,”, MIT Sloan School of Management Working Paper 4671-07, 12/01/2007.

53/ Jon B. DeFriese, Chad Ellis and Professor Steven Wheelwright, “HBS toolkit: Lifetime customer value calculator,” Working Knowledge, Harvard Business School, April 4, 2000.

54/ “Insights for results: The next generation of customer intelligence: Real-time value from on-demand decisioning,” Bearing Point, with research conducted by IDC, 2006.

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Appendix Connecting Customer Value

to Shareholder Value

According to Aberdeen Group: “Forty-seven percent of Best-in-Class companies that have implemented KPI strategies, capabilities, and technologies) improved profitability and revenue by greater than 10%.” It turns out that any kind of measurement system stimulates managers to pay closer attention to results.

Publicly-held companies are measured in large part according to quarterly earnings. This enables management, analysts and shareholders to see a trends over time, but doesn’t provide insights about what really matters in value creation. In our experience, now backed up by our research findings, customer value is the single most important factor in business success. Turner DeVaughn compiled a menu of 189 possible metrics to provide insights about a company and its market based on what we have learned:

valUe ProPoSition

cUsTomEr VALUE is whAT bUyErs gET iN rETUrN for ThE pUrchAsE pricE. This iNcLUdEs

bENEfiTs As wELL As AdopTioN cosTs. A VALUE cALcULATor shows ThE dETAiLs.

valUe model

A VALUE cALcULATor rEqUirEs AN UNdErLyiNg sTrUcTUrE driVEN by mETrics ANd mArkET

iNTELLigENcE. A VALUE modEL qUANTifiEs how A compANy crEATEs cUsTomEr VALUE.

bUSineSS model

compANiEs mAkE morE moNEy morE EfficiENTLy by focUsiNg oN cUsTomEr VALUE.

A NUmbEr of mETrics cAN TrAck how ThE bUsiNEss is pErformiNg.

SHareHolder valUe

(

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CMO Metrics

•

•

•

•

•

•

•

•

•

•

•

# commItmENt to valuE crEatIoN sourcE

� Percentage of time SPent by cmo gatHering intelligence TUrNEr dEVAUghN

valuE proposItIoN – BENEFIts

� economic valUe of Primary benefit TUrNEr dEVAUghN

� economic valUe of Secondary tangible benefitS ALiNEAN

� economic valUe of Secondary intangible benefitS ALiNEAN

valuE modEl – customErs & BENEFIts

� cUStomer Segmentation Profile TUrNEr dEVAUghN

� degree to wHicH tHe ProdUct deliverS tHe Primary benefit in eacH cUStomer Segment TUrNEr dEVAUghN

� degree to wHicH tHe ProdUct deliverS tHe Primary benefit (acroSS all SegmentS) TUrNEr dEVAUghN

� dominance of Primary benefit (acroSS all SegmentS) TUrNEr dEVAUghN

� dominance of Primary benefit by cUStomer Segment TUrNEr dEVAUghN

ThE modEL for EAch compANy shoULd bE cUsTomizEd, dEpENdiNg UpoN ThE NEEds of diffErENT bUyErs ANd ThE goALs of ThE bUsiNEss.

cmo BusINEss mEtrIcs

�0 new cUStomerS – volUme and valUe cUsTomEr bLiss

�� loSt cUStomerS – volUme and valUe and reaSonS cUsTomEr bLiss

�� renewalS witH reaSonS cUsTomEr bLiss

�� revenUe and Profitability by cUStomer groUP cUsTomEr bLiss

�� referral rate by cUStomer Segment cUsTomEr bLiss

�� recency whArToN

�� retention rate whArToN

�� cUStomer Profit whArToN

�� cUStomer lifetime valUe whArToN

�� ProSPect lifetime valUe whArToN

mEtrIcs wIth BullEts arE dEscrIBEd IN part thrEE

���

# cmo BusINEss mEtrIcs – coNtINuEd sourcE

�0 cUStomer referralS (net Promoter) 0 -10 sAT mETrics

�� average acqUiSition coSt whArToN

�� average retention coSt whArToN

�� trial whArToN

�� rePeat volUme whArToN

�� Penetration whArToN

�� volUme ProJectionS whArToN

�� ProdUct vitality booz ALLEN hAmiLToN

�� growtH – Percentage whArToN

�� growtH – cagr whArToN

�0 cannibalization rate whArToN

�� fair SHare draw rate whArToN

�� brand eqUity metricS whArToN

�� conJoint UtilitieS and conSUmer PreferenceS whArToN

�� Segment UtilitieS whArToN

�� conJoint UtilitieS and volUme ProJectionS whArToN

�� market SHare whArToN

�� Unit SHare whArToN

�� relative market SHare whArToN

�� brand develoPment indeX whArToN

�0 category develoPment indeX whArToN

�� market SHare whArToN

�� market Penetration whArToN

�� brand Penetration whArToN

�� Penetration SHare whArToN

�� SHare of reqUirementS whArToN

�� Heavy USage indeX whArToN

�� HierarcHy of effectS whArToN

�� awareneSSS whArToN

�� toP of mind whArToN

�0 ad awareneSS whArToN

�� knowledge whArToN

�� beliefS whArToN

�� intentionS whArToN

aPPendiX

•

NET VALUE��0

# cmo BusINEss mEtrIcs – coNtINuEd sourcE

�� PUrcHaSe HabitS whArToN

�� loyalty whArToN

�� likeability whArToN

�� willingneSS to recommend whArToN

�� cUStomer SatiSfaction whArToN

�� willingneSS to SearcH whArToN

�0 SaleS force workload whArToN

�� SaleS Potential forecaSt whArToN

�� SaleS total whArToN

�� SaleS force effectiveneSS whArToN

�� SaleS force comPenSation whArToN

�� SaleS force break-even nUmber of emPloyeeS whArToN

�� SaleS fUnnel, SaleS PiPeline whArToN

�� nUmeric diStribUtion – Percentage whArToN

�� all commodity volUme whArToN

�� ProdUct category volUme whArToN

�0 total diStribUtion – Percentage whArToN

�� facingS whArToN

�� oUt of Stock – Percentage whArToN

�� inventorieS whArToN

�� markdownS whArToN

�� direct ProdUct ProfitabilitieS whArToN

�� groSS margin retUrn on inventory inveStment whArToN

�� baSeline SaleS whArToN

�� incremental SaleS/Promotional lift whArToN

�� redemPtion rateS whArToN

�0 coStS for coUPonS and rebateS whArToN

�� Percentage SaleS witH coUPonS whArToN

�� Percent SaleS on deal whArToN

�� Percent time on deal whArToN

�� average deal dePtH whArToN

�� PaSS-tHroUgH whArToN

�� Price waterfall whArToN

���

# cmo BusINEss mEtrIcs – coNtINuEd sourcE

�� imPreSSionS whArToN

�� groSS rating PointS whArToN

�� coSt Per tHoUSand imPreSSionS whArToN

�0 net reacH whArToN

�� average freqUency whArToN

�� freqUency reSPonSe whArToN

�� effective reacH whArToN

�� effective freqUency whArToN

�� SHare of voice whArToN

�� web viSitS by new vS. retUrning googLE ANALyTics / UrchiN

�� web viSitS by SoUrce googLE ANALyTics / UrchiN

�� web UniqUe viSitorS wEb ANALyTics AssociATioN

�� web viSitor Segmentation Performance googLE ANALyTics / UrchiN

�00 web boUnce rate googLE ANALyTics / UrchiN

�0� web Page viewS whArToN

�0� average time on web Page googLE ANALyTics / UrchiN

�0� Percent Single Page acceSS on tHe web Site googLE ANALyTics / UrchiN

�0� Percent one-Page viSitS on tHe web Site googLE ANALyTics / UrchiN

�0� average time on web Site googLE ANALyTics / UrchiN

�0� viSitS/SeSSionS on web Site whArToN

�0� dePtH of viSit on web Site googLE ANALyTics / UrchiN

�0� clicktHroUgH rate on web Site whArToN

�0� coSt Per click on web Site whArToN

��0 coSt Per order on web Site whArToN

��� coSt Per cUStomer acqUired whArToN

��� goalS converSionS googLE ANALyTics / UrchiN

��� goal fUnnel googLE ANALyTics / UrchiN

��� toP content googLE ANALyTics / UrchiN

��� dynamic content googLE ANALyTics / UrchiN

��� abandonment rate whArToN

��� marketing SPending whArToN

aPPendiX

NET VALUE���

COO Metrics

•

•

•

•

•

•

•

•

# commItmENt to valuE crEatIoN sourcE

��� Percentage of time SPent on redUcing ProdUct comPleXity TUrNEr dEVAUghN

��� Percentage of time on redUcing organizatonal comPleXity TUrNEr dEVAUghN

valuE proposItIoN – adoptIoN costs

��0 economic imPact of learning cUrve (adoPtion coSt[S]) TUrNEr dEVAUghN

��� adoPtion coSt relative to Price Point TUrNEr dEVAUghN

valuE modEl – adoptIoN costs & complExIty

��� ToLErANcE of cUsTomEr To AdApT To chANgE TUrNEr dEVAUghN

��� learning cUrve TUrNEr dEVAUghN

��� learning cUrve by cUStomer Segment TUrNEr dEVAUghN

��� level of ProdUct comPleXity TUrNEr dEVAUghN

��� level of organizational comPleXity TUrNEr dEVAUghN

��� oThEr risk fAcTors ALiNEAN

coo BusINEss mEtrIcs

��� nUmber of kPis acroSS enterPriSe TUrNEr dEVAUghN

��� emPloyee engagement pricEwATErhoUsEcoopErs

��0 talent attraction & retention dow joNEs iNdEx

��� colleagUe develoPment pricEwATErhoUsEcoopErs

��� labor Practice indicatorS dow joNEs iNdEx

��� loSt time inJUrieS pricEwATErhoUsEcoopErs

��� time-to-qUality six sigmA

��� defectS Per million oPPortUnitieS six sigmA

��� indUStry SPecific criteria dow joNEs iNdEx

��� environmental Performance (eco-efficiency) dow joNEs iNdEx

��� environmental rePorting* dow joNEs iNdEx

��� groUP carbon footPrint pricEwATErhoUsEcoopErs

��0 emiSSionS pricEwATErhoUsEcoopErs

��� waSte pricEwATErhoUsEcoopErs

���aPPendiX

CFO Metrics

•

•

•

•

# commItmENt to valuE crEatIoN sourcE

��� Percentage of time SPent by cfo on Pricing TUrNEr dEVAUghN

valuE proposItIoN – prIcE poINt

��� Price Point TUrNEr dEVAUghN

��� Price Point relative to economic valUe of dominant benefit TUrNEr dEVAUghN

valuE modEl – prIcE poINt

��� oPtimal Price whArToN

��� oPtimal Price by cUStomer Segment TUrNEr dEVAUghN

��� average Price Per Unit whArToN

��� Price Per StatiStical Unit whArToN

��� Price elaSticity of demand whArToN

��0 reSidUal elaSticity whArToN

��� eXPerience cUrve bAiN & compANy

��� cUrrent Price Point relative to eXPerience cUrve bAiN & compANy

cFo BusINEss mEtrIcs

��� target revenUeS whArToN

��� target-volUme whArToN

��� break-even SaleS whArToN

��� fiXed coStS relative to Price Point TUrNEr dEVAUghN

��� variable and fiXed coStS whArToN

��� Unit margin whArToN

��� margin – Percentage whArToN

��0 cHannel marginS whArToN

��� Price PremiUm whArToN

��� reServation Price whArToN

��� Percent good valUe whArToN

��� contribUtion Per Unit whArToN

��� contribUtion margin – Percentage whArToN

NET VALUE���

* “FINaNcIal” aNd “NoN-FINaNcIal” arE tErms usEd By prIcEwatErhousEcoopErs.

“markEtINg aNd FINaNcE” arE tErms usEd By whartoN. “EcoNomIc,” “ENvIroNmENt”

aNd “socIal” arE tErms usEd By thE dow JoNEs sustaINaBIlIty INdEx.

��� free caSH flow pricEwATErhoUsEcoopErs

��� revenUe pricEwATErhoUsEcoopErs

��� revenUe growtH pricEwATErhoUsEcoopErs

��� caPital eXPenditUre pricEwATErhoUsEcoopErs

��0 net Profit whArToN

��� oPerating marginS pricEwATErhoUsEcoopErs

��� retUrn on SaleS whArToN

��� retUrn on inveStment (eqUity) whArToN

��� caSH ProdUctivity ratio pricEwATErhoUsEcoopErs

��� debt pricEwATErhoUsEcoopErs

��� economic Profit whArToN

��� Payback whArToN

��� net PreSent valUe whArToN

��� internal rate of retUrn whArToN

��0 retUrn on marketing inveStment; revenUe whArToN

��� earningS Per SHare pricEwATErhoUsEcoopErs

��� earningS Per SHare growtH pricEwATErhoUsEcoopErs

��� ebitda pricEwATErhoUsEcoopErs

��� total SHareHolder retUrn pricEwATErhoUsEcoopErs

��� dividendS Per SHare pricEwATErhoUsEcoopErs

��� codeS of condUct / comPliance / corrUPtion & bribery dow joNEs iNdEx

��� corPorate governance dow joNEs iNdEx

��� riSk & criSiS management dow joNEs iNdEx

��� indUStry SPecific criteria dow joNEs iNdEx

���

1-800-GOT JUNK? 101, 102, 118

A

Aberdeen Group 100

Accenture 189, 193

AdAge 205

Adobe Systems ix, 110

Adoption costs 3, 4, 6, 7, 10, 11, 14- 16, 38-40 46, 48, 61 78-80, 82, 84,

90, 180, 256

Advertising vii, 16, 28, 38, 110, 112, 136, 207, 208, 220, 221

Adweek 221

Aerosoles 146

Affiliate marketing 28

Airliners.com 231

Allen, Scott 102

Alpha Copier” 31-34

Amazon.com i, 107, 134

American (Airlines) 112

Ampuja, Jack 70

Ananyan, Sergei 237

Anderson, Tom 89

Andiamo Systems 233, 237

Apple Computer ix, 42, 43, 45, 107, 242

Artesia 53, 54

Ariba 3ASO – Tour de France 146

Athena 160

Autonomy (“Meaning-based computing”) 47

AXA 244

bBain & Co. 41, 182, 185, 190, 191, 194, 195

Band, William 217

Bank of America 137

Barry, Stephanie 57, 60

Barsh, Capozzi and Davidson 192

BazaarVoice 223, 230

Bearing Point 199, 203, 211, 240Beatles, The 170

Becton Dickinson 65

Benefits (of products) vii, 4, 6, 7, 10, 11, 14, 16, 17, 21-23, 25, 29, 30, 36, 38, 39, 48, 50, 51, 58, 60, 61, 67, 84, 85, 180, 246

Berman, Josh 89

Bliss, Jeanne 248-253

Blockbuster 107, 232

BlogPulse 211, 231

Booz Allen Hamilton 19, 117, 183

Bonpoint 146 Bose 8Brand(s), branding 16, 22, 65

British Telecom (BT) 214, 215

Bromley, Michael L. 63

Buffet, Warren xiv

Index

“

NET VALUE���

Bund, Barbara 202

Business model innovation(s) 37, 106-114

Business Week 70, 181, 183, 240

Byrnes, Jonathan 196

BzzAgent 224

C

Cadillac 63

Campbell’s Soup (Easy Open Pop Top) 39

Carlson, Curtis R. (Innovation) 50

Carr, Nicholas 210

Chasm Companion, The 108

Chasm Group, The 91, 103, 106, 170

Chen, Steve 89

Chesbrough, Henry 103

Chief executive officer(s) (CEOs) 9, 12, 25, 90, 101, 115, 117, 175, 176, 183, 185, 186, 188, 189, 200, 249,

Chief financial officer(s) (CFOs) 25, 185, 186, 193, 194, 197, 198, 204- 208 , 240, 259-261, 263

Chief information officers (CIOs) 208-216, 244, 263

Chief marketing officers (CMOs) 25, 183, 185, 186, 189, 200-203, 208, 240, 246-248, 263

Chief operating officers (COOs) 38, 183, 185-189, 192, 256-258, 263

Christie First 165

Cisco Systems 2, 69, 191

ClearStory 53

Clorox Company, The 71

Clorox GreenWorks™ 71

Coca Cola Enterprises 70

Coda 244

Coke, Coke Zero 221

Commission Junction 28, 29

ComScore 28, 222

Conference Board, The 187Consumer Electronics Assocation 67

Consumer Electronics Show 67

Conversion Curve© 119, 127, 165, 168-170

Conway, Craig 216

Copernicus 115

Corbis 54Corning 65

Costs 14, 50, 51, 70, 71

Cost Plus World Market ixCostco 107 Cotel, Orli 71

Craigslist 89

Cray 69

Creating value 10, 29, 60, 107, 108, 175

Creative Destruction 108

Creative Spark 220

Crossing the Chasm 200

Cudahy and Coleman 194

Curves 20

Customer BLISS 248

Customer Relationship Management (CRM) 113, 147, 160, 161, 164, 212, 216-218, 220, 222, 223, 228, 229, 236, 238

CustomerThink 235

Customer value 16, 25, 28, 50, 55, 60, 69, 70, 84, 98, 103, 143, 149, 176, 180, 186, 216, 228

D D-Wave Systems 234, 243

Data mining 229, 231-233, 238

���

Decker, Sue 240

DeVaughn, Stan 1, 42, 65, 103

Dell 107

Delta (Airlines) 112

DeWolfe, Chris 89

DialogueTDN 227, 228, 236 Differentiated value-pricing 31-35

Digg 231

Digidata 164

Digital culture viii, xi, 5, 16, 73, 175, 211, 212, 215

DNA Plant Technology 8, 85, 118

Disciplines of Market Leaders, The 109

Discriminatory pricing 36, 37

Disruptive innovation 109

Draper, Fisher, Jurvetson 234

Duffield, Dave 216

Dunnaway, Cammie 240

Dyson, Esther 242

EE*Trade 137

East Avenue Capital 36

EBay 29, 95, 107

Edison, Thomas viii, 91EDS 237

EMC Documentum 54

Engineering, engineers 2, 64, 67, 69

Entrepreneurs 90, 91, 94, 95, 97

Ethnography 57

Excel 30

Exchange 30

EXpresso 29, 30

EZ Publishing 164

FFacebook 222

Federal Express, Fed Ex 102, 107

Feifdom Syndrome, The 38

Features (of products) 10, 22, 38, 60, 61, 67, 70, 128, 168

Filemaker 53

Finance (departments) 8Fiorina, Carly 181

Ford, Henry 62

Ford Motor Company 63

Forrester Research 163, 217

Fortune 500 (CEOs) 178

Forum Corporation 216

Foster and Kaplan 108

Friedman, Thomas vii, 196

Friendster iv, 89

g Garden Fresh 235

Gartner Group 191, 217

Gates, Bill 108

GE Healthcare 127, 152-158, 160, 166

General Electric viii, 56, 189

General Motors 63

Getty Images 54

GEICO 112

Gistics 49, 52, 85

GoodGrips™ 65Goodyear, Charles 62

Goodyear Tire & Rubber 62

Google 2, 28, 107, 119, 165, 241

GoogleAlerts 213

GoogleDocs 30

Greene, David 220

Guess 146

NET VALUE���

HHSBC 137

Haas School of Business (Univ. of California, Berkeley) 105

HP (Hewlett-Packard) 69, 181, 182

Harrick, Chris 162

Harrison, Shelley 99

Hathaway viiHarvard Business School 94, 253

Heckimian Labs 88

Herbert, Liz 163, 217 Herbold, Robert 38

How to Succeed in Business Without Really Trying 201

Hurd, Mark 181, 182

Hurley, Chad 89

Home Depot 60, 107

IIBM 69, 103, 220

IcelandAir 244

Ikea 244

Immelt, Jeff 158

ING Direct 127, 133-137, 166

Innovation 5, 6, 8, 10, 11, 49, 51, 61- 64, 69-71, 108, 183

Inside View 223

Institutes of Medicine 154

Intel 107, 110

International Houseware Association 67

Internet Capital Group 8Internet marketing 28

Interwoven MediaBin 53

iPod 42, 44

iTunes 43, 109

JJanney, Montgomery, Scott 8Jobs, Steve 42

Judge, Peter 234

kKPMG 137, 153

Kaplan, Jerry 95, 97

Karim, Jawed 89

Keller, K.I. 205, 206

Kellogg’s 65

Kellogg School of Management (Northwestern Univ.) 204

Kelsey Group 222

Key Performance Indicators (KPIs) 175, 186, 239, 242

Kiewell and Roegner 193, 196

Koogle, Tim 240, 241

Kuhlman, Arkadi 134

lLadd, David (Mayfield Fund) 174

Lancel 146, 147, 149

LaunchPad 99

Lawrence, David 242

Library Journal 61

MMacintosh 42

Macy’s 112

Market 6, 10, 11

Marketing i, ii, xi , 3, 8, 24, 30, 48, 71-73

Marketing Communications 52

Marketing 2.0 (Don Thorson) 141

Market Research 57, 65, 98, 100

Martin, Herb 243

���

Matranga, Vicki 67

Matson 167McDonald’s restaurants 107

McDowell, Sandi 102

McGrath, Michael 36

McKinney, Robert A. 31, 35

McKinney Group, LLC, The 35

McKinsey & Co. 27, 145, 149, 158, 185, 187, 188, 193, 194, 196

Megaputer 237

Men At Work 43

Microsoft Corp. 30, 38, 65, 100, 107, 108, 164

Model-T Ford 62, 63

Moon, Michael 52

Moore, Geoffrey 200

Motorola 189

MySpace iv, 89, 222

NNABC model 50, 51

NafNaf 146

Nanonex 127-132, 166

Napster 43

NCR 181

Net Promoter 253, 255

Network Appliance (NetApp) iv, 232

Network Equipment Technologies (N.E.T.) 1, 2, 85, 232

North Plains 53

Networked Insights 223

Newmark, Craig 89

New England Journal of Medicine 154

Nielson Net Ratings 135

Nintendo 240

Nordstrom 112

Nowlin, Sarah 88

NBC Universal xiNVIDIA 67

OOenslager, George 62

Ogden, Keith 37

Ogilvie, David vi, vii, xi, 61, 122

Omidyar, Pierre 95

OpenText-Artesia 54

Operations (departments) 8, 85

Operating profits 27

OpinionLab 224, 230

Optimized price-point 15

Oracle 110, 191, 217

Oracle-Stellent 54

Osterwalder, Alex 103

Outlook 30

Outside-In Corporation, The 202

Overtone 235-237

PPalace, Bill 213

PeopleSoft 216

Perot, Ross 237

Pew Internet Research (Pew Foundation) 135, 136

Positioning 49

PowerPoint 30

Prat and Madnick 214

Price, pricing 2, 16, 24, 31-35, 37, 38, 48, 84, 98, 100, 185, 193, 259

Pritchard, Stephen M. 8Procurement (purchasing) departments 2ProVina (WinePod) 225

Procter and Gamble viii, 38, 205, 207

NET VALUE��0

qQualcomm 110

Qantas 112

Quebecor 54

Quicken 29

RRR Donnelley 54

Raggio and Leone 206

Raikes, Jeff 100

Raytheon 189

Real Capital Markets (RCM1) 127, 138-143, 166

Risk Management Solutions 37

Robert Mondavi Wine ixRoberts, Michael 94

Roche, Jeremy 244

Rokonet 43-45, 131

Rolls Royce viiRosen, Ben 242

Rosenzweig, Phil 188

Royal Bank of Canada 134

Russo, Tony 1

SSAP 110, 164, 244, 262

Safeway 71

Salesforce.com 161, 217

SatMetrix 255

SC07 68

Schawk 54

Schlemmer, Randy 37

Scudamore, Brian 101

Semel, Terry 240, 241

Shapiro, Gary 67

Shareholders, shareholder value 71, 108, 179, 180, 186

Sharepoint 30

Shopping.com 5, 13

Siebel Systems 217

Seidman, Dov (How) 197

Sierra Club 71

Singapore Airlines 112

Six Sigma 189

Sloan School of Management (M.I.T.) 163, 202

Smart Design 65

Smart Straw™ 57, 59, 60

Smith, Frederick W. 101

Social Networking 222

Sony Corporation 42

Sony Walkman 42, 43

South African Pulp and Paper Industries (SAPPI) 13

Southwest Airlines 107, 134

Springer, Beth 71

SRI International 49-51, 86

SSPA 191

Starbucks 107

Strategy + Business 117

Stengel, Jim 205, 206

SugarCRM 127, 159-164, 167, 217

Sun Microsystems 69, 191, 225

Survey(s) 24, 38

Suppressed price point 14, 46

T Talking Heads 43

Toyota 63

Toys’R’Us 107

Transactional metrics 248

Treacey and Wiersma 109

Trecker, Jill 236

���

Tuck School of Business (Dartmouth College) 205

Turner, Nigel; and Evans, Dave 214Turner DeVaughn, TDN i, ii, iii, ix, 16, 50, 55, 57, 116, 118. 127, 146, 163, 176, 185, 212, 226

Turner DeVaughn (analytic) model 48-50, 85, 170, 244

Turner DeVaughn Top Line Conference 57, 99

Turner Investor Survey 104, 101

Turner, Stephen 2, 13, 62, 64, 240

u

United Airlines 64, 112

Usenet 89

User Adoption Lifecycle 97

Unisys 113

VVCS Timeless 127, 144-149, 165

Valentine, Don 1Value viii, 57, 57-59, 60, 84, 106, 165, 190, 226

Value-based pricing 36Value proposition(s) xii, 1, 2, 5, 8, 12, 14, 16, 26, 28, 30, 36, 45, 47, 48, 51, 52, 55, 56, 68, 71, 84, 89, 90, 106, 110, 119, 123, 124, 150, 151, 176, 180, 217, 226

Value Creation Model 73-83, 85

Vantive 216

Vendome Luxury Group 147 Venture capitalists 12

Virgin Atlantic 112

Voice of the Customer (VoC) 222, 264

WWall Street Journal, The 179, 182

Wal-Mart 70, 71, 107, 112, 113

Washington Post 63

WD-40 Company 56, 57, 85, 118

Web 2.0 126, 160, 162, 163, 176, 191, 208, 212, 214, 222, 227

Welch, Jack 56, 70

WELL, The 89

Wieden 54

Wiefels, Paul 105, 114, 170

WisDom 43-45, 131

White, Rene 91

World Economic Forum 183

xXBRL (Extensible Business Report- ing Language) 213, 242, 243, 244

Xerox 189

YYahoo ix, 107, 240

Yahoo Shopping 5YouTube 89, 221

ZZappos 72

ZENS Management Suite 21

Zoho 30

Zucker, Jeff xiZylaya 21

Zyvex 68

NET VALUE���

Stan DeVaughn’s decades-long career and influence as a technology marketer, publicist and investor communicator spans the seminal events in Silicon Valley. His contributions at vanguard companies and categories – Apple in personal computing, Network Equipment Technologies (NET) in communications networking, and NetApp in Internet data storage and management – were instrumental in the early success of each enterprise. He co-founded Turner DeVaughn Network in 2006 and has lectured at the business schools of University of San Francisco and Santa Clara University.

Nationally acclaimed designer and marketer Stephen Turner is an advisor to senior management of global brands throughout North America with special expertise in customer and shareholder value in the technology sector. He developed and executed the landmark Turner Investor Survey revealing new insights about investors in the digital age and applied the research to collabora-tions with leading brands such as Yahoo, Ariba, PeopleSoft, McAfee, Macromedia and Adobe, and non-technology companies such as Cost Plus World Market, WD-40 Brands, California Water Service Company, National Upholstering, Robert Mondavi, Coffee People Worldwide, CenturyTel and Zeum.

Turner DeVaughn Network (TDN) is a nationwide consortium of experts in marketing, finance, operations, R&D and IT. Its mission is to improve clients’ revenue and earnings by identifying ways to develop and market products of greater value.

Visit http://www.netvaluegap.com to find out if your company is performing consistent with its potential – and what you can do to close the “value gaps” that weaken revenue and erode profits.

About the Authors