P3M4 Customers & Competitors

It’s time to start looking more closely at what customers in your market want and how you can establish a competitive advantage over your competitors.

This module gives you an overview of the theory and introduces you to the two basic forms of advantage:

  • Market preference based on the customer choosing the product which offers the best value for money
  • Operational advantage based on internal capabilities and costs.

It may seem a strange place to start but lets go back to 500 BC and see what a Chinese general had to say about winning in battle.

Sun Tsu The Art Of War

  • If you are ignorant of both your enemy and yourself, then you are a fool and certain to be defeated in every battle
  • If you know yourself but not your enemy, for every battle won you will suffer a loss
  • If you know your enemy and yourself, you will win every battle   [you choose to fight]

Indulge me and read those three bullet points again.

OK imagine you’re in a bar and you’re average height about 5′ 9″ (1.75m) and average build. You’ve got no martial arts training and you don’t know any special self defence tricks.

A giant, 6′ 7″ (2.0m) and very muscular is causing a bit of trouble. Are you going to tell him to quieten down?

Probably not because you know if it comes to a fight, you’re not going to win and he’s not causing that much of a problem.

You’re able to assess the situation because the information is clear.

Now suppose there’s a similar situation – same giant, the trouble is worse – he’s leering and groping the women and hitting the men –  and you’re a sixth dan ju jitsu black belt.

You challenge the giant and he makes a lunge and you throw him on his back.

Stunned, he gets up and rushes at you again. This time you get him in an intensely painful armlock which quietens him down since the more he struggles, the more it hurts. You escort him out of the door, whispering in his ear that worse is to follow if he doesn’t go away to sober up and quieten down.

This time the visual information wasn’t so good. The giant’s assessment of you as an “average guy” was wrong. Some of the information was right but one vital bit was missing – the 6th dan martial arts!

The same thing can happen in business.

You don’t want to fight battles you can’t win – or at least that you don’t have a good chance of winning – and that relies on having a much better understanding of the battlefield (what customers want, need and are willing to pay for) and your opponents (your competitors).

Head on battles against a market leader are a disaster waiting to happen. Just like the murderous campaigns fought in the First World War at The Somme and Ypres where troops were sent over the top into the other sides cannons and machine guns.

Competitive Advantage

  • The ability to outperform competitors by:
    • Attracting more customers
    • Attracting customers willing to pay a higher price because your product is unique
    • Supplying products and services at a lower cost
  • So that the business generates higher profit and return on investment

This is a fundamental concept and one of the five pathways to your Profit Tipping Point.

Read: Competitive Advantage

Different Types of Business – Different Power To Find Competitive Advantage

The power of finding an effective competitive advantage has been recognised for many years but it was originally thought that advantage and size of business were strongly linked.

And so they are for some types of business where a huge advertising budget can create overwhelming brand preference (Coke & Pepsi for example – I think they taste very similar but each has strong advocates) or where development costs are huge (drugs companies, software companies).

In other businesses, competitive superiority is built by establishing many small advantages.

Read: The Strategic Environments Matrix

This identifies Competitive Stalemate as one outcome, where no competitor has succeeded in establishing a big competitive advantage.

Breaking Out Of Stalemate

  • Competitors operate in similar ways
  • Customers perceive little difference between suppliers (rightly or wrong)
  • The product is treated like a commodity and bought on price and convenience
  • Courage to challenge the industry recipes
  • Funnel vision not tunnel vision – look around
  • This program

The strategic stalemate is caused by all competitors working in the same way and thinking in the same way. Everyone believes there is one way to run a business successfully.

The inevitable consequence is that customers see the product or service as a commodity where price  and convenience should be the major factors in the buying decision. Under the surface there may be some differences but they are not seen or appreciated by customers.

The businesses and customers get trapped – prices are low, profits are low, service levels are low and the customers are forced into making compromises because there’s not enough choice to give them what they want.

To break out of competitive stalemate, you need the courage to try something different and the commitment to see it through. The challenge is to stand out from the crowd and create valuable differentiation.

The old, established industry recipes of “this is how you succeed in this business” have to be challenged by going back to what it is customers really want combined with opening your eyes to what is possible from other markets.

This is why the idea of funnel vision over tunnel vision is so important. Tunnel vision reinforces the industry recipe but funnel vision opens up your mind to new possibilities.

Your investment in this program is one way you are opening yourself up to new ideas.

What Do Customers Want

  • Solutions to problems
  • Help to achieve goals
  • Outcomes and consequences (spoken and hidden) – travel companies sell holiday destinations and not the journey
  • Attributes become purchase criteria
  • Value for money
    • Pre-purchase perceived customer value
    • Post-purchase perceived customer value
  • What the customer thinks/feels is all that matters

Customers have two main motivations:

  • To move away from the personal pain of problems
  • To move towards the personal gain of solutions and achieving goals.

We buy to feel better – for ourselves or for those we nurture and care for.

It’s outcomes and consequences that matter, both those that we’ll freely admit and those that lay hidden. We try to connect what we want with purchase criteria – a few attributes of the product or service we can look for when buying to give us reassurance on the outcomes.

We then translate these criteria and outcomes into an assessment of value for money since few of us can buy without considering the price.

It’s instinctive.

You’re in a restaurant and you look down the menu and see one of your favourites. You think you’ll have it and then you cast your eye at the price and recoil. There’s no way you’re going to pay that much and you start looking for things that cost less.

Or you’re looking for clothes and see something nice. You check the price and put it straight back on the peg. You pick something else up and the price is £25 less than you were expecting. You try it on, it fits and you buy.

We make this value assessment at two stages:

  • In the pre-purchase stage when you’re deciding to buy. If it doesn’t measure up, you don’t buy.
  • In the post-purchase stage when you’ve had the experience and you’re assessing whether it was good – well worth the money – or bad – a big disappointment. This assessment holds the key to whether you will become a regular customer.

Notice it is the customer doing the assessment. What he or she thinks or perceives is all important. If it feels too expensive, it is too expensive to buy. If it’s a bargain and you can rationalise that it’s not too good to be true, then you buy.

Positioning by Price

  • Fair value for money line – indifference curve
  • Economy, mid market, premium – any gaps?
  • Customers who pay a higher price expect more
  • “Higher priced items are better quality” – wine?
  • General rule for suppliers – costs follow price but margins increase as you escape the crowd
  • Where are competitors?
  • Where are customers?  From choice or necessity?

Let’s start analysing your market by recognising that the two main factors in any buying decision are:

  • The value the customer expects to receive
  • The price the customer has to pay

These divide the market into a number of different categories

  • Low value, low price – this is the bargain basement end of the market
  • High value, high price – the deluxe solutions
  • Low value, high (relative) price – with big promises and no substance, this sector consists of deliberate scams created to rip people off together with products that are well intentioned but just not good enough.
  • High value, low price – these are the real bargains where you get much more than you pay for although it may be, the seller doesn’t understand what he or she is selling e.g. genuine antiques sold as imitations, art masterpieces sold as forgeries – note that the other way around, you have the low price, high value scams.

In amongst all the combinations you have what can be considered “fair value” – the value and price are well balanced compared to what else is available in the market.

In fact  customers should be unsure which to buy – the higher priced item which is better quality or the lower priced version which isn’t quite as good. It’s what economists call “indifference” and in my graph, it’s represented as a straight line.

It’s why Hyundai’s sell at a low price and the buyers are pleased, why Fords sell at a higher price, why BMW can charge more and why at the very top, it can still make sense to buy a Rolls Royce if you have the budget to back it up.

The concept is easy to see in the car market and it makes a great example to use for why it makes sense for one person to pay £6,000 for a new car and another can pay £300,000 and both believe they got a good deal.

It applies to just about every market including your own.

Some people charge much higher prices and customers buy at those high prices because they perceive some kind of extra value which makes the purchase seem worthwhile.

Markets sub-divide into an economy segment, the mid market and the premium segment.

As customers pay more, they expect to get more although sometimes the “more” is exclusivity and privacy.

Think of a hotel or bed & breakfast business – whether you’re paying £25 per night or £250 per night, you expect it to be clean but the more you pay, the more you expect to experience luxury, special facilities and better customer service.

It makes sense and for the business, the higher the price, the easier it is to find the cash to give more back to customers.

However the mind plays tricks.

The value for money line or indifference curve is hard-wired into our brain with sayings like “you get what you pay for.”

We know expensive things are usually better than cheaper things and price has become a proxy or short cut way of assessing quality and value.

Going back to the hotel example, if you are asked to pick a hotel (and a customer is paying the bill because you’re recharging it on expenses) and one is £50 per night and the other £100 per night, which one are you most tempted to pick when your automatically approved overnight allowance is £125?

The expensive one gets your vote most of the time because you don’t want to suffer a bad experience – noisy, cold, bad food, in a poor location etc.

This higher price means better quality assumption is especially true for products and services where the quality cannot be assessed adequately even after consumption.

For example research on wine shows a huge swing in appreciation if people know the price of the wine. The more expensive people believe it is, the more they say they like the taste.

Incredibly it seems this “more expensive is better” phenomenon even works for medicines.

Dan Ariely in his book “Predictably Irrational” reports on giving students electric shocks to test a new painkiller (vitamin C). The placebo effect of it nullifying pain worked on almost all the participants when they were told it was $2.50 a tablet and only on half when each tablet cost 10 cents.

Dan Ariely’s team of researchers even did another experiment when they asked their students who suffered from a cold to monitor what they bought and how it worked. The 13 who paid list price reported significantly better medical outcomes than the 16 who bought the medications at a discount.

No wonder when given a choice between two brain surgeons, one charging $500 an hour and the other charging $5,000, we don’t automatically choose the lower priced option. The same logic can apply for business consultants – low price is too cheap and the assumption is that quality isn’t up to standard.

We think like this because it matches our general experience. Generally we do get what we pay for. The suppliers costs increase as price increases and more value is created. However when you escape the crowded parts of the market, profit increases since you have fewer competitors forcing you to compromise on your price.

I’ve got two questions for you about the value for money line and your market:

  • Where are you and your competitors? I recommend you assess relative prices first and then their quality/value.
  • Where are the bulk of the customers?

When you see your market mapped out like the cars, you can start to see gaps. Those gaps may be opportunities if customers are forced to make compromises.

The fair value line can be difficult to find in practice. The car market is well structured with clear information on price and value available for everyone to see.

Customers don’t have perfect information and a poor value product may win sales in the short term. This is because it is being compared to even worse products or because the customer has accepted the first offer.

This is how “holiday-trap” restaurants are able to make a good profit from providing mediocre food near a popular attraction. The locals know the food is bad and don’t go, the tourists don’t and are attracted by the convenience and reassurance from other people being there (who have also been sold on convenience).

If the food is poor, and the tourist is the area for a few days, the chance of repeat business is low.

It’s the same with products, customers gradually learn about better products and lower prices and find their own sense of where the value for money line lies.

The Customer Search Zone

Customers think differently.

Some customers will set a maximum price they are prepared to pay, while others may set a minimum price because they are suspicious of the quality if the price is too low.

Other customers will set a minimum quality threshold – for example they will only buy a car if it seats four in comfort and will accelerate from 0 to 60 in less than ten seconds.

This helps to narrow the market down to what I call the Search Zone –  a few viable alternatives.

It takes time to consider a purchase and the more products that are considered, the more difficult it can be to make a decision.

Establishing Customer Preference

Thinking in terms of value and price helps customers to establish a preference.

The customer is indifferent to products A and B because both are on the fair value line. The customer recognises that B is the better product but it has a higher price to offset the benefits.

Product C is preferred to both.

The customer looks at the quality and value of the product and decides that products B and C are very similar. However product C has a lower price which makes it the better buy.

Product A and C are the same price but C is seen as the better item, so it is preferred to A.

Based on market positioning, then for this customer, product C has an advantage. The basic offer- the value the customer gets for his money – is the best.

Whether this is a genuine competitive advantage depends on the costs of product C.

Strategic Fit

  • Marketing Positioning can give you an advantage in attracting customers
  • Two big internal operations questions
    • Can you deliver on the promise and give the customer the value they expect?
    • Can you do it at a cost that still gives you a good contribution margin?
  • Competitive question
    • Can your competitors do anything to stop you?

As you can see, positioning yourself above the fair value line – high perceived value with a fair price – gives you an advantage in attracting customers although selling is only part of the equation for business success.

Operation Performance Underlines Or Undermines The Market Promise

Making a promise to attract customers is one thing, delivering on that promise is another.

The ability to deliver depends on what happens inside the company and you can think of it in terms of relative capability – how good is it – and relative cost.

Going back to the previous example, C has positioned itself to have a market advantage – it provides better value for money than either of its competitors.

But where is it in terms of operational performance? Does it have strategic fit?

If C is at C1 like competitor A it has low costs but a low capability. It can’t deliver on the inflated promises and risks high returns and a bad reputation.

If C is at C2 like B, it can deliver the value promised but because costs are at Bs level and it sells at A prices, its margins are squeezed. Sales should be high and customers happy but the business has to work hard to make a good profit.

The market position will only lead to a sustainable profitable business if it has a cost and capability advantage at C3, that is C is as good as B but has costs as low as A.

Competitive Strengths & Weaknesses

  • This Positioning – Capability – Cost concept gives a basis to assess competitive strengths and weaknesses
  • SWOT is often done badly – because it is not relative – “We are good but they are better” is not a strength unless many of the competitors are worse.
  • What is better/unique about the product?
  • What can be done better or unique?
  • Who has the cost advantages?

This market positioning and internal capability and cost gives you a basis to assess relative strengths and weaknesses. That word relative is important because it stops you fooling yourself.

Any architect is going to be “good at drawing plans for buildings” because it’s a fundamental requirement. Any accountant will be “good with numbers.” You need to go further and find the things that set you apart from the mass market of competitors.

In particular what is better or what can you do that could be better or unique?

And how do your costs line up? If your costs are higher, you must be better or special or you need to go through a cost cutting program.

What To Do

  • Recognise the problem – is the industry trapped in one recipe with competitors “stuck in the middle”?
    • Identify and develop competitive advantages
    • Deepen existing competitive advantages
    • Communicate advantages to customers
  • Where is the space?
    • Market positioning (attractive to customers?)
    • Special attributes, outcomes & consequences

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