Luminas Founder & CEO, D. Keith Pigues
At the center of pricing and revenue management (two very important topics for every business, large or small) is the matter of Customer Value Management. However, to fully understand customer value management, and its impact on sustained organic revenue growth, it is important to note that there are two critical components that must be managed well.
The first component of customer value management is customer value creation – the amount of value a supplier’s offering creates-for or provides-to a customer. We suggest this value be quantified in order to “prove” the value delivered to the customer. But, quantifying the value created for customers doesn’t go quite far enough. At Luminas, we work with our clients to quantify the “differential value” created for customers. This is the value that the customer can only receive from you (the supplier), versus their next best alternative (your competition) and it’s truly what gives you a confident and actionable assessment of value creation.
Once you know what differential value the customer receives from you (and only then), you’re able to focus on the second component of customer value management – customer value capture. The true measure of success for revenue management and pricing strategies is to capture as much of the differential value you provide to customers as possible – your fair share or more!
Many organizations struggle with revenue management and pricing due to a few fundamental issues:
- They don’t know the differential value they provide to customers.
- They forget there is a prerequisite to developing meaningful and sound value capture strategies (e.g. pricing strategies, business model strategies, etc.). They must first understand, quantify and prove the differential value they create for customers. (Yes, in all cases, value creation precedes value capture).
- It is your responsibility to assess the differential value you deliver to customers, in order to ensure you’re not making important business decisions in a vacuum – void of customer validation.
I love this quote from the management team at Owens Corning and how they explained the impact of this approach – captured in my book, Winning with Customers: A Playbook for B2B:
“In the measurement phase we can start to put the whole picture together. Remember, I started this by talking about the one dimensional view we had, which was what our customers meant to us which was in terms of whether we had strong margins with that customer, did we have strong share? Now we can combine that with what we mean to them and we can actually start to see a different picture. In some cases, we have a situation where we are not making money but our customer is receiving great value. This is an opportunity for us to work on capturing more of the value created. On the other hand, we’ve identified customers where we thought things were great, and they are great because we are receiving strong margins. But when we looked at it in terms of what we were delivering to them, we discovered our value proposition was not strong. And those customers, candidly, are at risk. These are the customers we’ve found during the past two years where we have challenged ourselves, we have to get engaged, and get engaged quickly or they are at risk and could fire us. So this has informed us in both ways, situations where we have lost opportunity because we are not capturing enough and situations where we are at risk because we are not creating enough value for the customers that we love.”