How to Maximize Pricing Power and Customer Loyalty
This marketing strategy will help you rigorously identify and maximize consumer value to increase your business or organization's pricing power, loyalty, and advocacy (i.e. word of mouth).
Note: The “elements of value” is one of the frameworks featured in Growth Marketing SuperBoost.
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Psychologist Abraham Maslow’s hierarchy of needs is a model that ranks the motivations of human beings.
At the bottom of the pyramid, there are the most basic elements that we need, like food, shelter, and sleep. As we satisfy these needs, we move up the pyramid and we get into things like safety and connections with other people, as well as feelings of accomplishment.
The “elements of value” works similarly. At the bottom of the pyramid, there are functional consumer needs/wants, emotional ones above it, then life-changing, and self-transcendence at the very top.
“When customers evaluate a product or service, they weigh its perceived value against the asking price. Marketers have generally focused much of their time and energy on managing the price side of that equation, since raising prices can immediately boost profits,” wrote Eric Almquist, John Senior, and Nicolas Bloch in Harvard Business Review. “But that’s the easy part: Pricing usually consists of managing a relatively small set of numbers, and pricing analytics and tactics are highly evolved.”1
“A rigorous model of consumer value allows a company to come up with new combinations of value that its products and services could deliver. The right combinations, our analysis shows, pay off in stronger customer loyalty, greater consumer willingness to try a particular brand, and sustained revenue growth.”
Almquist, Senior, and Bloch identified 30 “elements of value” — fundamental attributes in their most essential and discrete forms. These elements fall into four categories: functional, emotional, life-changing, and social impact.
Some elements are more inwardly focused, primarily addressing consumers’ personal needs. For example, the life-changing element of motivation is at the core of Fitbit’s exercise-tracking products.
Others are outwardly focused, helping customers interact in or navigate the external world. The functional element of organizes is central to The Container Store and Intuit’s TurboTax, because both help consumers deal with complexities in their world.
The “elements of value” do not accept on its face a customer’s statement that a certain product attribute is important; instead they explore what underlies that statement.
For example, when someone says their bank is “convenient,” its value derives from some combination of the functional elements, such as saves time, avoids hassle, simplifies, and reduces effort.
And when the owner of a $10,000 Leica talks about the quality of the product and the pictures it takes, an underlying life-changing element is self-actualization, arising from the pride of owning a camera that famous photographers have used for a century.
Like Maslow’s “hierarchy of needs,” the “elements of value” pyramid is a heuristic model — practical rather than theoretically perfect — in which the most powerful forms of value live at the top.
To be able to deliver on those higher-order elements, a business or organization “must provide at least some of the functional elements required by a particular product category. But many combinations of elements exist in successful products and services today,” according to Almquist, Senior, and Bloch.
To test whether the “elements of value” can be tied to company performance — specifically, a business or organization’s customer relationships and revenue growth — Almquist, Senior, and Bloch surveyed more than 10,000 U.S. consumers about their perceptions of nearly 50 U.S.-based companies.
They found that the companies which performed well on multiple “elements of value” would have more loyal customers than the rest.
“More is clearly better,” they wrote, “although it’s obviously unrealistic to try to inject all 30 elements into a product or a service. Even a consumer powerhouse like Apple, one of the best performers we studied, scored high on only 11 of the 30 elements. Companies must choose their elements strategically.”
Almquist, Senior, and Bloch also found that companies doing well on multiple elements does indeed correlate closely with higher and sustained revenue growth. Companies that scored high on four or more elements had recent revenue growth four times greater than that of companies with only one high score.
“The winning companies understand how they stack up against competitors and have methodically chosen new elements to deliver over time,” they wrote.
Next, Almquist, Senior, and Bloch explored whether the “elements of value” could shed light on the astonishing market share growth of pure-play digital retailers. This, too, was confirmed empirically.
Amazon, for instance, achieved high scores on eight mostly functional elements, illustrating the power of adding value to a core offering. It has chosen product features that closely correspond to those in their model.
In launching Amazon Prime in 2005, the company initially focused on delivering the elements of reduced cost and saving time by providing unlimited two-day shipping for a flat $79 annual fee. Then it expanded Prime to include streaming media (the elements of providing access and fun/entertainment), unlimited photo storage on Amazon servers (reduces risk), and other features.
Each new element attracted a large group of consumers and helped raise Amazon’s services far above commodity status. That allowed the company to raise Prime’s annual fee to $99 in 2015 — a large price increase by any standard.
You should improve on the elements that form their core value, which will help set them apart from the competition and meet their customers’ needs or wants better. You can also judiciously add elements to expand your business or organization’s value proposition without overhauling your products or services.
Some businesses and organizations have refined their product designs to deliver more elements. Vanguard, for instance, added a low-fee, partly automated advice platform to its core investment services in order to keep its clients better informed and, in many cases, to reduce risk.
A chainsaw manufacturer that felt undifferentiated used the elements of value to identify specific ways of making future products distinctive. It focused on the elements of quality (defined as the results of using its products), saves time, and reduces cost. These three elements had the greatest effect on customer satisfaction and loyalty, and the company was able to build competitive advantage with them.
Other businesses and organizations have used the elements to identify where customers perceive strengths and weaknesses. They start by understanding which elements are the most important for their industry and how they stack up on those relative to competitors. If your business or organization trails in the crucial elements, it should improve on them before attempting to add new ones.
A large consumer bank found that, although it fared relatively well on the elements of avoiding hassles and saving time, it did not score well on quality. The bank did extensive research into why its quality ratings were low and launched initiatives to strengthen anti-fraud operations and enhance the mobile app experience.
“The elements of value work best when a company’s leaders recognize them as a growth opportunity and make value a priority. It should be at least as important as cost management, pricing, and customer loyalty. Companies can establish a discipline around improving value in some key areas: new product development, pricing, and customer segmentation,” wrote Almquist, Senior, and Bloch.
For B2C and D2C businesses and organizations, the “elements of value” are, from bottom to top:
Functional: saves time, simplifies, makes money, reduces risk, organizations, integrates, connects, reduces effort, avoids hassles, reduces cost, quality, variety, sensory appeal, and informs.
Emotional: reduces anxiety, rewards me, nostalgia, design/aesthetics, badge value, wellness, therapeutic value, fun/entertainment, attractiveness, and provides access
Life-Changing: provides hope, self-actualization, motivation, heirloom, affiliation/belonging
Social Impact: self-transcendence
For B2B businesses and organizations, the “elements of value” are, from bottom to top:
Table Stakes: meeting specifications, acceptable price, regulatory compliance, ethical standards
Functional: improved top line and cost reduction (economic); product quality, scalability, and innovation (performance)
Ease of Doing Business: time savings, reduced effort, decreased hassles, information, and transparency (productivity); organization, simplification, connection, and integration (operational); availability, variety, and configurability (access); responsiveness, expertise, commitment, stability, and cultural fit (relationship); risk reduction, reach, flexibility, and component quality (strategic)
Individual: network expansion, marketability, and reputational assurance (career); design and aesthetics, growth and development, reduced anxiety, and fun and perks (personal)
Inspirational: vision, hope, and social responsibility
Depending on the nature of your business or organization (B2B, B2C, or D2C), identify all of the “elements of value” that are true, honest, and authentic to your product or service, and then score them on a scale of 1 to 10.
This score should be given through the lens of your average customers, not through the lens of you or your colleagues. Individual customer interviews or a survey, while not mandatory, can certainly be helpful.
When businesses and organizations conduct a full elements analysis, they are often surprised to find major gaps between their self-assessments and customer opinions of the overall experience of buying and using their offerings. In commercial insurance, for instance, elements analyses show that brokers particularly value carriers’ stability, product quality, variety of offerings, and responsiveness.
When one large carrier surveyed its brokers, it found that it fared well in product quality relative to key competitors but lagged in the relationship elements, particularly responsiveness. This carrier is now investing in responsiveness and in improving the overall value proposition for brokers.
Next, for the values that received a score of 7 or less, figure out how you can improve their score. Finally, identify additional “elements of value” that you can add in the foreseeable future, and make an action plan for how you can honestly and authentically include them with a score of 8 or higher.
There’s more where this came from at the Growth Marketing Institute.
“The Elements of Value.” Harvard Business Review.