CHAPTER 3: IDENTIFY AND SPECIFY CUSTOMER VALUE
Introduction
Providing quality services is important not only to the customer but also to the business. Providing poor quality will lead to a loss of reputation and wasteful costs rectifying the fault. In our open economies there is strong competition to attract buyers for most goods and services. Businesses also know it is more expensive to find new customers than to have existing ones return or recommend you to someone else.
The customer perspective of what represents value may be different to that of the provider, so understanding what represents their value is essential to ensure that this can be delivered and that effort is not wasted on developing products and services that do not meet these requirements. Also, this may often include items that are not directly related to the service provided (e.g. the friendliness of reception staff, loyalty programmes and accessibility may all be important for hotels).
Consider a very minor fault on an aeroplane – for example my seat back tray not working properly. To the airline, one or two broken trays on an aeroplane holding over 300 passengers may seem trivial, compared with getting the passengers (and hopefully their baggage) safely and securely a couple of thousand miles. But to passengers – it makes it difficult to eat a meal and may also raise irrational (and incorrect) doubts about how the airline services the aircraft and engines. Hence it could be something of value, especially as the cost of repair will be low.
It’s a very worn phrase, but we need to understand the whole of the customer journey from their perspective in order to understand what is important. The problem is that this is very subjective and so it’s important to gain a wide variety of views – not just from existing customers but also from prospective customers in a wider market
Customer value
In lean, the term customer value is a relative one, as different customers will have different levels of expectations. For bespoke tailors or others delivering premium personalised services, this may not be an issue, as they can cater to the high value, low volume market by meeting these expectations. But large volume producers may need to have a proxy for what customer’s regard as value. Organisations invest a lot of time and effort to understand their customer base and the value, in terms of price they are willing to pay for that good or service. I have been involved in a number of such projects to provide a single view of the customer and data that can be used to profile the customers’ requirements or identify other services that we can offer.
Suppliers are trying to hear the voice of the customer and in a lean environment this would be used as a pull for supply and production. However, there are a number of flaws:
1. Suppliers often inadvertently ask for information in a biased way that limits the information they receive from potential customers. For example, a few years ago I was at an international air show and was asked to undertake a survey. There were ten questions, such as ‘Would you prefer to fly direct to your end destination or go via a hub’? The other questions were similar – it was obvious to me that the survey was on behalf of Boeing and was designed to justify not building a super jumbo, rather to compete with the A380.
2. The bias is towards existing customers and what they have bought, based on what the supplier wants to provide. There is little or no information from other potential buyers.
As choices available have increased, the customer has been given more power, as they can often find an alternative product or service. By illustration, let’s consider the experience of two customers, both buying bedroom furniture – one in the 1950s and one in the 2010s.
In the 1950s, the customer would go along to their local furniture store, during their limited opening hours, and would have a very limited range to choose from – perhaps just one or two manufacturers. Having made the choice, they would speak to a salesman who would arrange HP credit for them which they would then repay in monthly instalments. There may be some room for negotiation on price but very little – also no scope for changing the design of the furniture, with only a limited number of colours and handles available. The shop would write to the customer when the furniture was available (probably after a couple of months) and delivery and installation of the pre-made furniture would be arranged. The deliverymen would check the furniture, remove all packaging and perhaps even take away the old furniture being replaced. There was rarely any formal arrangement to provide feedback, other than if the customer went back into the same shop for something else and the salesman remembered them. Overall the input required from the customer was minimal.
In the 2010s the customer can source the furniture from virtually anywhere via the Internet, at a time and place convenient to them. The choice is also almost endless – including pre-owned items. The customer has greater control over the choice and the amount paid – they can bid, compare prices and even to a certain extent negotiate. They may be given some form of ‘loyalty’ award for items they have bought previously. They may also be able to create a virtual image of their bedroom and see how the furniture would appear, including plans of the room with the new furniture, to see how it fits. Even when the choice has been made, the customer is asked to make choices about colour, design, delivery, etc. The site is then likely to make a number of further recommendations for purchase at the same time (e.g. carpets, linen, coat hangers …). If the customer decides to buy they will be taken online to a payment portal and provide credit card or online payment information. The purchase and payment arrangements have been separated. The customer will then be sent an email confirming the order and providing tracking information – probably within two weeks. They are asked for feedback on the website, including many additional questions relating to demographics and future purchasing requirements. They may also be asked to ‘friend’ the supplier on social media – even though they have had no human contact with the vendor throughout the process.
When delivery is made, they will need to arrange for someone to be at home when it is delivered. They will then have to take the furniture into the room, unpack the furniture, build it and then dispose of the packaging and the old furniture. They are then asked to complete a survey for the furniture and probably a separate survey for the delivery company. The customer will also receive many more emails in a week informing them of offers, etc. In this scenario the customer has more choice but they have purchased a pile of wood – not the end-to-end service they would have received from the 1950’s scenario.
In their book Lean Solutions: How Companies and Customers can Create Value and Wealth Together, Womack and Jones identify six principles underpinning lean consumption.
As a customer I want you to:
• completely solve my problem
• not waste my time
• seliver my needs
• deliver value where I want it
• supply value when I want it
• reduce the number of decisions I must make to solve my problem.
Based on the scenario I described above, it would seem that in some ways the customer experience was better in the 1950s than it is today. Hence there is a lot of work that many organisations still need to do to fully understand and emphasise with their customer’s true needs.
Key concepts, techniques and tools
Defining value
Value is subjective – not only from the perspective of the customer but also from the perspective of the supplier. The customer will think of the end-to-end experience as constituting value. So, as we saw in the furniture example earlier, this may be not only the actual product, but how it is marketed, sold, delivered and installed and after sales service. A shop selling furniture therefore needs to consider every step of this process – not just the sale. Some organisations seem to have taken this even further. Many utility companies, for example, can have different departments working in silos to provide their specific part of the service. I once called my telephone service provider with an issue and was transferred eight times – the last time back to the first person I had spoken to without the problem being solved – I gave up and just went to another supplier. I have also been told my problem is nothing to do with them as they have outsourced that part of the process! As a customer I am not interested in how you decide to manage the service – I just want to get the value I am paying them for.
The challenge of lean then is for organisations to re-think what constitutes value. This will often be based on guess work, based on the best information available at the time – and it will change over time. This rate of change has increased with the information revolution, as customers can now be better advised and can obtain feedback from other customers and fairly independent review websites on any purchases, from technology, cars, travel, cruises and restaurants – the list is endless. Social media also plays a part – a small family run restaurant had a customer who had a complaint – they resorted to social media and the proprietor of the restaurant made an inappropriate response – this quickly went viral, not only in the local press but also on the wider web, with an impact on the media.
Customer needs
Customers only buy products or services because they have a need. Maslow categorised these in his hierarchy of needs:
Figure 1: Maslow’s hierarchy of needs
All suppliers are seeking to meet one or more of the above needs. There are slight variations in the products required for each in different cultures. For example, in the emerging economies there is an increasing demand for red meat products as the population becomes wealthier. There are also changes over time, for example, when they were first invented mobile phones could only be afforded by the wealthy, now they are almost universal.
The Kano model
For a product or service to be successful, it needs to fulfil one or more of the needs identified above, in response to a customer’s problem. Professor Noriaki Kano developed the Kano model in 1984 (see www.kanomodel.com/) from his studies of customer satisfaction and loyalty. The model is now supported by a number of tools and matrices.
Figure 2: The Kano model
The grid consists of a Y axis (Satisfaction) and an X axis (Execution).
Satisfaction
The Y axis shows satisfaction of the customer, from low at the bottom, to high at the top. This is subjective and will vary between customers and products/services. Because of our expectations as customers, some services will have a neutral impact because we expect them to work. Take buying a washing powder, for example. If I regularly buy a particular brand at a particular price, I will be neutral when I make the purchase – it’s just meeting my expectations. I will remain neutral as long as I don’t suddenly develop an allergy and the product continues to operate as I expect. However, if I buy a new brand at a lower price than my previous brand and it gets my shirts cleaner, with a nice smell, I will have a higher level of satisfaction. Over time the level of satisfaction may subside and decrease.
There is also some scope creep in society as our expectations increase and this is especially true for software products. There has been an incredible rate of change over the last 30 years. Imagine I am going to launch a spreadsheet competitor to MS Excel – my product has a limit of 20 rows and 20 columns and can only perform basic mathematical functions. I don’t think the market would be very excited about this! However, in 1983 we used just such a product and it was brilliant – saving a lot of time over the previous method of pen, analysis paper, paper tape calculator and correcting fluid.
Execution
The X axis represents execution, or fulfilment, from low on the left, to high on the right. These represent how well the provider is able to execute, or meet, the requirement for the goods or service. Execution covers the whole life of the product or service, from initial marketing, production, sales, delivery and post sale support. The scale is from poor to excellent.
Customer preference
Kano used the grid to illustrate three distinct categories of customer preference:
• Performance (as an arrow going from the bottom left to top right box)
• Basic (as an arrow from bottom left to bottom right box)
• Excitement (as an arrow from top left to top right box).
Performance
Performance requirements are those requirements that customers can easily define, articulate, communicate and in some cases measure (e.g. the energy efficiency rating of a household appliance). If these requirements are executed badly, the customer will have a very low level of satisfaction (bottom, left quadrant of the chart). If executed well, they will bring high satisfaction.
On a software project, for example, these will be the requirements identified in the customer requirements or design documentation. They will be used as a basic measure to ensure the software meets its requirements and should be included in testing and product demonstrations, such as show and tells.
Basic
Basic (or ‘must-be’s’) are the requirements that customers expect and assume will be included. When performed well, customers will be neutral (like in my washing powder example above). They do cause dissatisfaction, however, when they are not delivered. We expect that products ‘do what they say on the tin’ – I expect a glue to stick things, a pen to make a mark, etc.
One issue with basic requirements is that because the customer is expecting them to be delivered they may not be specified clearly by the customer. I have found this a particular problem on software projects, leading to many failures not being identified until user acceptance testing, or even after go live.
Excitement (Wow factor)
These are the nice surprises, the features with benefits that we were not expecting, that differentiate the product or service from its competitors. For example, the flight upgrades we were not expecting, but got as a reward for loyalty, or free postage on a delivery.
On software products, when a standard package has been introduced, there may be features that were not identified in the requirements but still provide benefit. I helped to introduce a new cashier system where the requirement was to ‘make it like the old system’. The new version had a bounced cheque warning facility which was particularly helpful to the cashiers when receiving cheques from high-risk customers.
Some innovations and changes can have a reverse effect, where the feature is disliked by the customer base. These should be rare if the supplier has done their customer research – they can usually be seen when the next release or model reverts to the previous functionality. BMW, for example, removed the temperature gauge from the instrument panel of their three series, and then brought it back on the next model due to customer demand. Dissatisfiers are waste, as the supplier is providing a feature that the customer does not see as a benefit – the customer will therefore not pay a premium for the feature and may prefer to purchase a product from another supplier that does not have it.
Audit considerations
The best approach is for the reviewer to identify all potential customers and then list the five key benefits that the customer is considering, and the likely price they will pay compared to competition. This will provide a high-level sense check of the findings reached by management.
The following questions are designed to help review the process that management has followed.
• How have management identified potential customer groups? – both end consumers and intermediaries.
• Has this review recently been reviewed and updated?
• Where do key stakeholders consider they are on the axes of ‘Basic’/‘Performance’ and ‘Excitement’?
• What is the current status of complaints received from customers?
• Is there evidence to show that complaints are decreasing and customer satisfaction is increasing due to lean interventions?
Summary
Understanding and responding to customer needs helps to generate new income and reduce waste. Under lean thinking this may require a re-thinking. It will be the basis upon which customer needs are defined and fulfilled, and will need to be re-considered over time as customers’ needs and expectations change, and competitors are innovative in their response.
The Kano model helps producers to scientifically understand and document all potential customer requirements or features to prioritise development efforts on the features and benefits that most influence satisfaction and generate future loyalty, thereby adding customer value.
In this chapter we have considered how customer value can be defined and monitored. This is a key part of understanding the lean process, and in the next chapter we will consider how this value is considered throughout the value creation process.
Another consideration for suppliers will be the target cost – can they meet these expectations and deliver at a price expected by the customer? In a lean organisation this will involve the reduction of waste and other costs to achieve the price required. We will consider this process further in the next chapter on the value stream.